Look out for Employment Allowances changes
The employment allowance (EA) is a welcome and valuable benefit for many businesses as it allows them to offset up to £3,000 a year against their employer PAYE NIC liabilities.
Who can claim? - Most employers with a liability to pay employer (secondary) NIC are eligible to claim the EA, including sole traders, partnerships and companies, charities and those with charitable status such as schools, academies and universities, community amateur sports clubs (CASCs), and employers of care or support workers.
Who cannot claim? - Certain types of business are ineligible to claim the EA deduction, including:
• personal service companies (PSCs) and managed service companies (MSCs) which are subject to the intermediaries’ legislation (IR35). Where there is a deemed payment of employment income, the EA is not available against any employer NICs that arise on the deemed payment. However, the allowance is still available where the company has employees in its own right.
• single director companies. A restriction was introduced from 6 April 2016 providing that where the only employee paid above the secondary NIC threshold is also a director of the company, the allowance is not available. The restriction can apply in a company which has two or more directors but where only one of those directors is on the payroll and there are no other employees.
The EA is delivered through standard payroll software and HMRC’s real time information (RTI) system. It is not, however, given automatically and must be claimed. Claiming is very straight forward – the employer simply signifies his intention to claim by completing the ‘yes/no’ indicator just once. Although, ideally, the claim should be made at the start of the tax year, it can be made at any time in the year. The employer then offsets the allowance against each monthly Class 1 secondary NICs payment that is due to be made to HMRC until the allowance is fully claimed or the tax year ends.
The EA applies per employer, regardless of how many PAYE schemes that employer chooses to operate, so each employer can only claim for one allowance. It is up to the employer which PAYE scheme to claim it against.
Two changes apply to the Employment Allowance from 6 April 2020.
Class 1 NIC bill exceeding £100,000
From 6 April 2020, access to the EA is limited to businesses and charities with an employer National Insurance contributions (NICs) bill below £100,000.
In assessing whether the £100,000 limit has been reached, the total liability of all connected employers must be added together. If the total exceeds £100,000 then none of the connected employers will be eligible to claim.
Where employers become connected during the tax year causing the total collective secondary Class 1 liability to exceed £100,000 in that year, they will be eligible to continue claiming for the remainder of the tax year but will cease to be eligible from the start of the following tax year.
Where an employer becomes connected to a group of connected employers whose collective secondary Class 1 liability was in excess of £100,000 in the preceding year, the employer joining the group will no longer be eligible for Employment Allowance in the year in which they join.
State Aid - From 6 April 2020, the EA is operated as state aid. This means that employers already in receipt of State aid will need to check that they have sufficient headroom to include the EA within their relevant de minimis limit, which will be dependent upon the particular economic trade sector within which the employer operates.
If there is insufficient headroom to claim the full allowance (even if the employer may not have used the full amount) they will not be eligible to claim.
Employers will be required to make a declaration as part of the annual RTI return, confirming that this condition is met.
What will the VAT cost of Brexit be?
Brexit will impact on VAT more than any other UK tax. However, for now until 31 December 2020 or possibly later, the VAT rules remain unaffected. Nonetheless, while your rights to reclaim VAT and obligations to charge it stay the same, there might be changes in procedure. For example, a change in the method for reclaiming VAT incurred personally on business expenses while travelling in the EU.
Despite no sea change in VAT rules until the end of 2020, the EU may, and probably will, make changes to its VAT rules before then. Theoretically, the UK should follow suit and reflect the changes in UK VAT regulation or practice, e.g. the zero-rating of e-books etc. to align the VAT rate with that for printed books. However, the UK government might not follow suit and it’s extremely unlikely the EU will bother arguing the point. In any event, such changes won’t affect the VAT rules for transactions between UK and EU businesses.
EU trade costs
The extent of the cost of Brexit for businesses where trade with the EU is involved will depend on how closely aligned the UK and EU rules are after the transition period ends. Unless we continue to follow the EU’s rules there’s bound to be extra admin and probably duties involved in importing and exporting goods.
Any extra costs will need to be factored in when pricing goods or services sold to the EU if and when the exit deal is done. GOV.UK has a microsite dedicated to the Brexit developments that will help you keep track of developments.
What about extra VAT costs
There will be little or no change to the VAT consequences when acquiring goods or services from businesses after we’ve left the EU. To understand this you simply need to consider the current VAT position of customers in countries outside the EU, known as “third countries”. After the transition period, unless we stick completely with EU VAT rules we will become a third country.
Currently, if you sell goods to a customer in a third country, you don’t charge VAT because it’s an export outside the EU. When the goods arrive at the other country the tax authorities there assess and charge duties and their equivalent to VAT. Your customer, subject to the rules in their country, reclaims the VAT (or equivalent). Unless there’s a special arrangement where we keep the no-VAT treatment on imports from the EU, you’ll be in a similar position as your customer outside the EU, i.e. you’ll pay VAT on goods entering the country which you’ll be able to reclaim.
Paying and reclaiming VAT.
Rather than having to pay VAT on goods you import at the time they enter the UK, the government will probably allow you to account for the VAT on your next VAT return. At that point, subject to the usual rules, you’ll be entitled to reclaim the VAT thus resulting in a cost-neutral position without any loss of cash flow.
Unless there’s a deal which retains the existing rules, VAT will be payable on imports of goods from the EU. However, you will be entitled to reclaim any VAT paid as you currently are for other purchases. The direct effect of Brexit will therefore be VAT neutral.
Changing a will after death
As long as certain conditions are met, it is possible to change a will after death. This is known as a post-death variation, and it can be a useful tax planning tool.
A post-death variation can be made to:
• reduce the amount of tax payable
• to change who benefits under the will
• place the assets of the deceased into trust
• to provide for someone who was left out of the will
Conditions that must be met
In order to vary a will after the deceased has died, the following conditions must be met:
• it must be made within two years of the deceased’s death
• all beneficiaries adversely affected by the variation must agree to it and be party to it
• it must be made in writing
• it must contain a statement of intent for tax purposes, specifying that the beneficiary/beneficiaries elect for the relevant statutory provisions to apply
• if the amount of tax payable as a result of the variation increases, the personal representative must be party to it and agree to it
• it must not be made in consideration for money or money’s worth
Although there is no requirement for new beneficiaries to sign the deed of variation, this is often done as good practice.
Where a deed of variation is made, the will is treated as if applied, as so varied, at the date of the deceased’s death.
There is a two-year window in which a deed of variation must be made. It is possible that in the period between the date of death and the making of the deed of variation, changes have occurred. For example, the asset that is subject to the variation may have been sold. In this situation, the proceeds, rather than the actual asset, would be redirected as a result of the deed of variation.
Once made cannot be undone
Once a deed of variation has been made, it cannot be undone. It is therefore advisable to take advice prior to varying a will.
Bill dies in October 2019 leaving an estate of £1.5 million split equally between his wife, Barbara, and his sons Simon and Philip.
The family agree to vary the will so as to leave everything to Barbara to benefit from the inter-spouse exemption. Bill’s unused nil rate band will be available on Barbara’s death. Her will provides for everything to be left equally between her sons.
