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Helpsheets ... continued 14 from homepage

  • VAT and free meals for staff

    If a business provides a canteen for staff, VAT is due on what the business actually charges for the meals, etc. If a business charges the market rate, VAT would be due in the normal way.

    However, if a business provides subsidised or free meals to staff, VAT is still only due on the actual monies received. This means that no VAT is due on catering supplied free to staff and is only due on what the staff actually pay for a subsidised meal. Even if catering is provided free to staff, any associated input tax is fully recoverable (assuming the employer is not partially exempt) as a legitimate business expense.

    Employee contributions

    Where employees pay for meals and so on under a salary sacrifice arrangement, following the judgment of the CJEU in Astra Zeneca (Case C-40/09), employers must account for VAT on the value of the supplies unless they are zero-rated. Subject to the normal rules, the employer can continue to recover the input VAT incurred on related purchases.

    However, in RW Goodfellow and M] Goodfellow (MAN/85/0020), the tribunal held that deductions made from an emp1oyee’s wages to take account of catering and accommodation paid in accordance with the Wages Order in force for the industry could not be regarded as monetary consideration and no VAT was due.

    Businesses should be careful to distinguish between a contract of employment, such as in the above tribunal case where no VAT was due, and any agreement between employer and employee whereby a deduction from salary or wage is specifically related to a supply of catering, in which case VAT is due.

    Where deductions are made other than under a contract of employment, the value of the supply is the amount deducted. HMRC argues that deductions made from an emp1oyee’s wages to take account of catering and accommodation amount to monetary consideration, and that the amount of the deduction was, therefore, liable to VAT.

    Vending machines

    In other commercial situations, employers may provide free or subsidised meals or catering in another form, such as drinks or food from a vending machine.

    If a business installs vending machines for its employees to use free of charge and it gives them tokens to operate the machine or it is operated Without tokens or coins, no VAT is due on the supplies from the machine. If a business gives its employees money, or they have to pay for tokens to operate the machines, the supplies are standard rated, and the business must account for VAT on them.

    Restaurants and hotels

    If the proprietor of a restaurant, café or other catering establishment supply themselves or their family with meals, this is not regarded as catering and they need not account for VAT on those meals.

    However, they must account for tax on the full cost to the business of any standard rated items (e.g. ice cream, sweets and chocolates, crisps, soft or alcoholic drinks) that they take out of their business stock for their own or their family’s use.

    If an employer provides staff with free meals or accommodation in the establishment (e.g. a night manager) no VAT is due.

    If a business provides its staff with meals or accommodation it only has to account for VAT on the amount paid, so if they are supplied free no VAT is due. Any input tax incurred in providing free or subsidised meals can be recovered as a legitimate business expense.

  • Helping children onto the property ladder - 2

    Help them to buy - Note that the 3% SDLT surcharge will apply to the entire purchase price when any co-owner is not buying their only property/replacement home, etc., so co-investing in the property directly, alongside a first-time buyer, can be tax-inefficient. Likewise, if the young buyer hopes to benefit from the main residence CGT exemption, any interest in the property that is attributable to a joint investor who has not occupied the property as their only/main residence will not benefit. It may therefore be more tax-efficient to lend money to the young buyer, so that their more tax- efficient acquisition and ownership covers more / all of the property.

    The older lender acting as guarantor can sometimes increase access to lending arrangements or reduce their cost - but there is a risk that such a guarantee may be called in. If you have spare capital wealth but want to retain it ‘just in case’, consider using it as funding for an offset arrangement that will again act to reduce the borrower’s finance costs; it may also prove slightly more tax-efficient for you as you will no longer be taxed on the interest that you might otherwise have earned. Here again, though, the offset funds are at risk if the mortgage defaults.

    Lending money, acting as guarantor or providing funds for offset mortgages has no effect for IHT or CGT purposes, although one’s estate would be affected if the funds were forfeit.

    Parents, etc., are sometimes required (or advised) to put their names on the legal title to mortgaged property; but without any actual beneficial interest such as a joint owner would ordinarily have (simply, their names might be recorded on the land register but they have no entitlement to proceeds from sale, etc.). The SDLT surcharge guidance has been updated specifically to confirm that a purely legal interest will not trigger the additional 3%.

    Help them to help-to-buy - The government’s help-to-buy individual savings account (ISA) is potentially useful: the government will ‘top up’ a qualifying investor’s fund by 25% - to a maximum of £3,000 on savings of £12,000 (overall - not annually). A qualifying investor has to be 16 or over and saving to buy their first home (to live in, although they can rent it out later on). The target property cannot be worth more than £250,000 (£450,000 in London).

    Give something away but keep the income? - There may come a time when parents want to divest themselves of capital but retain their income, to cover living costs, care fees, etc.

    It would be possible to give most of the ownership in a rental property to adult children or grandchildren, but then to agree to share the net rental income therefrom so as to favour the older co-owner(s). HMRC’s manual states:

    ‘...the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.’

    Strictly, the younger owner is entitled to demand his or her ‘fair share’ of the net rental income, so it could be argued that he or she is ‘giving’ away their income, and this might be considered a ‘settlement’. However, the settlements legislation is meant to apply only where a person ostensibly gives away his or her income but somehow still benefits from it; if the younger co-owner ‘genuinely’ does not benefit from the share he or she gave up, there may be a settlement, but that alone does not trigger the anti-avoidance tax legislation.

    Conclusion - There are many routes to helping children onto the property ladder. Some are more tax-efficient than others. Long-term planning is highly recommended in order to balance the different requirements of the various tax regimes that may apply, and it is vital to seek appropriate advice.

  • Determining whether goodwill exists in a business

    A business generally comprises various assets, one of which is often goodwill. However, a new business will not normally have goodwill; the goodwill of a business is broadly the advantage of the reputation and connection with customers that the business possesses. A new business will not usually have a ‘name’ or reputation as such. Goodwill is not necessarily reflected in the accounts of a business, even if goodwill exists. The business may have built up its goodwill from scratch over time. HM Revenue and Customs (HMRC) confirms: ‘The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist’. However, in some cases HMRC may contend that there is little or no goodwill in the business.

    For example, if the goodwill is attributable to the personal skills of the proprietor (e.g. a chef or mobile hairdresser), HMRC’s view is that such ‘personal’ goodwill is not transferable on a sale of the business. Thus if a business with personal goodwill is sold to a company upon incorporation of the business (with the proceeds being left outstanding as a loan owed to the proprietor, which is repaid by the company as funds allow), there is a danger that the value of the goodwill transferred will be lower than anticipated because of the personal goodwill element, which HMRC considers cannot be transferred to the company.