Simon and Philip must be agree to be party to the deed of variation as they are adversely affected by the redirection.
The deed of variation is made in February 2020. The changes are deemed to be effective from the date of Bill’s death as if they represented his will at that time.
Should I buy a rental property through a limited company?
Landlords hit by recent and forthcoming tax changes may wonder if it is better to buy a rental property through a limited company, rather than holding it personally.
Holding it personally
Where a property is held by an individual, the property income tax rules apply. The profits of the property rental business are charged to income tax at the individual’s marginal rate of tax. If a loss is made, this can only be carried forward and set against future profits of the same property rental business. The personal allowance is available if not used elsewhere.
Interest relief restrictions have been phased in progressively from 6 April 2017. For 2019/20, 25% of interest can be deducted in computing taxable profits (attracting relief at the landlord’s marginal rate), with relief for the remaining 75% given as a tax reduction at the basic rate. From 6 April 2020, relief for all interest and finance costs will be given in this way.
When purchasing the investment property, if it is a residential property and the landlord already owns at least one other residential property, the 3% Stamp Duty Land Tax (SDLT) supplement applies.
On sale, capital gains tax will be charged on any gain. The higher residential rates apply – 18% where total income and gains do not exceed the basic rate band and 28% thereafter. The individual can set his or her annual exempt amount – set at £12,000 for 2019/20 – against any chargeable gain where available.
Owning it through a company
Where a property is owned through a company, any profits are charged to corporation tax rather than income tax. There is no equivalent of the personal allowance – so profits are taxed from the first pound. However, at 19%, corporation tax rates are lower than income tax rates. The interest rate restrictions do not apply to companies, and interest is deductible in accordance with the corporation tax rules.
Companies pay corporation tax on chargeable gains and any gain on disposal of the property is subject to corporation tax. There is no annual exempt amount, and basic rate taxpayers pay capital gains tax at a lower rate than the corporation tax rate payable by companies; however, at 28%, the rate payable by higher rate taxpayers is more.
If the value of the property is more than £500,000, the company will also have to pay the annual tax on enveloped dwellings. The amount depends on the value of the property – ranging from £3,650 for a property in the £500,000 to £1 million band to £232,350 for properties valued at £20 million or more (2019/20 rates).
Where the property is brought by the company, SDLT will be payable, with the 3% supplement applying to the purchase of residential properties.
Buying through a company will also raise the issue of how best to extract the profits, and once personal and dividend allowances have been used, this will trigger personal tax liabilities in the hands of the recipient.
Do the sums
The best option will depend on personal circumstances, and there is no substitute for doing the sums. Remember to take account of the non-tax considerations, such as the additional costs associated with running a company and higher borrowing costs.
Deferring your state pension
If your contributions record is sufficient, you will be entitled to the state pension on reaching state pension age. The age at which you reach state pension age depends on when you were born.
To qualify for a full single tier state pension (set at £168.60 per week for 2019/20, rising to £175.70 per week for 2020/21), a person needs 35 qualifying years. A reduced pension is payable to someone who has at least 10 qualifying years, but less than 35. The single tier state pension is payable those reaching state pension age on or after 6 April 2016.
When you reach state pension age, you do not need to take your state pension immediately. You can instead choose to defer it, receiving a higher pension in return. The rules on deferred state pensions differ depending on whether state pension age was reached before 6 April 2016 or on or after that date.
The state pension is taxable.
State pension age reached on or after 6 April 2016
If you reach state pension age on or after 6 April 2016 and opt to defer your state pension, the amount that you receive when you start taking your pension will be increased, as long as you defer your pension by at least nine weeks.
The state pension is increased by 1% for every nine weeks by which the pension is deferred. Deferring the state pension for 52 weeks will increase it by just under 5.8%.
At the 2019/20 rate of £168.60 per week, deferring the state pension for 52 weeks will increase it by £9.74 per week. This will increase as the state pension increases.
Any deferred state pension is paid with the regular state pension and is taxable in the same way.
It is not possible to take a deferred pension as a lump sum where state pension age is reached on or after 6 April 2016.
State pension age reached before 6 April 2016
Different rules applied where state pension age was reached before 6 April 2016. Under the rules that applied at that time, the extra state pension could be used to increase the weekly pension payments or taken as a lump sum. Those reaching state pension age before 6 April 2016 receive, depending if the eligibility conditions are met, the basic state pension. This may be supplemented by the earnings-related second state pension.
The deferral rate was better under these rules too – the state pension was increased by 1% for every five weeks by which it was deferred. This is equivalent to an increase of 10.4% for every 52 weeks that the pension was deferred.
For 2019/20 the basic state pension was £129.20 per week. It will increase to £134.25 per week for 2020/21. At the 2019/20 rate, deferring the pension for 52 weeks increases it by £13.44 per week.
Under the pre-April 2016 rules applying to those who reached state pension age before 6 April 2016, it is possible to take the deferred pension as a lump sum if it has been deferred for at least 12 months in a row. Interest is also paid at 2% above the Bank of England base rate. This can be taken in the year in which the state pension is claimed or the following year.
A deferred pension lump sum is taxed at the taxpayer’s highest marginal rate on their other income when the lump sum is taken. So, if the taxpayer’s other income in that year is covered by the personal allowance, the deferred pension sum will be tax-free, but if the taxpayer has other income and is taxable at the basic rate, they deferred pension lump sum will be taxed at the basic rate, even if this takes the taxpayer’s total income into the higher rate band. It is taxed in the year in which it is taken
Deferring the state pension can be a useful way to increase your weekly pension if you do not need it immediately on reaching state pension age.
Calculating taxable profits using the cash basis
Under the cash basis, small businesses are taxed on the basis of the cash that passes through their books, rather than being asked to spend their time doing calculations designed for big businesses. For 2018/19 onwards the annual turnover limit below which a business can use the cash basis is £150,000. The exit threshold above which the cash basis may not be used is set at double the entry threshold (i.e. £300,000).
Certain types of businesses are not currently permitted to use the cash basis including limited companies.
The cash basis operates by reference to the tax year. This means that small businesses can calculate their taxable income for the tax year by adding or subtracting:
• receipts in connection with the business received in the tax year
• payments made in the tax year to cover allowable expenses
• amounts allowed for simplified expenses
The cash basis operates on a VAT-inclusive basis. This means that full amount of receipts and payments will be counted including any VAT element. If a business is registered for VAT, any VAT paid to HMRC will be an allowable expense, and any VAT refund received from HMRC will be taxable as a receipt in connection with the business.
Receipts in the form of ‘money’s worth’ will be included, for example the value of goods or services received from customers. In addition, a reasonable amount would need to be added to income to reflect any deficiency arising from a transaction being made other than on a commercial basis. An example would be if, after expensing the cost of purchasing stock, an item of the stock was taken for personal use without any actual payment being made.
Sale proceeds for capital assets (such as plant or machinery) whose purchase costs have previously been relieved will be taken into account as a receipt.
Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500. If the business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated.
Businesses should consider their annual business interest costs and if it is anticipated that these costs will be more than £500 it may be more appropriate for the business to use the accruals basis and obtain tax relief for all the business-related financing costs.