    There may be circumstances where HMRC argues there is no goodwill in the business whatsoever. This might happen if an asset such as land or buildings generates one or more income streams; HMRC could contend that the income streams do not represent goodwill. For example, in The Leeds Cricket Company Football Sr Athletic Company Limited v Revenue and Customs [2019] UKFTT 559 (TC), the appellant (‘the company’) contracted with Yorkshire County Cricket Club for the sale and purchase of freehold property at Headingley cricket stadium. Prior to the sale, the company carried on a cricket business comprising hospitality (i.e. finding clients and organising/attending meetings), advertising (i.e. selling advertising packages for boards at the ground), and catering (i.e. 19 full-time staff were employed to provide meals and refreshments to stadium visitors on cricket days).

    The issue was whether the sale involved: (a) a disposal of a business with attached goodwill; or (b) only a disposal of land with attached income streams. The First-tier Tribunal found that distinguishing between certain goodwill types (i.e. inherent (or ‘site’) goodwill and adherent (or ‘free’) goodwill) was an ‘artificial exercise’. The tribunal concluded that the cricket business (with attached goodwill) was transferred together with the property. The transfer was not merely a transfer of land with attached income streams. The appellant’s appeal was allowed.

    For a helpful summary of points to consider when seeking to establish whether goodwill exists, see Balloon Promotions and Others v Wilson (Inspector of Taxes) and another [2006] SpC 524, at paras 159-169. Even if goodwill contains a personal (non-transferable) element, there may also be elements of non-personal goodwill.

  • Property rental toolkit - 1

    Mistakes in completing self-assessment returns can prove costly. There is the risk that more tax will be paid than is necessary. If tax is understated and HMRC judges that reasonable care has not been taken, there is also the possibility of penalties. However, in seeking to avoid common errors there is help at hand in the form of HMRC’s toolkits.

    Toolkits are designed to help agents ensure that client returns are complete and correct. Each toolkit focuses on a particular area and draws attention to common errors which have come to HMRC’s attention. The toolkits each contain:

    • a checklist to identify key errors that often occur;
    • explanatory notes which identify underlying types of error, explain how to avoid them, and provide a brief outline of the tax treatment; and
    • links to relevant guidance, generally in the HMRC guidance manuals.

    The toolkits are updated each year to reflect changes in the relevant Finance Act. Although the toolkits are designed with agents in mind, their use is not limited to agents. They are a useful resource for anyone completing a tax return.

    Property rental toolkit - A person who owns a property or land and who receives income from that asset will generally be carrying on a property rental business, the profits of which are taxed. Where that person is an individual, the profits and losses from the property rental business need to be returned on the property pages of the self-assessment return. The property rental toolkit provides an awareness of common errors, allowing action to be taken to avoid them.

    Record keeping - The first risk area highlighted in the toolkit is that of record keeping. Without complete and accurate records, it is impossible to accurately compute profit; the calculation of profits relies on knowing the income from the property and also the allowable expenses. Failure to keep proper records may mean that:

    • receipts other than rental income are overlooked;
    • expenditure or relief are claimed incorrectly or overlooked; or
    • property disposals are overlooked.

    Property income receipts - All income (with the exception of capital receipts) should be taken into account in computing the profits of the property rental business. Receipts that are not rent but nevertheless represent income of the property rental business are commonly overlooked. It should also be remembered that property income can include payments in kind as well as cash receipts. This situation may arise if the landlord and tenant agree (say) that the tenant will decorate the property in lieu of one month’s rent. Income from casual or one-off letting (e.g. letting a field out for parking during a village show) will also constitute income from a property rental business. However, if this is the only income it may well fall within the property income allowance of £1,000, with the result that it does not need to be reported to HMRC.

    Some types of lettings need to be considered separately. This includes profits and losses from overseas properties (which form a separate overseas property rental business) and also that from furnished holiday lettings. Properties which are let out rent-free or at below market rent should also be considered separately to ensure expenses are restricted appropriately. To avoid mistakes when computing the income from the property rental business, the following questions should be considered:

    1. Have all gross rents and other receipts from land and property been included as property income as appropriate?

    2. Have any deposits received been included as income as appropriate?

    3. If a jointly-owned property is let, has the profit or loss been divided up correctly?

    4. If there are overseas rental properties, have the profits or losses been treated correctly as income of an overseas property business?

    5. If there is commercial letting of furnished holiday accommodation in the UK or the EEA, have all the qualifying conditions been met?

    6. If surplus business premises have been let and the rent receivable treated as income of the business, have the associated conditions been met?

  • When can selling your home trigger a tax bill?

    From April 2020 if you sell your home changes to capital gains tax private residence relief (PRR) mean that you’re at greater risk of being hit with HMRC penalties. Why, and what are the must-know PRR rules?

    Post-5 April 2020 gains - If on or after 6 April 2020 you make a gain from selling your home which isn’t covered by private residence relief (PRR), you’ll have just 30 days to notify HMRC, work out and pay any tax due. Whereas you currently have up to 20 months to mull over the finer points of PRR, from April you’ll have only 30 days from completion.

    The date a capital gain occurs is when contracts are exchanged and not when the sale is completed. For example, if contracts are exchanged on 31 March 2020 and completion is on 29 May 2020, any gain is before 6 April 2020 and so the new 30-day rule doesn’t apply.

    Private residence relief limitations - In the simplest of circumstances, i.e. where you bought and lived in only one home before selling it, PRR will reduce the taxable amount of any gain to zero. But if at any time while you owned the property you lived elsewhere, worked from home or owned a second home, you will need to consider if PRR should be limited. If so, part of the gain may be liable to capital gains tax (CGT) and the new 30-day reporting rule will apply.

    PRR and periods of absence - The good news is that periods where you haven’t occupied your home can be ignored. That is, PRR will apply regardless. From 6 April 2020 absences falling into this category are:

    • the final nine months of ownership - in rare circumstances the period is three years
    • where you lived abroad because you or your spouse/civil partner were employed there
    • up to four years, where you or your spouse/civil partner were required to live elsewhere in the UK because of your employment
    • up to three years for any reason if you lived in the property before and after the absence
    • the first twelve months of ownership where you acquired the property but were delayed in occupation because the house was being built, renovations or alterations were being carried out or a previous property was being occupied whilst arrangements were made to sell it.

    Business use - If at any time you’ve used all or part of your home for business (not for your work as an employee) a proportion of the gain won’t qualify for PRR. This is worked out according to the area or value of the part used for business and the amount of time it was used for. Where you used part of your home exclusively for your job as an employee, PRR is reduced proportionately according to the time and area/value used for work.  If you used no more than one room in your home for your job as an employee by concession HMRC will accept no apportionment of PRR is required.

    If you make a capital gain from the sale of your home, you may be required to report details and pay tax within 30 days of completion. PRR might not apply in full and so taxable gains might arise if you’ve lived away from your home or used any part of it for work. However, special rules may mean you can ignore periods of absence.

  • Understanding and minimising VAT surcharges

    If you’re late submitting your VAT return or paying what you owe, HMRC can fine you. However, financial penalties won’t always apply and if they do they can be mitigated. What steps can you take to minimise them?

    VAT penalties and surcharges - While the same principles for penalising errors and omissions from documents etc. apply to the main taxes, VAT has its own system for late returns and payments. Except for some businesses in their first year after registration, HMRC issues a default surcharge notice if either a return or payment is late. The good news is that as long as you aren’t late again within the next twelve months you won’t be fined.

    Unlike other taxes, a fine can’t be avoided by agreeing instalment payments with HMRC.

    Surcharge window - The surcharge notice indicates the start of a default window. This runs for twelve months from the date the late return/payment was due (but this period can be extended by HMRC) and means you’ll incur a surcharge penalty (fine) if you’re late again within that period. If you’re late one more time the fine is equal to 2% of the amount payable according to the VAT return. This increases to 5%, 10% and then 15% respectively for subsequent late returns or payments.

    If you can’t pay the tax, it is still important to submit the return on time to HMRC. This will avoid a different penalty which can apply if you submit a VAT return more than 30 days late.

    Minimising or avoiding a fine - The surcharge penalty is a percentage on the unpaid VAT due and doesn’t vary whether you’re one or 60 days late. However, there is a good reason for paying as much of the VAT due as possible on time.

    During the periods when the 2% and 5% surcharges apply HMRC waives the fine if the amount that would be payable is less than £400. This means that by making a part payment on time, so that the tax outstanding will be either less than £20,000 for the 2% period or £8,000 for the 5% period you’ll escape the fine.

    Example 1. Acom is within a default surcharge period and its VAT return for the quarter ended 30 September 2020 shows £30,000 payable. It pays £10,001 on time, meaning that only the balance of £19,999 is liable to a 2% surcharge, i.e. £399.98. As this amount is less than £400, the surcharge is waived.

    Example 2 . In its next VAT quarter Acom’s return shows £25,000. A late return or payment will trigger a 5% surcharge. If Acom pays £17,001 on time the surcharge would be £399.95 ((£25,000 - £17,001) x 5%). As this is also less than £400 HMRC will again waive it.

    Third time unlucky - This escape won’t work for the next late payment. Even where earlier surcharges are waived they are still on record and a subsequent late return or payment will result in a surcharge of 10% or 15% of the VAT due even if it’s less than £400. The waiver means that the first surcharge penalty you might have to pay is at the 10% rate, which can be a bit of a shock. However, you can still reduce the amount of the fine by paying as much of the VAT as you can afford by the due date.

    The first time you’re late you’ll be on a warning of a fine for twelve months. Further failures in that period result in a fine of 2% and 5% of the VAT due. If you submit your return on time and pay enough VAT so that the fine is less than £400, HMRC will waive it. Submitting your VAT return on time prevents different penalties from applying.

  • Take advantage of interest-free loans

    Employers can offer employees a tax-free cheap or interest-free loan of up to £10,000 per year.

    Subject to a few conditions, as long as the total amount outstanding on all loans from an employer to an employee does not exceed £10,000 at any time in the tax year, then the loans are ignored for the purposes of the rules on beneficial loans for both income tax and national insurance contributions purposes.

    Conditions - No taxable benefit-in-kind will arise where:

    • the loan has been made on commercial terms by employers who lend to the general public; or

    • the total of all loans made to an employee does not exceed £10,000 at any time in the tax year.

    It is important to remember that this is an all or nothing exception. If, however briefly, the loan balance rises above £10,000 at any time in the tax year, then the exception will not be available and the benefit-in-kind will be taxed in full.

    Example - In March 2020, Jim (a higher-rate- 40% taxpayer) needs to renew his annual season ticket to travel to work, which costs £8,200. To pay for this out of his take-home pay he would need to earn gross pay of £14,138 (£14,138 less tax at 40% (£5,655) and Class 1 NICs at 2% (£283)).

    If his employer gives him an interest-free loan of £8,200 to enable him to buy the season ticket, it only costs Jim the £8,200 he borrows and subsequently repays to his employer. Providing the total of all beneficial loans made to Jim by his employer is less than £10,000, no taxable benefit arises, so the cost of the benefit is nil.

    In addition, since the loan is not salary, his employer will not have to pay secondary Class 1 NICs on the amount borrowed.

    Individual loans - No taxable benefit arises in respect of loans, however large, if the loan is made by an individual and it can be shown that it was made in the normal course of his/her domestic, family or personal relationships (for example, where the owners of a business make a loan to a son or daughter). HMRC are however, likely to take a close look at cases where such a claim is made.

    Tax staff dealing with the tax affairs of an employer will liaise with staff dealing with the business accounts of that employer before agreeing that this exemption applies. If the loan is shown as an asset in the accounts of the employer’s business, HMRC will be less inclined to accept that this was made in the course of a private relationship.

    This exemption can only apply where the lender is an individual. It cannot, therefore, apply where a loan is made by a company, even where that company is controlled by somebody with the relevant personal relationship. However, certain loans can be chargeable under the employment-related loan rules where they are made by an individual having a material interest in a close company. In these cases, where the loan is made by the individual with the material interest, the exemption for loans made in the course of personal relationships can still be available.

    Similarly, no tax charge can arise if an employee is able to demonstrate that he has derived no benefit from a loan made to a relative of his. This exemption applies to the charge in respect of a loan and also applies where a debt is released or written off.

    Loans to directors - Loans to directors are prohibited under the Companies Act 2006, though loans not exceeding £10,000 are permitted and larger loans may now be made with approval of the members.

  • Leaving your main residence to go into care

    There may come a time when an individual can longer manage on their own at home and has to leave their main residence to go into care. Depending on their financial circumstances, they may need to sell their home or rent it out in order to meet some or all of their care costs.

    Selling the main residence

    A person may not have time to plan their move into care – the move may be dictated by circumstances. An unexpected fall may lead to a hospital stay followed by a move into care. Consequently, the property may be empty for a time before it is sold.

    Where the property has been the only or main residence at some point, the final period of ownership qualifies for private residence relief. This allows time for a buyer to be found without the loss of relief. For a disposal occurring on or after 6 April 2020, the final period of exemption applies to the last nine months of ownership, reduced from 18 months for disposal before that date. However, where either the individual or their spouse or civil partner is a long-term resident in a care home, the final period exemption applies to the last 36 months of ownership. This is the case for disposals both before and on or after 6 April 2020.

    Thus, if the property was occupied as a main residence until the person went into care and the disposal occurs within three years of that date, the gain will be fully sheltered by private residence relief.

    Example

    Following the death of his wife, Albert moves into a bungalow in September 2014, which he lives in as his main residence until June 2018, when he moves into a care home following a fall. The property is finally sold in May 2020, realising a gain of £80,000.

    The gain qualifies for private residence relief in full. Although the disposal took place on or after 6 April 2020 and, at 23 months, the period from the date on which Albert moved to the care home and the date on which the property was sold is more than nine months, as Albert is a long term care home resident, he is entitled to the longer final period exemption of 36 months.

    Letting the property

    The family may wish to retain the property rather than sell it, particularly if it has been the family home. Instead, a decision may be taken to let the property out to generate income to pay for the care.