Hire Purchase interest is not included in the annual amount of £500 and can be treated as a separate expense.
The following items are not treated as income under the cash basis:
• capital introduced by the owner of the business for purposes of financing the business
• changes in the form of money, e.g. cash withdrawals from bank accounts
• loan capital borrowed by the business from third parties for financing purposes
• proceeds from disposals of durable assets, e.g. land and property, intellectual property, shares
• refunds of income tax, capital gains tax, or tax credits
With regard to expenses, the ‘wholly and exclusively’ rules continue to apply.
From 6 April 2017, the general disallowance of capital expenditure rule was replaced with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period. This means that from 2017/18 onwards relief will be prohibited only in relation to costs incurred in relation to the provision, alteration or disposal of:
• any asset that is not a ‘depreciating asset’ (to be defined as having a useful life of up to 20 years)
• any asset not acquired or created for use on a continuing basis in the trade
• a car (but of course business mileage-based relief is available)
• land (as defined)
• a non-qualifying intangible asset, (as per Financial Reporting Standard 105) including education or training
• a financial asset
Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.
Stamp duty land tax on mixed-use properties
Stamp duty land tax (SDLT) is payable on the purchase of land and buildings in England and Northern Ireland over a certain value. SDLT does not apply in Scotland and Wales; instead land and buildings transaction tax (LBTT) applies in Scotland and land transaction tax (LTT) applies in Wales.
As far as SDLT is concerned, there are different rates for residential and non-residential properties. The residential rates apply where the consideration for the property is more than £125,000, with different rates applying to different slices of the consideration. The rates range from 2% to 12%. For individuals, a 3% supplement applies to second and subsequent residential properties costing more than £40,000. Relief is available for first-time buyers. Where the property is purchased by a company, a 3% surcharge applies to the residential rates.
No residential rates are much lower and only apply where the consideration exceeds £150,000. The next £100,000 is charged at 2%; thereafter the rate is 5%.
Mixed use properties
A mixed-use property is one that incorporates both residential and non-residential use. The non-residential rates apply to mixed use properties. As these are considerably lower than the residential rates, the SDLT may be considerably less on a mixed-use property than on a residential property.
Identifying the type of property
It will not always be clear whether the property is a residential property (to which the residential property rates apply) or a mixed-use property (to which the lower non-residential rates apply).
A residential property is one which is used as a dwelling or which is suitable for use as a dwelling. The test is applied at the effective date of the transaction. The physical attributes of the dwelling are important in determining whether it is ‘suitable’ for use of a dwelling, irrespective of whether it is actually being used as a dwelling.
Where a building is used partly as a dwelling and partly for other purposes, it may not be straightforward to determine the SDLT rates that apply. A distinction is drawn between a property where certain rooms of a building that would otherwise be a dwelling are used for work (such as a spare room being used as a home office) and one where the building is divided into separate areas, with part used for residential accommodation and part adapted for business or commercial use (such as house part of which has been converted into a surgery).
In the ‘home office’ situation, the building remains a dwelling and the SDLT residential rates apply. However, the position is less clear cut where the property is converted or used without specific conversion. It is important to note that the actual use is not important – what is important is the degree of conversion required and the degree of separation from the residential areas. If the property is sold as a single building and it consists of or includes land that is not residential property, SDLT will be applied at the lower non-residential rates. Where the property meets the test for a residential property, the residential rates will apply.
HMRC’s new guidance on cryptoassets and business taxes
Until now, HMRC’s guidance on the tax consequences of using or trading in cryptoassets, such as digital currencies like Bitcoin, was mainly aimed at individuals. It’s now published new guidance for businesses.
Types of cryptoassets
In November 2019 HMRC issued new guidance on cryptoassets. It prefers this name to cryptocurrencies because, in common with most governments and banks, it doesn’t recognise Bitcoin etc. as currency or money. Instead it views them as types of token: exchange tokens, utility tokens or security tokens. The differences between these three is subtle, but for now HMRC has limited its latest guidance to exchange tokens. HMRC says that an exchange token is ”intended to be used as a method of payment and encompasses cryptocurrencies like bitcoin” for which “there is no person, group or asset underpinning these, instead the value exists based on its use as a means of exchange or investment.”
Tax and exchange tokens
The tax treatment of crypto exchange tokens depends on how you use them, and whether your business operates through a company or is unincorporated.
Paying with cryptoassets
Where cryptoassets are used as a means of payment, the value on the transaction must be recorded in your books in a recognised currency. For example, for transactions in the UK the value must be recorded as sterling.
The value is that at the time of the transaction. This is especially important for VAT because invoices must show values in a recognised currency.
If your business owns cryptoassets at the end of an accounting period, it must show their monetary value at that date in your accounts balance sheet. For UK tax returns this must be shown in sterling.
No effect on VAT
VAT is due in the normal way on goods or services you sell in exchange for cryptoassets. It applies to the value of the transaction (in sterling) at the time of the transaction. If you’re the seller you’ll need to make the valuation to show the VAT amount in sterling (or for overseas sales another recognised currency) on your invoice. You can’t show the value of the sale or the VAT in, say, bitcoin.
Investing in cryptoassets
Other than where you use cryptoassets as a means of payment, buying or selling them is a capital transaction. That means gains resulting from buying, selling or changing values of cryptoassets by companies are liable to corporation tax. Owners of unincorporated businesses are liable to capital gains tax on gains made from the sale of cryptoassets. Gains from changes in value aren’t taxable until there’s an actual sale.
Buying and selling and data mining
If you or your company frequently trade in cryptoassets, or if you “mine” them, any gains you make are taxable as profits rather than as capital gains.
For VAT and direct tax purposes all transactions in cryptoassets must be given a value in a recognised currency, e.g. sterling. If your business makes a profit from owning cryptoassets, it usually counts as a capital gain and so is liable to corporation tax for companies and capital gains tax for other businesses.
HMRC confused over compensation payments
HMRC has amended its internal guidance regarding compensation payments for discrimination. While there was nothing incorrect about the old text it was open to misinterpretation. The new version is more helpful and precise.
The new guidance explains that if, as an employer, you make a compensation payment, you must consider the tax position for each element. For example, it might include not just an amount for injury to feelings caused by discrimination but also loss of earnings. Depending on whether the employee still works for you or the payment relates to the termination of their employment, the different elements might be entirely outside the scope of tax; taxable as earnings; or taxable as a termination payment (meaning that up to £30,000 is exempt).
HMRC has improved its guidance regarding compensation for discrimination payments made to employees. Employers must consider the tax treatment of each element of the payment not just the whole.
NLW – Is your business ready for 1 April 2020? - Part 1
When can you claim ER if you don’t own enough shares?
While the conditions for capital gains tax (CGT) entrepreneurs’ relief (ER) were made tougher in April 2019, there was also good news for shareholders of companies who raise more capital by issuing more shares. Prior to the new rules the issue of new shares could result in an existing shareholder losing their entitlement to ER.