    Normal rules apply as regards the taxation of the rental income and the individual will be taxed on the rental profits.

    If the rental income is less than £1,000 year, the individual can take advantage of the property income allowance and enjoy the income tax-free. Otherwise it is necessary to complete the property income pages of the tax return and pay tax on the profit. Normal rules apply – there are no modifications where the landlord is in care.

  • Tax-efficient savings for all the family

    Although interest rates remain low, there are still various tax-efficient savings incentives available which may help maximise potential returns. This article summarises some of these schemes.

    Help-to-save - The Help-to-save scheme offers working people on low incomes a 50% bonus, rewarding savers with 50p for every £1 saved. Over four years, a maximum bonus of £1,200 is available on savings of up to £2,400. Savings limits are flexible and it is not necessary to pay in every month to get a bonus.

    How much is saved and when is up to the account holder – the rules stipulate that investors can save between £1 and £50 every calendar month, up to a maximum of £2,400 over a four-year period.

    Accounts last for forty eight months from the date that the account is opened and the government bonuses are added at the halfway point, i.e. after two years, and at the end of the four year lifespan of the account, or on the date that the individual becomes terminally ill or dies, if earlier.

    Accounts will be available to open up until September 2023 and may be held by anyone:

    • receiving Working Tax Credit;

    • entitled to Working Tax Credit and receiving Child Tax Credit;

    • claiming Universal Credit and their household earned £604.56 or more from paid work in the last monthly assessment period.

    The investment limits mean that £2,400 is the maximum an individual can save, with a maximum government bonus payable of £1,200. In comparison, high street banks are currently offering a typical interest rate of between 1 and 2% on savings bonds, which does appear to make the Help-to-Save account a particularly attractive option for someone looking to save.

    ISAs and Junior ISAs - The maximum annual investment limit for Individual Savings Accounts (SAs) remains at £20,000 for 2020/21. The limit effectively allows a couple to save a not-insignificant £40,000 a year and receive interest on the investment tax free. There will also be no capital gains tax to pay when the account is closed.

    Junior ISAs are available to UK-resident children under-18 and run on similar lines to ‘adult’ ISAs. The maximum investment limit has been significantly increased for 2020/21 to £9,000 (from £4,368 in 2019/20). This increase provides adequate scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren.

    Help-to-buy ISAs and equity loans - Help-to-buy ISAs continue to be available to assist first-time buyers save a deposit to purchase their first home. Broadly, up to £200 a month can be saved in the ISA (along with an initial deposit of £1,000, and up to a maximum of £12,000) and, provided certain conditions are met, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. A couple buying together could therefore save up to £30,000 tax-free towards the purchase of their first home.

    The Help-to-buy loan equity scheme for new-build properties is designed to help those with 5% deposits get on the housing ladder. The Government lends up to 20% of the property price and after five years the purchaser starts paying interest on the loan. The scheme was due to end in 2021, but it was announced in the Autumn Budget that it has been extended until 2023. However, the scheme is now only open to first-time buyers and lower regional price caps will be applied.

    Premium bonds - With a return rate comparable with regular savings accounts (currently 1.40%), Premium Bonds (PBs) remain one of Britain’s most popular ways to save.  Currently the minimum amount of PBs that can be purchased is £25 and the maximum that may be held is £50,000. It is now permissible for anyone over the age of 16 to buy PBs on behalf of children. The odds on winning a prize in any one month are currently 24,500 to one. There are currently two £1m prizes, five £100,000 prizes and ten £50,000 prizes each month.

    Although Premium Bonds are not strictly an ‘investment’, they can be encashed at any time with the full amount of invested capital being returned - and in the meantime, any returns by way of ‘winnings’ will be tax-free. ISAs

  • Help for the self-employed during COVID-19

    The self-employment income support scheme (SEISS) provides financial help to self-employed traders and partners in partnerships who have lost income as a result of the COVID-19 pandemic. Not all self-employed traders can benefit – it is only open to those with profits from self-employment of £50,000 or less who have filed a 2018/19 tax return.

    The scheme will provide eligible traders with a grant equal to 80% of average profits for three months, capped at £2,500 a month. The grants should be paid in early June 2020.

    Who is eligible? - To qualify, the individual must:

    • have submitted their self-assessment tax return for 2018/19 by 23 April 2020;

    • traded in 2019/20;

    • be continuing to trade when they claim the grant, or would be except for the Coronavirus pandemic;

    • intend to continue to trade in 2020/21; and

    • they have lost profits due to the Coronavirus.

    Traders who had not submitted their 2018/19 tax return by 23 April 2020 are not able to claim a grant under the SEIS.

    £50,000 profit limit

    The grant is limited to traders whose trading profits are not more than £50,000 either for 2018/19 or on average for the three years 2016/17 to 2018/19 inclusive. This if a trader has profits in excess of £50,000 for 2018/19 they can still qualify if their average profits over 2016/17, 2017/18 and 2018/19 are less than £50,000.

    Profits from self-employment must comprise at least 50% of the individual’s income.

    Amount of the grant - The grant is based on average trading profits over the following three tax years:

    • 2016/17;

    • 2017/18; and

    • 2018/19.

    The grant is worth 80% of the average trading profits (capped at £2,500 per month) for three months.

    Where self-assessment returns have not been submitted for 2016/17, 2017/18 and 2018/19, the grant will be calculated by reference to average profits for continuous periods of self-employment, either 2017/18 and 2018/19 or only 2018/19 where the trader was not trading in 2017/18, even if they traded in 2016/17. This will apply, for example, to those who only started trading in 2017/18 or 2018/19.

    Making a claim - It is not yet possible to claim. HMRC are to write to those who (based on 2018/19 filed returns) they think are eligible for a grant in mid-May. Claims must be made via the online portal once this is open and grants should be paid in early June.

    Help for those outside the scheme - The SEISS will not help all self-employed traders who lose income as a result of the pandemic. Those whose profits exceed £50,000 either in 2018/19 or an average over the three-year period from 2016/17 fall outside its scope, as do those who did not submit a 2018/19 tax return by 23 April 20202 or who did not start to trade until 2019/20. Individuals outside the scheme can, if eligible, make a claim for universal credit if they need financial help during the pandemic.

    Deferring VAT and self-assessment - The self-employed can also take the opportunity to defer the self-assessment second payment on account for 2019/20, due by 31 July. Where this option is taken, the payment must be made by 31 January 2020. VAT registered businesses can also take advantage of the VAT deferral option.

  • Annual investment allowances

    From January 2019, businesses considering investing more than £200,000 in plant and machinery may benefit from a change to the capital allowances rules, which should allow them to obtain tax relief at a much earlier time.

    Broadly, business profits, after any adjustments for tax purposes (for example depreciation of fixed assets), are reduced by capital allowances to arrive at taxable profit.  Since capital allowances are treated as a trading expense of a particular accounting period, they can potentially increase a loss, or turn a profit into a loss for tax purposes. This in turn, will have an impact on the amount of tax payable by a business - so where a business is considering expenditure on qualifying items, it may be beneficial to undertake some upfront planning.

    Annual investment allowance

    The annual investment allowance (AIA) for capital allowances purposes is a 100% allowance for qualifying expenditure on machinery and plant. Put simply, this means that a business buying a piece of equipment that qualifies for the AIA can deduct 100% of the cost of that asset from the business’s profit before calculating how much tax is due on that profit.

    VAT-registered businesses claim the AIA on the total cost of the asset less any VAT that can be reclaimed on that asset. Non-VAT-registered businesses can claim the AIA on the total cost of the asset.

    The AIA was set at its current level of £200,000 from 1 January 2016, but it was announced in the 2018 Autumn Budget that, subject to enactment, the limit will be increased to £1,000,000 from January 2019. This measure is designed to stimulate business investment in the economy by providing an increased incentive for businesses to invest in plant or machinery. However, the increase will only be available for a limited time. Under current proposals, the AIA limit will revert to its current level from 1 January 2021. Businesses considering making significant investments in, say, the next five years, may wish to consider bringing their purchase forward, so as to benefit from the increased AIA limit and obtain immediate tax relief on their investment.

    Where a business spends more than the annual AIA limit, any additional qualifying expenditure will still attract relief under the normal capital allowances regime, but this will result in relief being spread over several years, rather than in one go.

    It is worth remembering that connected companies are only entitled to one AIA between them.

    Transitional rules

    The legislation includes a series of transitional rules, which can be complex. It is worth seeking guidance where expenditure on qualifying AIA items is being considered and the business has a chargeable period that spans either of:

    • the operative date of the increase to £1,000,000 on 1 January 2019, or

    • the operative date of the reversion to £200,000 on 1 January 2021.

  • Cars and vans – What’s new for 2020/21

    There are a number of changes that apply from the start of the 2020/21 tax year that relate to the taxation of company cars and vans.

    New way of measuring CO2 emissions - The way in which the level of a car’s CO2 emissions is determined changes from 6 April 2020. The CO2 emissions figure for new cars registered on or after that date is determined in accordance with the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). The CO2 emissions figure for cars registered before 6 April 2020 is determined in accordance with the New European Driving Cycle.

    Different appropriate percentages - For 2020/21, it will be necessary to know whether a new car was registered before 6 April 2020 or on or after that date in order to ascertain the correct appropriate percentage to use when calculating the company car benefit charge.

    With the exception of zero emission cars and those with CO2 emissions of 170g/km and above, for 2020/21, the appropriate percentage for cars registered on or after 6 April 2020 whose CO2 emissions are determined in accordance with the WLTP is two percentage point lower than for a car with the same CO2 figure which was registered prior to 6 April 2020 and whose emissions are determined in accordance with the NEDC. This means, for example, that the appropriate percentage for a car with CO2 emissions of 100—104g/km is 23% where the car is registered on or after 6 April 2020 and 25% where the car is registered before that date. The maximum charge applies for cars registered prior to 6 April 2020 with CO2 emissions of 160g/km and over and to cars registered on or after 6 April 2020 with CO2 emissions of 170g/km and over. The 4% diesel supplement applies where diesel cars do not meet RDE2 standards, subject to the 37% maximum charge.

    For 2021/22, the appropriate percentage for cars registered on or after 6 April 2020 will be one percentage point lower than those registered prior to that date. The figures are aligned from 2022/23.

    Zero emission cars - The charge for zero emission cars is 0% for 2020/21, regardless of whether the car was registered before or after 6 April 2020. It will increase to 1% for 2021/22 and to 2% for 2022/23.

    Cars in 1—50g/km

    The appropriate percentage for cars in the 1—50g/km band also depends on the car’s electric range for 2020/21 onwards. This is the case regardless of whether the emissions are measured under the WLTP or the NEDC.

    The 1—50g/km is split into five bands according to the car’s electric range (also referred to as its zero emission mileage). The bands are:

    • more than 130 miles;

    • 70 to 129 miles;

    • 40 to 69 miles;

    • 30 to 39 miles; and

    • less than 30 miles.

    The appropriate percentages range from 2% to 14% for cars registered before 6 April 2020 and from 0% to 12% for cars registered on or after this date, with lower percentages applying to cars with the greatest electric range.

    Car fuel benefit - Where an employer provides, or meets the cost, of fuel for private motoring in a company car, a benefit in kind charge arises, found by multiplying the appropriate percentage by the multiplier for the year. For 2020/21, the car fuel multiplier is set at £24,500.

    Vans - The flat rate van benefit in kind is set at £3,490 for 2020/21. The charge for zero emission vans is 80% of the full charge, equivalent to £2,792. The fuel benefit charge where fuel is provided for private motoring in a company van is set at £666 for 2020/21.

    The charge for zero emission vans is to be reduced to nil from 2021/22.

  • Making tax-free payment to employees working from home

    As a result of the Coronavirus (COVID-19) pandemic, many workers have been forced to work from home. While working from home saves the costs of commuting to the workplace and perhaps allows workers to adopt a more relaxed dress code, there are also costs associated with working at home. Workers may need to equip themselves with somewhere to work, and perhaps invest in furniture, equipment and stationery where this is not provided by the employer. Household bills are also likely to increase as a result of homeworking arrangements.

    There are also tax implications to consider, both where the employer meets the additional costs and provides equipment etc., and also where the employee picks up the tab.

    Additional household expenses - Household expenses may increase where an employee works from home – the costs of heating and lighting may rise, as may telephone, broadband and cleaning costs. The tax system recognises this and include an exemption that allows employers to reimburse tax-free reasonable additional household expenses incurred as a result of working from home. Household expenses are defined as ‘expenses connected with the day-to-day running of the employee’s home’. For the exemption to apply, the employee must be working at home under ‘homeworking arrangements’. These are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of employment at home.

    The costs that can be reimbursed within the scope of the exemption include the additional costs of heating and lighting the work area and increased charges for internet use, home insurance or business telephone calls. Where working at home triggers a liability for business rates, the extra cost that this entails can be met within the terms of the exemption.

    The exemption does not apply to fixed costs which are the same regardless of whether the employee works at home or not, such as rent or mortgage interest. Likewise, expenses that put the employee in a position to work at home, such as the costs of setting up a home office, are not covered

    As regards the amount that can be reimbursed tax-free, the employer can meet the actual additional costs of working at home. However, these are likely to be difficult and time consuming to identify, and the effort is likely to be disproportionate to the amounts involved. Far simpler is to take advantage of the flat rate allowance which enables employers to pay homeworking employees £6 per week tax free to cover additional household expenses. Prior to 6 April 2020, the tax-free amount was £4 per week. On the downside, the amounts are not exactly generous and may not cover the additional costs in full.

    However, where an employer does not meet the cost of additional household expenses, the employee can only deduct expenses to the extent that they are wholly necessarily and exclusively incurred in performing the duties of the employment. There is no corresponding flat rate deduction for employees.