Example. Acom Ltd, a family company, has ten shareholders who own between 5% and 15% of the company’s shares. John owns 5% and has proportionate voting rights on company matters. Acom needs more working capital and intends to offer new shares to existing shareholders. John can’t afford to buy new shares. But if he doesn’t his stake in Acom will be diluted to less than 5% and he’ll lose his right to ER.
Individuals whose shareholding is diluted on or after 6 April 2019 to below the 5% qualifying threshold as a result of a new share issue can make an election to preserve their right to ER, but only for the period up to the date on which the new shares were issued. ER doesn’t apply to capital gains made after that date unless the individual acquires more shares so they again meet the 5% condition. If you make the election you might trigger a CGT bill.
One of the terms of the election is that the shareholder is treated for CGT purposes as if they sold their shares. The amount they are deemed to receive for them is a proportion of the value of the whole company. For example, if Acom was worth £1 million, the value of John’s 5% stake would be £50,000. If the cost of John’s shares was, say, £5,000, he is deemed to have made a capital gain of £45,000 but because ER applies he’ll only pay tax at 10% of the gain after deducting any exemptions or reliefs he’s entitled to.
The time limit for making an election is twelve months from the 31 January that follows the tax year in which the new shares were issued. So if the shares were issued on 1 May 2019 the election must be made by 31 January 2022. Once the election has been made it is irrevocable.
Avoiding the CGT bill
Paying CGT, even at the ER rate of 10%, might not seem like an especially great deal as it means you’ll have to find the cash to pay the tax despite not actually having sold anything. However, a different election can be made to defer the gain from being taxed until you actually sell or transfer your shares. The time limit for this election is four years from the end of the tax year in which the new shares were issued, e.g. for shares issued in 2019/20 you have until 5 April 2024.
Under rules which took effect on 6 April 2019 you will lose ER if your shareholding falls to less than 5% of the company’s total share issue because of a new share issue. The good news is that by making two elections you can preserve your entitlement to ER and defer the tax bill that results until you sell your shares.
Your State Pension
In the current tax year, for the first time, the cost to the UK government of state pensions is set to surpass £100 billion, according to the Office for Budget Responsibility. This figure does not take into account other benefits state pensioners can claim, and is set to rise each year.
There will come a point where the state pension scheme is unsustainable, as some countries across the world have already found.
The rising cost of UK pensions is caused partly by improved healthcare, which helps us all to live longer. The government has tried to redress it to some extent by increasing the age state pensions can be claimed, but this has not dropped the annual figure, which is now 14% of GDP.
In the UK, the employer must have a pension scheme in place, but it does not have to be used. Employees can opt not to contribute to the scheme, and if that is the case the employer does not have to contribute either.
Self-employed workers also have the choice whether to contribute to a pension or not.
The need for a pension other than from the state
Most people have ideas about how they would like to live when they retire, but very few think about how they will finance the lifestyle they desire until it is too late. For those that wait until their forties to start thinking about a pension, the contributions needed to give them a reasonable pension can be too high.
For people in their twenties, retirement seems a very long way off, but that is the best time to get something in place. A delay of just ten years in starting a scheme can make a big difference to the pension pot when they reach retirement. This is because for those ten years all their contributions will be making money and will continue to do so for the length the scheme has to run.
Of course, there are some jobs that have pensions attached, such as the armed forces and many roles within large organisations. Unless someone is lucky enough to have a pension included, they really need to think about saving for their future now.
A tax-efficient way of saving
Pensions are the most tax-efficient way of saving as tax relief is given on the contributions. This relief is given at the highest rate of tax being due as long as the contributions are not more than the annual salary or do not exceed the annual allowance, which is currently £40,000.
All other forms of savings or investments are taxed for most people, and for those that do not have any other income, they can claim their returns on investments tax-free. A pension goes one step further and basically amounts to a contribution from the government towards your retirement pot.
Prepare for the worst?
The government needs to do whatever it can to reduce the burden of state pensions and whether someone is employed or a business owner, they can’t rely on the government to provide for their old age. Our current trajectory makes it likely the government will go the way of other countries, and state pensions will be stopped.
What is the small company exemption?
When the Government confirmed the April 2020 private sector extension of the off-payroll rules in October 2018, the Budget documentation contained a notable exclusion for small companies.
Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.
Although there was initially some confusion over the definition of the term ‘small’, the Government has since confirmed that it will use the same criteria contained in the Companies Act 2006.
During a 12-month period, a business is deemed to be a ‘small’ company if it meets 2 or more of the following criteria:
Any contractors engaged by small companies will continue to operate the IR35 rules as they do currently – and the responsibility for determining their employment status will not pass to their clients.
Rollover relief is a relief available for capital gains made on business assets sold by traders such as sole traders or partnerships and includes those in furnished holiday letting businesses. This article focuses on unincorporated businesses, but the relief is also available to companies. The relief can also be used for sales by individuals if the business asset is being used in a company in which they have at least 5% of the voting shares. If an individual has more than one trade (e.g. if they have two sole trader businesses) they can rollover a gain on one trade to a purchase of an asset in their other trade.
What does rollover relief do?
Rollover relief, sometimes called ‘replacement of business assets’ relief, is a form of deferral for capital gains tax (CGT) purposes. Rather than a trader having to pay CGT on a gain on the sale of a business asset immediately, if the original asset is replaced with another business asset to be used in the trade, it is possible for the gain to be deferred until such time as that replacement asset is sold.
Unlike gift relief, rollover relief does not change the identity of the taxpayer of the gain, but it does change the timing of the payment, which moves from the date of the sale of the original asset to the date of the sale of the replacement asset. The replacement needs to be acquired within one year before and three years after the sale of the original asset, although with the approval from HMRC this window could be extended.
Why is it required?
When a business is trading, it will need to upgrade or replace assets occasionally. It is not convenient or conducive to efficient business practice for the trader to incur a CGT charge every time they sell and replace their business property.
Rollover relief allows the trader to put the CGT liability out of mind until they sell an asset that they are not immediately replacing.
Not all assets qualify for rollover relief. The detail is in the legislation, but the most common qualifying assets are land and buildings, aircraft, goodwill, and fixed plant and machinery.
If the trader were a farmer, for instance, they could claim rollover relief on a new milking parlour but not on a new combine harvester, which would be movable machinery. More unusual qualifying assets include space stations, satellites, and hovercrafts!
The replacement asset does not need to be the same type of asset as the original asset, so a building could be replaced with an aircraft and still be eligible.
It may not be in the trader’s best interests to roll over the gain.
For example, if the current gain would be eligible for entrepreneurs’ relief, but any future gain would not be, it may be better to pay the gain at the time of the sale of the original asset.
Rollover relief requires a claim, so does not happen automatically. The claim must be made within four years of the end of the tax year in which either the gain arises on the original asset, or the replacement asset is purchased, whichever is later. Provisional claims are available to defer the gain even if the new assets have not yet been purchased at the time the CGT would be normally due.
Student loan scheme information for employers
If you employ more than a few staff, the chances are that at least one of them will have a student loan. As their employer you’re responsible for collecting repayments, the arrangements for which are increasingly complex.