    Equipment and supplies - A separate exemption removes any charge to tax where the employer provides the employee with ‘accommodation, supplies or services’ used by the employee in performing the duties of the employment. In a homeworking context, this may cover the cost of providing a computer and a printer, stationery and maybe a desk and chair. Private use does not jeopardise the availability of the exemption as long as it is not significant.

    Again, relief is only available to the employee for revenue costs that are wholly, exclusively and necessarily incurred – stationery costs may come into the category. There is no relief for capital expenditure met by the employee in order to facilitate working from home.

  • Covid-19: Business rate help for smaller businesses

    As the Government’s response to the Covid-19 pandemic evolves, various measures have been announced to help business struggling to cope with the impact of the virus. The measures include help through the business rate system for smaller businesses and those in certain sectors.

    Grants for businesses eligible for small business rate relief

    Full (100%) small business rate relief (SBBR) is available for businesses where the rateable value of their business premises is £12,000 or less. Where the rateable value is between £12,001 and £15,000, reduced SBRR is available, tapering from 100% where the rateable value is £12,000 to nil where the rateable value is £15,000 or above.

    To help businesses that pay little or no business rates, it was announced at the time of the Budget that funding would be provided to local authorities to provide businesses eligible for SBBR with grants of £3,000. However, following the Budget, the Chancellor announced an increase in the amount of the grant, to £10,000. The grant is a one-off grant designed to help eligible businesses to meet their on-going business costs. The grants will be available to businesses that receive full or tapered SBRR or rural relief.

    Businesses do not need to claim the grants – local authorities will write to businesses that are eligible.

    Retail, leisure and hospitality sectors - To help sectors that are being hit particularly hard during the Covid-19 pandemic, retail business rate relief is to be doubled from 50% to 100% for 2020/21 and extended to businesses in the leisure and hospitality sectors, providing them with a business rate holiday for 2020/21. The holiday will apply to eligible businesses in England where the rateable value of their business premises is less than £51,000. It will apply where the premises are used wholly or mainly as:

    • shops, restaurants, cafes, drinking establishments, cinemas and live music venues;

    • for assembly or leisure;

    • as hotels, guest and boarding premises and to provide self-catering accommodation.

    Businesses eligible for the holiday do not need to take any action – it will apply to the council tax bill in April 2020. However, where a bill has already been issued, councils may need to reissue a bill to exclude the business rate charge.

    Businesses in the retail, leisure and hospitality sectors will also be able to benefit from a cash grant of up to £25,000 where the rateable value of their business premises is £51,000 or less. The grant is set at £10,000 where the rateable value is £15,000 or less, and at £25,000 where the rateable value is between £15,001 and £51,000. Business do not need to claim the grants – local authorities will write to businesses that are eligible.

    Nursery business - A business rates holiday for nursery businesses is being introduced for 2020/21. It will apply to nursery businesses based in England in premises occupied by providers on Ofsted’s Early Years Register and used wholly or mainly for the provisions of the Early Years Foundation Stage. Local authorities will apply the holiday automatically, although this may involve re-issuing bills that have already been issued.

  • Coronavirus Job Retention Scheme

    The Coronavirus Job Retention Scheme (CJRS) enables employers who are unable to maintain their workforce due to the COVID-19 pandemic to furlough their staff and claim a grant of 80% of the employee’s wages to a maximum of £2,500 a month. Employers are also able to claim the associated employer’s National Insurance contributions on the amount claimed, and also the minimum pension contributions that they are required to make under auto-enrolment. The full amount of the grant must be paid over to the furloughed employee, and the employee pays PAYE tax and National Insurance in the usual way. Employers can choose to top up the amount paid to employees to maintain their usual salary but are under no obligation to do so. The money received by the employer is taxable income and is taken into account computing their taxable profits.

    Eligible employers

    Claims can be made by employers who have furloughed staff as a result of the COVID-19 pandemic, as long as they:

    • created and started a PAYE payroll scheme on or before 19 March 2020;

    • are enrolled for PAYE online; and

    • have a UK bank account.

    Eligible employees

    Claims can only be made in respect of furloughed employees. The scheme does not apply to staff who have had their hours and pay reduced. Furloughed employees cannot do any work for the employer while furloughed, although they may be able to work for a different unconnected employer if their contract permits this or work in a self-employed capacity.

    Only furloughed employees who were on the payroll on or before 19 March 2020 and in respect of whom a PAYE submission had been made by this date are within the scope of the scheme. Employees who were on the payroll as at 28 February 2020 and who were made redundant after that date and before 19 March 2020 can be included in the scheme if the employer re-employs them and furloughs them. The employee does not need to be re-employed by 19 March to be eligible for furlough.

    The option to furlough an employee is available regardless of what type of contract an employee is on. Thus the scheme can be used to furlough employees on full or part-time contacts and also those on flexible or zero-hours contracts.

    Amount of the claim

    Employers can claim 80% of a furloughed employee’s wages to a maximum of £2,500 a month. The calculation of the amount which can be claimed will depend on how the employee is paid and whether their pay varies. The claim will be based on the employee’s ‘wages’, which are the regular payments which the employer makes to the employee. It will include non-discretionary overtime, fees and commission, but no discretionary payments. Payments in kind are also excluded.

    The employer can also claim the associated employer’s National Insurance and minimum pension contributions on the amount of the grant.

    HMRC have produced a calculator which can be used to work out the amount which can be claimed in respect of a furloughed employee.

    Claims should be made online via the online portal. Employers should receive the money within six working days.

  •  

  • Helping children onto the property ladder - 1

    Property taxation is fraught with potential traps. For example:

    • Restricted income tax relief on borrowings to finance residential lettings;
    • Stamp duty land tax (SDLT) (or local equivalents) can be onerous for higher-value properties - especially with the additional 3% ‘surcharge’ that applies to buy-to-let properties;
    • Capital gains tax (CGT) has an effective 8% surtax on the disposal of dwellings;
    • Inheritance tax (IHT) awaits, and most property investment businesses cannot access the business property relief that is available to most trading businesses so that the latter doesn’t have to be ‘broken up’ to pay off IHT;
    • Property is ‘lumpy’; one tends to hold only a few but they each have high value, and it is cumbersome to keep moving the ownership of fractions of property. A gift of property to someone other than your spouse/civil partner will normally be subject to CGT as if you had sold it for its full market value.

    In particular, there is anti-avoidance legislation to consider, such as:

    • ‘Settlements’ legislation;
    • Gifts with reservation of benefit;
    • Pre-owned assets tax.

    Broadly speaking, these act to ensure that you cannot give something away while continuing to derive any benefit from it.

    Start them young - Children under the age of 18 cannot hold legal title to property but they can hold a beneficial interest in property beforehand. One can gift property (or an interest therein) to a simple trust that holds the property until they are old enough to give good receipt; meanwhile, any rental income, etc. belongs to and can be taxable on them.

    Gifts directly from parents to minor children can be caught by the settlements legislation to ‘bounce’ any resulting investment income back to the donor parent, but grandparents, etc., are not generally caught.

    More complex trust arrangements can be devised to ‘hold on’ to the property for longer if there is concern that children/grandchildren will not be mature enough to handle significant wealth at age 18.

    Start young(er)  - Wealth planning prefers a timeframe of decades, rather than months. A married couple or civil partnership can trigger a gain of £24,000 this tax year (2019/20) but pay no CGT, as the personal annual exemption is £12,000. Given time, even relatively modest transfers can accumulate to significant capital wealth without having to pay any CGT.

    It is also possible to make regular gifts out of one’s surplus income that are immediately exempt from IHT, and do not interfere with the usual £3,000 per annum limit (nor do they have to be survived by seven years). Depending on the extent of one’s surplus income, such gifts can dwarf the traditional gift limits. Gifts out of surplus income can effectively act as a ‘safety valve’ to stop further funds accumulating unnecessarily in one’s IHT estate; that is what the regime is designed for.

    Gradual transfers of wealth can more easily be effected by giving away shares in one’s property company over time, instead of fractional interests in the properties themselves. Note that a poorly drafted arrangement to transfer property interests over several years can easily result in CGT arising on all the planned transfers, immediately.

  • Maximise your VAT claim for road fuel

    If your business pays for fuel for work and private journeys, there are different methods to work out the VAT reclaimable. There are further complications if your business is partially exempt.

    Different methods

    Until 2014 if a business paid for road fuel for its owners or workers which they used for business and private journeys, it was expected to reclaim none of the VAT or all of it. If it opted for the latter, it had to account for VAT on the private use using HMRC’s scale charges. Some businesses did well out of the arrangement while others did badly. These days while the scale charges still exist and continue to be used, you can instead work out the amount reclaimable on fuel costs by applying the general VAT rules. These say you can use any fair and reasonable method of apportioning the VAT between business (reclaimable) and private (not reclaimable) use.

    Scale charge pros and cons

    One advantage of HMRC’s scale charge is that it’s simple to use. The drawback is you can end up paying too much VAT. As a rule of thumb, the less fuel paid for by the business the less likely it is that the scale charge will be the most VAT-efficient option. To use the apportionment method instead you’ll need to keep a record of business and total mileage for each car for which the business pays for fuel.

    For each return period you can choose which method to use and opt for the most VAT efficient. What’s more, you can use different methods for each car for which your business pays the fuel.

    Partial exemption

    If you want to work out the most VAT-efficient method, and your business is partially exempt, you’ll need to consider another factor. You must decide if the cost of fuel is attributable to taxable or exempt supplies your business makes, or both. In virtually all cases car journeys will be for the business as a whole and therefore the VAT on the fuel falls in the last category. This is known as the “residual VAT” or “residual input tax”. You can now decide whether to claim/account for VAT using the scale charge or by apportionment.

    You can change methods each VAT period and for each car for which your business has bought fuel. The options are to pay HMRC VAT based on its scale charges or account for private mileage. If your business is partially exempt you must reduce your claim according to the partial exemption rules. The scale charge can be similarly reduced.

  • Structures and buildings capital allowances

    A new tax relief for capital expenditure on construction works applies to qualifying expenditure incurred on or after 29 October 2018. Broadly, the structures and buildings allowance (SBA) provides tax relief on the structural elements of a building, where previously there was no relief available. SBA expenditure does not, however, qualify for the capital allowances annual investment allowance (AIA).

    The main features of the SBA are summarised as follows:

     

    • The allowance is given at a 2% flat rate over a 50-year period, pro-rated for short tax periods.

    • Relief is available for new commercial structures and buildings only, but this can include costs for new conversions or renovations. It may be claimed where all the contracts for the physical construction works were entered into after 28 October 2018.

    • Relief is not available for land costs or rights over land.

    • The structure can be located in the UK or overseas, business must be in the charge to UK tax.

    • Tax relief is limited to the costs of constructing the structure or building, including costs of demolition or land alterations necessary for construction, & direct costs.

    • Relief cannot be claimed for costs incurred in applying for and obtaining planning permission.

    • The claimant must have an interest in the land on which the structure or building is constructed.

    • Relief is not available for dwelling-houses, nor any part of a building used as a dwelling where the remainder of the building is commercial.

    • Business expenditure on integral features and fittings of a structure or building that are allowable as expenditure on plant and machinery, continue to qualify for writing-down allowances for plant and machinery including the AIA, up to its annual limit (£1,000,000 until 31 December 2020).

    • Where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure qualifies for a separate 2% relief over the next 50 years.

     

    The structure must be used for a qualifying activity, taxable in the UK. Qualifying activities are:

    • any trades, professions and vocations

    • a UK or overseas property business (except for residential and furnished holiday lettings)

    • managing the investments of a company

    • mining, quarrying, fishing and other land-based trades such as running railways and toll roads

     

    The sale of the asset does not result in a balancing adjustment (the purchaser takes over the remainder of the allowances written down over the remainder of the 50-year period).

    Claiming SBAs - Only possible to make a claim from when a structure first comes into use.

    The claimant will need an allowance statement for the structure. Where the claimant is the first person to use the structure, a written allowance statement must be created before making the claim & must include information to identify the structure, such as address and description, the date of the earliest written contract for construction, the total qualifying costs, the date the structure was first used for a non-residential activity.

    Where a used structure is being purchased, the claimant can only claim SBA if they obtain a copy of the allowance statement from a previous owner.

    For any extensions or renovations that were completed after the structure was first used, the claimant can record separate construction costs on the allowance statement or create a new allowance statement.

    Record-keeping - A key message is that record keeping and cost segregation will be of paramount importance. In order to claim the allowance, evidence of qualifying expenditure must be produced in the form of an allowance statement, submitted to HMRC. Records can include things like formal contracts, emails or board meeting notes.

  • Property rental toolkit - 2

    Deductions and expenses - Deductions and expenses pose a significant risk area. There is the risk that the landlord will not claim a deduction for all allowable expenses, with the result that more tax will be paid than is necessary. On the other side of the coin is the risk that the landlord will claim a deduction for items which are not allowable, understating profits and running the risk of a penalty. Expenses are only deductible if they are incurred wholly and exclusively for the purposes of the business. Subject to the deductions for capital expenses permitted under the cash basis capital expenditure rules, they must be revenue rather than capital in nature. Distinguishing between capital and revenue expenditure is not always straightforward, and risks may arise.

    Risks also arise where the expense has a dual purpose and is partly private in nature and partly business in nature. A deduction for the business proportion is permitted where this can be separately identified and meets the wholly and exclusively test. Changes to the treatment of finance costs are being phased in with the method of relief switching from relief by deduction to relief as a basic rate tax reduction. Care should be taken to ensure that the split is correct for the tax year in question. Guidance on the rules can be found in HMRC’s Property Income manual at PIM2054.