Changing rules for student loans - Where a former student is employed, repayments are made by deduction from their salary along with PAYE tax and NI. As well as understanding what HMRC requires, you might also have to explain it to your employees if they have questions about how the deductions are worked out.
Different loan schemes - There are now three types of loan repayment scheme: pre-September 2012 loans (Plan 1), post-September 2012 loans (Plan 2) and, since April 2019, postgraduate loans (PGL). Repayments are only required when the employee’s rate of pay exceeds the annual rate set by the government. The earnings trigger point for each is different, as is the rate of deduction.
Even if you’re aware that a new employee has a student loan you’re only required to make deductions if you are notified in one of three ways: by a start notice ( SLP1 , SLP2 or PLG ) from HMRC, the employee indicates they have a loan on their starter checklist, or the employee gives you a P45 that indicates they are making loan repayments (in which case you should ask them to complete a starter checklist which asks what type of loan they have).
April 2020 changes - Employees with graduate loans who began employment from September 2019 weren’t required to start repaying loans straightaway. Instead, repayments aren’t required until the beginning of the tax year after graduation or when they leave a course, if earlier.
If you have newish employees falling into the category above, you should have recently received a start notice directing you to begin making deductions in April 2020.
New rates for 2020/21 - While your payroll software will take care of calculating the student loan repayments (as long as you’ve indicated to it that they are required), if you’re asked by one of your employees how much the deductions will be in 2020/21, you can provide them with details from the table below.
Plan type Annual rate of pay Deduction
1 £19,390 9%
2 £26,575 9%
PGL £21,000 6%
What to do with combination loans? - Because Plan 1 loans were the only type until Plan 2 was introduced in April 2016 an employee may be liable to both types of repayment. All you need to do is set up your payroll to indicate a Plan 1 loan. The Student Loans Company (SLC) takes care of attributing the repayments between the two.
End of the loan - If it appears to the SLC that an employee will finish repaying their loan within two years it will offer them the chance to switch from payroll deductions to direct debits.
You’re only required to make student loan deductions if you are notified by HMRC on Forms SLP1, SLP2 or PGL, or on a P45 or a starter checklist produced by the employee. If the employee has Plan 1 and Plan 2 loans, you should enter them in your payroll software as Plan 1 only. New deduction rates apply from April 2020.
Giving money to charity to save inheritance tax
One way to reduce the amount that the taxman takes from an estate in inheritance tax is to make a donation to charity. This is can be particularly tax effective. The donation is taken off your estate before inheritance tax is calculated, and if the donation is large enough – at least 10% of your net estate – the rate at which inheritance tax is levied on the remainder of the estate is reduced.
Making smaller donations
Even if the donation is less than 10% of the estate, it will be effective in reducing the amount of inheritance tax paid. This is because the donation is deducted from the net estate before working out the inheritance tax payable.
An individual dies leaving a net estate (after allowing for the nil rate band and residence nil rate band) of £400,000. The estate is left to his children. Inheritance tax of 40% of the net estate is payable – an inheritance tax bill of £160,000. After inheritance tax, the children receive £240,000 in total.
Assume instead that the individual had left £20,000 to charity and the remaining £380,000 to his children. The inheritance tax bill will now be 40% of (£400,000 - £20,000), i.e. £152,000.
Leaving £20,000 to charity saves £8,000 in inheritance tax. After inheritance tax, the children receive £228,000 and the charity £20,000 – a total of £248,000. The £20,000 gift to charity effectively costs the children £12,000.
Donations of at least 10% of the net estate
To encourage charitable giving on death, the rate of inheritance tax is reduced by 10% -- from 40% to 36% -- where at least 10% of the net estate is left to charity. The effect of this can be illustrated by the following example.
An individual dies leaving a net estate of £1 million, split equally between his four children. Inheritance tax payable on the estate is £400,000 (40% of £1 million), leaving £600,000 after tax (£150,000 per child).
If instead the individual had left 10% of his estate to charity – equal to £100,000, the amount on which inheritance tax is payable is reduced to £900,000 and the rate of inheritance tax is reduced to 36%. The inheritance tax payable on the estate is now £324,000 – a reduction of £76,000. The children receive £576,000 (£144,000 each) and the charity receives £100,000 – a total of £676,000.
The gift of £100,000 to the charity effectively costs the children £24,000 as a result of the inheritance tax savings.
Is it worth it?
It depends on your outlook. If the aim is to reduce the amount that the taxman gets or make a tax-efficient gift to charity, the answer is yes. However, if the beneficiaries want to maximise the amount that they get from the estate, the answer is no. In each case, they are worse off by making the charitable donation than by taking the inheritance tax hit. While it may be preferable for money to go to charity rather than to HMRC, some of the charitable gift is coming out of their pocket.
Charitable giving can reduce the inheritance tax payable, but at a cost.
What’s new with company cars in 2020
If you have use of a company car for private travel you’ll have to pay tax for the privilege. Plus, there’s a further tax bill if the business pays for your fuel for private journeys. What’s changing with these tax charges in April 2020?
Cars and car fuel
Company cars are still popular despite sometimes being expensive in terms of tax. Conversely, employer-paid-for fuel has become less popular because of the reputation it gained for the high tax bills. However, because the environment is back in the headlines there are changes to the tax regime ahead which favour greener cars.
Back to zero
After a few years’ absence a zero tax charge makes a comeback in April 2020. It will apply to company cars registered:
• before or after 6 April 2020, powered wholly by electricity and therefore producing zero emissions
• on or after 6 April 2020 which have emissions up to 50g/km and can be driven solely on electrical power for 130 miles or more.
It was originally proposed that the rate for the latter group would be 2% of list price. That’s low, but the proposed 0% is better.
Also from 6 April 2020 there will be lower rates for cars with up to 50g/km emissions, but which don’t meet the 130 miles by electrical power only benchmark that’s needed to qualify for the 0% tax. Interestingly, there will be low but different rates for these hybrid cars depending on whether they were registered before or after 6 April 2020. For example, a hybrid car registered before the April date which can travel between 40 and 69 miles on electricity alone will result in a taxable charge of 8% of list price, while cars registered later will be chargeable at 6%
The disparity between pre and post 6 April registered cars continues throughout most of the new company car tax regime. Broadly, cars registered on or after 6 April will for 2020/21 be taxed on 2% less of list price than a comparable car registered earlier. For example, a driver of a company car registered pre 6 April 2020 which has emissions of between 100g/km and 104g/km will be taxed on 25% of its list price, whereas the rate for a driver of a later registered vehicle will be taxed on 23%. However, the difference will be eroded over the next two tax years as the lower rate will rise to match the higher.
Overall the new company car tax rates will be welcome news for anyone driving zero or very low emission cars. Further, because the decreased taxable amounts also mean lower Class 1A NI charges, employers which provide the cars should also be pleased.
The separate tax charge where an employer pays for fuel for private journeys made in a company car usually makes it tax inefficient and should be avoided. However, where the new lower or 0% rates apply to a car from April 2020 they will also cover the provision of fuel. This could make providing fuel a low tax perk worth considering.
The main change will be the reintroduction of a zero tax on wholly electric cars and hybrids which have a long electric only range. There will also be lower rates for some hybrid cars. The new rates also apply to car fuel benefit which could make it a more worthwhile perk for 2020/21 and later years.
A Property Business - Am I Trading?
The so-called ‘badges’ of trade are what the courts tend to focus on when evaluating whether or not an activity amounts to a trade. No one badge is necessarily determinative, nor are all badges required to be present and correct in order for a trade to exist. Both taxpayers and HMRC will go back to these ‘badges’ when trying to decide whether a business is actually trading.
Generally, an individual taxpayer will want there to be a trading activity. This is because trades access:
- A wider range of loss reliefs - most importantly, against total income. Losses arising in a property letting business may normally be set only against future property profits, whereas trading losses can be set against other incomes.
- More reliefs for capital gains - when a fixed asset is sold for a capital gain, the trading individual or partner will tend to be able to access a wider range of reliefs, to postpone the gain (or to claim Entrepreneurs’ Relief).
However, this is not always the case - and particularly not with property businesses, as we have noted above. The tax case Terrace Hill (Berkeley) Ltd v HMRC  UKFTT 75 (TC) is interesting because it illustrates a rather unusual situation where HMRC tried to argue that a property development business was trading, so that it was ineligible to use substantial capital losses on the disposal of a property. (The taxpayer won, by demonstrating to the tribunal that the property had been developed for long-term investment purposes).
Set out below is a summary of the nine badges of trade recognised by HMRC from the perspective of a property business.
Profit Motive - If there were a clear intention to sell property at a profit when acquired, that is a strong indication of trading.
Method of Acquisition - Where a property has been inherited or received by way of gift then it is unlikely to be considered an asset held for trading purposes.
Source of Finance - The usual tests are whether or not one had to borrow to acquire the asset, or if borrowings could be repaid only when the asset was sold. These are less relevant in terms of property since property letting businesses (not trading) might equally answer ‘yes’ to both.
Perhaps more telling would be the agreed terms or duration of any finance, and whether or not its interest cost might be sustainable under a letting model.
Number of Transactions - Even a single property development project might be a trade, while a large-scale property investor might sell one or two properties every year but still not be trading. Nevertheless, a greater frequency of similar transactions might well indicate a trading pattern.
Existence of Similar Trading Transactions or Interests - If someone is already a recognised trading property developer, a tax tribunal might require stronger evidence to rebut an assumption that property acquired and then sold on at a profit was also trading. This and the previous badge are commonly used by HMRC in cases where builders and other property developers repeatedly acquire property, enhance it, live in it and then sell it on at a profit, basically because if it’s a trading activity then it is removed from the CGT regime and cannot be eligible for PPR / main residence relief (see CG6523o).
The Way the Sale was Carried Out - Properties marketed for sale as part of a development, off-plan or while being developed, would be indicative of a trading activity.
Interval of Time Between Purchase and Sale - Most property transactions are relatively long-term: relatively modest developments can take more than a year to complete. While holding property for relatively short periods of time might be indicative of trading, many developers had to take property off the market and rent out on a short-term basis, when the recession started to bite in 2008/09. This did not change their fundamental trading status.
Changes to the Asset - In many cases, properties will be enhanced whether held privately, for letting or for sale - and in similar ways. This badge arguably has little bearing on whether or not someone is trading in property.
Nature of the Asset - Again, residential property can be held privately, as part of an investment business or as part of a development trade. The asset itself is often ‘inconclusive’ - although one might rarely acquire a hotel as an asset for purely private purposes.
Tax and NI on salaries 2020/21
The table below shows the position for director shareholders taking a low salary from their company to minimise tax and NI liabilities for 2020/21
Allowances Director’s annual salary
£12,500 £9,500 £8,788
Personal allowance £12,500
NI primary threshold £9,500
NI secondary threshold £8,788
Employment allowance £3,000
Director's tax payable - - -
Director's NI payable £360 - -
Employers’ NI payable £512 £98 -
Director's net pay £12,140 £9,500 £8,788
Net cost of salary to company £12,500 £9,500 £8,788
before tax relief if the employment allowance applies
Net cost of salary to company £13,012 £9,598 £8,788
before tax relief if the employment allowance does not apply
Employer provided food in the workplace
Apart from the exemption from the benefit in kind rules for free or subsidised food provided to employees in staff canteens meals or light refreshments provided in the workplace may also be exempt under s.317 Income tax (Employment and Pensions) Act 2003. For the exemption to apply the following conditions must be met:
• The meals/food must be provided of a “reasonable scale”, HMRC manuals say that inspectors should not interpret the rules narrowly. For example, a glass of wine with a meal is accepted but not “the provision of an elaborate menu, fine wines and cigar”; and
• all the employees working at that location must be entitled to either free or subsidised food.
Property trading or investment - why does it matter?
Individuals And Non-Corporate Entities: Income Tax vs CGT
There can be a substantive difference between the tax, etc., applied to a trading activity when compared to an investment activity - at least for unincorporated businesses.
There can also be a difference in the treatment for losses.
There is no ‘hard and fast rule’ as to which is the better approach; nor is there often a choice. But let’s say for simplicity that a residential property is being sold by an individual for £500,000 that cost only £300,000. The profit or gain is £200,000. In such a simple example, the profit would be the same as the gain.
While the CGT Annual Exemption is slightly less generous than the Personal Allowance, capital gains are generally taxed less harshly than income.
Trading income also attracts a Class 4 National Insurance Contributions charge and also a fixed Class 2 NICs charge for most trading activity.
0n the basis that the band for the main rate of Class 4 NICs broadly overlaps the Basic Rate Band for Income Tax purposes, the main combined rates for trading will be 0%/29%/42%/47%.
This opens up a huge margin between the tax that will be levied on a trading profit when compared to a capital gain on the same amount - the combined tax and NICs rate of 29% in the ‘Basic’ Rate Band is almost three times the rate of 10% that would apply to the capital disposal of a commercial property in that band. (Investment income, such as from rental profits, has no National Insurance charge).
Since property tends to be ‘lumpy’, profits and/or gains commonly end up at many tens or even hundreds of thousands of pounds, so even relatively small rate differences can result in dramatically higher tax bills through being taxed as a trade, for non-corporates.
This difference is exacerbated for non-corporates with long-term projects that might span more than one tax year because unused Personal Allowances/Basic Rate Bands, etc., in Year 1 cannot be rolled into the following year to soak up large profits from, say, a property development profit in Year 2. (While this approach applies also to capital gains, the rates are lower, so it is less problematic).
The end result is that a great deal of self-employed property development profits may well end up being taxed at 47%, compared to 28% at most for capital gains on the sale of a residential property (or as little as 20% for a commercial property gain).
For companies, the rate of tax is the same regardless of whether it is trading profits or capital gains - currently 19%. For now, companies can also claim Indexation Allowance - a form of inflation-proofing on their capital gains, to further reduce the tax charge on capital disposals. Note that the 2017 Autumn Budget announced that Indexation Allowance would be frozen at December 2017 for future corporate capital disposals and is likely to be withdrawn completely at some point 1n the future (this is what happened to Indexation Allowance for individuals: frozen in 1998 and withdrawn completely in 2008). Until this happens, however, Indexation Allowance is likely to remain extremely valuable to many long-term corporate investors.
Companies are also potentially useful for holding residential property that would otherwise be subject to 18%/28% CGT if held personally: selling company shares is not selling the bricks and mortar that the company owns, so will be taxable at only 10%/20%, using the rates as above.
Buying and selling, or mining cryptoassets - tax consequences
Buying and selling cryptoassets
Buying and selling cryptoassets such as bitcoin may count as a trade. To decide you should consider to what extent the so-called “badges of trade” apply to the activity. The “badges” are the factors which the courts have over time determined need to be materially present for an activity to be considered a trade.
The main badges are:
• degree and frequency of activity
• level of organisation
• intention to make a profit and the risk of making a loss.
You can find more information about the badges of trade in here: https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim20205
The badges of trade are also the criteria that should be considered to determine whether cryptoasset mining is a trade or a miscellaneous activity. Organised frequent mining with the intention and likelihood of making a profit is probably a trade while ad hoc and infrequent mining is likely to be taxable as miscellaneous income.
Apply to reduce self-assessment payments on account
You can apply in writing or by using HMRC’S online service to reduce the amounts of income tax payable on account of your self-assessment tax liability.
If applying in writing, send details of:
• how much you want to reduce the payments to; and
• the reason why you think your tax liability will be less than the existing payments on account. For example, the income on which you pay tax through self-assessment, say dividends, is lower than for the previous year or you’re entitled to more tax deductions say, for additional pension contributions.
You should address your application to the HMRC office shown on your most recent tax statement of account.
Alternatively, you can complete an application online, print and send it to HMRC. To start your application, go to:
To use the online service, sign in to your HMRC account, choose the self-assessment service and on the following screen click “Claim to reduce payments on account” (which is usually near the bottom of the page). Follow the on-screen instructions from there.
Putting a commercial property in a SIPP
A SIPP is a self-invested personal pension plan, which is available to individuals. A SIPP can be an attractive option as individuals have the opportunity to choose where their pension funds are invested rather than this decision being made by the fund manager.
The range of investments that can be held within a SIPP is wide and includes commercial (but not residential) property. It can be tax efficient to invest in a SIPP, particularly if the individual has a need for business premises.
Properties that can be held through a SIPP include offices, shops, business units, hotels and care homes. The fact that the property has a residential element, such as a shop with a flat above it, does not necessarily preclude the property from being held in a SIPP. The property will count as commercial property as long as the flat is not occupied by a member of the SIPP.
If the SIPP does not have sufficient funds to buy the property outright, the SIPP can borrow to fund the purchase. Rental income can be used to meet the loan repayments and associated interest.
Renting it to the business
The commercial property can be rented to a business run by the SIPP member, as long as rent is paid at a commercial level. This can be an efficient way of building up pension savings – instead of the business renting a property from a third party and paying the rent to them, the rent is paid into the SIPP, building up the pension savings. The SIPP also benefits from any capital appreciation on the property.
Harry runs a web design agency. He sets up a SIPP to save for his retirement and builds up some funds. He decides to invest in a unit on an industrial estate from which to run his business. The SIPP purchases the unit for £50,000, funded in part by a £20,000 loan.
The business rents the unit from the SIPP paying the market rent of £500 a month. The loan repayments and interest are paid from the rent and the balance of the rent builds up in the SIPP.
This is a win-win situation as Harry benefits from the rental income and any increase in value in the unit.
NLW – Is your business ready for 1 April 2020? - Part 2
Some payments must not be included when the NMW is calculated.
• payments that should not be included for the employer’s own use or benefit, for example if the employer has paid for travel to work
• items that the worker has bought for the job and has not been refunded for, such as tools, uniform, safety equipment
• tips, service charges and cover charges
• extra pay for working unsocial hours on a shift
There are a number of people who are not entitled to the NMW, including:
• self-employed people
• volunteers or voluntary workers
• company directors
• family members, or people who live in the family home of the employer who undertake household tasks
All other workers including pieceworkers, home workers, agency workers, commission workers, part-time workers and casual workers must receive at least the NMW.
Businesses should make regular checks to ensure compliance with NLW/NMW obligations including:
• checking that they know who is eligible in their organisation
• taking the appropriate payroll action where relevant
• letting employees know about any new pay rate
• checking that staff under 25 are earning at least the right rate of NMW
The penalty for non-payment of the NLW can be up to 200% of the amount owed, unless the arrears are paid within 14 days. The maximum fine for non-payment is £20,000 per worker.
The government is currently committed to raising the NLW to £10.50 per hour by 2024 on current forecasts.
Employers need to take action over the coming weeks to ensure that they are ready for the increase in rates on 1 April 2020 and beyond.
Acceptable reasons for not paying your VAT on time
You were late with your VAT payment because your bookkeeper was ill. HMRC will automatically issue a penalty notice. The First-tier Tribunal (FTT) recently ruled on whether reliance on a third party was a reasonable excuse for the late payment.
Eglas Ltd offers landscape gardening services via its sole director, Mr Evans (E). Like many small businesses E concentrated on the firm’s core business and used a qualified specialist (G) to manage its bookkeeping and accounts. When a cycling accident left G unable to work for nearly seven months, E filed the VAT returns on time, but payment slipped and he ended up with a late payment penalty (surcharge) of nearly £600. E said G’s long absence on sick leave was a reasonable excuse for the late payments. HMRC said that E had ten weeks to make alternative arrangements and so didn’t have a reasonable excuse. E asked the First-tier Tribunal (FTT) to rule on the matter.
HMRC will only accept an appeal against a penalty if it considers it to be reasonable. However, it can’t arbitrarily dismiss an appeal; you either have to formally withdraw it or refer it to a tribunal to decide. The definition of “reasonable excuse” has always been a grey area. HMRC’s view is unfairly narrow and so can be worth challenging. HMRC only accepts an excuse is reasonable if the event which triggered the penalty was unexpected, unforeseen and out of your control, like the death of a close relative or last minute problems with IT.
On its website under the heading “What will not count as a reasonable excuse” HMRC explicitly says that failure by someone else on whom you’re relying isn’t a valid excuse but tribunals have contradicted this view on several occasions.
In E’s case G’s role was vital because E’s knowledge of Sage was “non existent”. He relied on G totally. Until G’s accident she had always prepared VAT returns and accounts and made sure VAT was paid on time. In her absence, E’s accounting was “paralysed”. HMRC said E had chosen to rely on G, so had to take the risk involved in that decision. It said E didn’t exercise reasonable foresight or due diligence in carrying out his tax responsibilities. The FTT disagreed.
The FTT heard that E had tried to obtain alternative help and had no luck because Sage temps weren’t available locally. E showed he knew compliance was a problem without G, and made efforts to put that right, including contacting a nearby university and other training centres, and making enquiries through a chain of accountancy offices - all without success. Either the distances were too far for daily travel or there was no one available. Despite all his efforts, E only managed to get a Sage temp for a day - and they had taken a day’s holiday from their usual job to do it. E’s excuse was reasonable despite HMRC’s attempt to narrow the definition. Don’t be put off by HMRC’s hard line on excuses. If you can show that you took all reasonable steps to prevent a delay, be prepared to call HMRC’s bluff and ask the FTT to rule.
If you need to plug a gap in key staff but are unsuccessful and this results in late VAT or other tax returns, keep records of what steps you took to find a replacement. If you can show a genuine skills shortage but HMRC refuses to accept the reason the FTT has ruled that the excuse can be reasonable.
The recent First-Tier Tribunal (FTT) case Jacqueline and Neil Potter v HMRC  UKFTT 554 (TC) considered whether entrepreneurs’ relief (ER) was available on the liquidation of a company that had previously been trading. It considered two different matters. Firstly, had the liquidation actually happened within three years of cessation of trade? Secondly, had the company (Gatebright Ltd) been a qualifying trading company for the twelve months up to cessation of trade? (Note that, following FA 2019, the latter qualifying period would now be 24 months).
The family owned all the shares in Gatebright Ltd, which traded on the London Metals Exchange. Following the financial crash, it sought to safeguard reserves by using its assets to acquire investment bonds. It issued its last invoice in March 2009 but continued, for several years, to try to revive its trade by seeking new business. Mr Potter was telephoning and meeting contacts but was unable to conclude any deals.
Gatebright Ltd was put into liquidation in November 2015, some six and a half years after it had issued its last invoice. HMRC refused the ER claim on the basis it was not a trading company within three years prior to the liquidation. S 165A TCGA 1992, (3) defines a trading company for ER purposes as one “... whose activities do not include, to a substantial extent, activities other than trading activities”. In HMRC’s Capital Gains manual (at CG64090) it states that ‘substantial’ in this context means more than 20% non-trading activities. It also states that a number of factors must be considered in the round, such as the value of trading and non-trading assets, the management time spent on the trading and non- trading elements respectively, and the extent of the income generated by the non-trading activities.
Is there an activity
Having solely held investment bonds for many years and undertaken no other transactions, it appears that Gatebright Ltd had become an investment company. However, the above statutory definition states that a trading company may fail to qualify only if there are non-trading activities and that they are substantial. Is the passive holding of investment bonds an activity? If not, the issue of ‘substantial’ does not arise! Note that the same analysis should be done when considering the ER available on a disposal of shares in a cash-rich trading company. It is unlikely that the passive holding of cash is an activity but, even if it is, it is unlikely to be a substantial activity.
The FTT considered whether Gatebright Ltd was a trading company after March 2009, when it issued its last invoice.
It found that there were still attempts to do new deals up to June 2014 and that, in November 2012 (i.e. three years before the liquidation) it was still reasonable to believe that the company would ultimately find new business. It also found that, despite holding bonds, the activities did not include, to a substantial extent, activities other than trading. Indeed, its activities were completely aimed at reviving its trade; the holding of investment bonds was not an activity. The taxpayers’ appeal was allowed.
The passive holding of significant cash balances or investments is unlikely to prevent a trading company from attracting entrepreneurs’ relief, as this should not represent non-trading activities.
Capital allowances - integral features
Since April 2008 some types of equipment or plant fitted to or in a building count as “integral features”. As such they qualify for capital allowances as “plant and machinery” to which the special rate (6% per annum from 1 April 2019) of writing down allowances applies.
The rules (Capital Allowances Act 2001) list the items which qualify as integral assets. They are:
a. electrical systems (including lighting systems);
b. cold water systems;
c. space or water heating systems;
d. powered systems of ventilation, air cooling or purification;
e. any floor or ceiling comprised in the systems described in c. or d.;
f. lifts, escalators or moving walkways; and
g. external solar shading.
However, where the primary purpose of an item is the insulation or enclosure of the interior of a building, or provide means of permanent internal divisions within a building, they will not qualify for plant and machinery allowances but if the expenditure on the item is incurred on or after 29 October 2018 they can qualify for the structures and buildings allowance.
Salary sacrifice and minimum wage
The government is cutting minimum wage red tape on salary sacrifice schemes. High profile cases, like Iceland’s Christmas savings club, saw employers penalised for diverting earnings to saving schemes for their employees which took their pay below the minimum wage. In future such schemes will be permitted, subject to conditions such as making good the shortfall.
There’s also good news regarding the methods for calculating hourly pay rates for workers for minimum wage purposes. The changes are expected to apply from 6 April 2020.
In future you won’t be fined for offering salary sacrifice and other schemes to workers where initially this causes their pay to fall below minimum wage rates. The methods for calculating hourly pay rates are also being changed from 6 April 2020.
Leasing assets to your company
Over the last decade, the emergence of the sharing economy has meant that millions of people worldwide are now able to earn supplemental income from personal assets. Companies like Airbnb have expanded beyond short-term rentals; it is now possible to book local tours, classes, photoshoots, and other bespoke experiences. While this opens up a world of opportunities, any business should be structured properly to ensure tax efficiency.
Individual or company ownership?
If an individual is already earning via self-employment or PAYE, they may seek to incorporate a new business - particularly if they are in the higher-rate tax bracket - in order to take advantage of favourable corporation tax rates and tax-planning options. Although there are many more advantages to incorporation, there are some circumstances where an individual may prefer - or require - to retain ownership of a personal asset, rather than transferring ownership to a limited company.
Unless the individual has already built up funds in an existing company from a related venture, a newly-formed company will have limited capital, preventing it from purchasing the asset outright. The transfer can be achieved through crediting a director’s loan account to represent the amount due to the director. In the case of an existing company, if the director has borrowed money and has not yet repaid it, this can offset the balance owed. In either case, an individual must raise an invoice to their company listing all items; the sale price must be in keeping with the market value at the time of sale.
Wit a wide range of possibilities, careful consideration is crucial. This would be especially true for the transfer of specialised or classic/ antique equipment, where asset values may appreciate over time. If the asset was purchased many years ago and current market value has appreciated beyond the purchase price, the sale could give rise to a capital gains tax (CGT) liability for the individual. In this scenario, a director’s loan is unfavourable as the individual has incurred a tax bill but has received no financial compensation for the sale; a transfer of funds should be made, if possible.
Renting assets to the company
An entirely legal alternative would be for the individual to rent their personal asset to their limited company for business use. To ensure the arrangement is legitimate, the individual should draw up a formal lease agreement with the company, treating the agreement as if they were leasing to another party. The agreement should detail the monthly cost of the lease, due dates for payment(s), the term of the lease, any requirements relating to insurance, and arrangements in the event of a missed payment. The rental fee must be reasonable and in line with rental rates for similar assets locally.
The individual would then declare the lease/ rental income via a self-assessment tax return. While retaining the ability to use the asset for personal use may be required, if it is instead used solely for business purposes this can reduce one’s overall tax liability by allowing the individual taxpayer to deduct several expense types from their rental profits. This could include insurance, interest, repairs/maintenance and/or general administrative costs, amongst others.
You may rent many asset types to your limited company; office space, machinery, equipment, vehicles, computers, property, etc. Certain assets may require special treatment, so you should always consult with a professional to ensure your arrangements are legitimate.