    The following questions should be considered in relation to deductions and expenses:

    1. Have all items of expenditure on the improvement of an asset been treated correctly?

    2. Have any legal and other professional fees incurred in acquiring an asset been allocated appropriately?

    3. Has all expenditure on essential repairs to a newly-acquired property been treated correctly?

    4. If expenditure is incurred prior to the commencement of the property rental business has been claimed, have all of the conditions been met?

    5. Have capital repayments been excluded from loan interest and finance charges?

    6. Has the finance costs restriction been applied to mortgage interest and other finance costs incurred?

    7. Have any dual purpose expenses been apportioned in respect of any property used only partly for rental business?

    8. If a vehicle has been used by a landlord for non-business travel, including home to work, has only the business travel been claimed?

    9. Are all expenses claimed by the landlord for business trips wholly and exclusively for the purpose of the property rental business?

    10. Where wages and salary costs are being claimed, have employment taxes been applied appropriately?

    11. If there have been wages or salaries paid to relatives or connected parties, are the amounts commensurate with their duties?

    12. If a property has been let rent-free or at less than the normal market rate, has any expenditure been restricted accordingly?

    Relief and allowances - Overlooking reliefs and allowances can prove costly for the landlord. Reliefs that may be in point include:

    rent-a-room relief where a furnished room is let in the landlord’s home;

    the property allowance of £1,000, which can be deducted in place of actual expenses;

    replacement of domestic items relief;

    capital allowances on certain items owned by the landlord, such as tools, ladders, and motor vehicles, which are used in the property business; and

    mileage allowances in place of the actual costs of using a vehicle.

    Care should be taken when claiming reliefs that all the associated conditions are met.

    Losses - Rental losses from a property rental business can only be carried forward and set against future profits of the same property rental business. Likewise, losses arising on furnished holiday lettings can be carried forward and set against profits of the same business. Losses from one rental business cannot be utilised by another property business operated by the landlord at the same time in a different capacity. Care should be taken that losses are computed and utilised correctly. Overseas landlords Landlords living abroad should be aware of the rules under the non-resident landlord scheme.

  • Cash basis accounting - effect on tax of reducing profits

    There are circumstances where using the cash basis of accounting can reduce your profits and create a permanent tax saving. These include where calculating your profits using the normal basis of accounting means:

     • you’re liable to the high income child benefit charge (HICBC)

     • some of your income falls into a higher tax bracket; or

     • your taxable income exceeds £100,000.

    Example

    John is self-employed. His accounts (prepared on the normal accruals basis) for the year ended 31 March 2019 show a profit of £61,000. If the cash basis of accounting were used his profit would be £52,000. John’s spouse receives child benefit for two children for 2018/19 of £1,789. Because his profit for that year is greater than £50,000 John is liable to the HICBC. The maximum charge would apply because his income exceeded £60,000, i.e. the charge would be £1,789. However, using the cash basis of accounting would reduce John’s profits and therefore the HICBC to £358 saving him £1,431.

  • Preparing for year-end PAYE

    HMRC has issued its last-minute advice for employers about submitting their final PAYE reports for 2019/20 and preparing for 2020/21.

    End of year.

    As usual, this time of year is a busy one for employers. There are several routine but important actions you need to take plus one or two new ones for 2020/21.

    PAYE reports.

    When you run your last payroll for 2019/20 you must use the final submission indicator in the full payment submission (FPS) to notify HMRC or it will assume there’s more to come and bombard you with reminders. If your software won’t accept the final report indicator on an FPS, submit an employer payment summary (EPS) with the indicator ticked instead. If you simply forgot to use the indicator, send an EPS with the indicator ticked to show that you didn’t pay anyone in the final pay period and use the final submission indicator. The deadline for your final FPS or EPS for 2019/20 is 19 April. If you find a mistake in your 2019/20 figures, there are different ways to correct it depending on the software you use.

    Updating codes for 2020/21.

    HMRC has just completed the issue of P9 notice of coding email and paper notifications of new tax codes which you must apply for your employees. The codes have been calculated using 2019/20 rates and thresholds because those for 2020/21 will not be definite until any changes announced in the Budget are made. If this is the case, you’ll receive a P6b notice with detail of the new codes which you should implement on the next payroll run.

    Other changes.

    Changes to the employment allowance mean that entitlement will not be automatically carried forward to 2020/21 and you must include a claim through your payroll software. Don’t forget to download and install the updated payroll app from your software provider or HMRC’s “Basic PAYE Tools”. Finally, check that your employees’ pay is at least equal to the new national minimum/living wage rates which apply from 6 April.

    Make sure the “final submission” indicator is used for your last payroll run for 2019/20 by 19 April, you claim the employment allowance for 2020/21 and your employees’ pay is at least equal to the new national minimum wage rates.

  • Using CEST employment status determinations

    Under the off-payroll working rules as extended from 6 April 2020, medium and large public sector organisations that engage workers who provide their services through an intermediary, such as a personal service company, must determine the status of the worker as if the services were provided directly rather than through an intermediary. If the worker is within the off-payroll working rules, the end client (or fee payer where different) must deduct tax and National Insurance from payments made to the worker’s intermediary, and also pay employer’s National Insurance.

    Where the end client is a small private sector organisation, it is the worker’s intermediary that must undertake the status determination in order to ascertain whether IR35 applies.

    HMRC’s CEST tool - HMRC’s Check Employment Status for Tax (CEST) tool can be used to find out whether a worker is employed or self-employed or whether the off-payroll working rules apply. The CEST tool was updated and enhanced at the end of 2019 in preparation for the extension of the off-payroll working rules.

    The tool asks a series of questions about the contractual relationship between the worker and the engager. The following information is required:

    • details of the contract

    • the responsibilities of the worker

    • who decides what work needs doing and when and where

    • how the worker is paid

    • whether the engagement includes any corporate benefits or reimbursement of expenses

    In order to reach a decision on the worker’s status, the user works through the questions selecting the answer most appropriate to their circumstances from those available. The answers given are used to provide a result.

    The tool can be used anonymously – there is no requirement to provide personal details.

    It is not possible to save information entered into CEST so that the user can return to it later – it must be completed in one session.

    Possible outcomes - The CEST tool will provide a result determined from the answers provided. These can be reviewed before obtaining the result.

    The possible outcomes are:

    • off-payroll working rules (IR35) do not apply

    • off-payroll working rules (IR35) apply

    • unable to make a determination (for whether the off-payroll working rules apply)

    • self-employed for tax purposes for this work

    • employed for tax purposes for this work

    • unable to make a determination (for employed or self-employed for tax purposes).

    The tool will provide a reason as to why CEST reached the determination it reached.

    Reliance on decision - HMRC have confirmed that they ‘will stand by the result produced by the service provided that the information is accurate, and is used in accordance with [their] guidance’.

    A copy of the output should be retained.

    However, HMRC warn that they will not stand by results achieved using contrived arrangements.

    Use by end clients - Medium and large private sector organisations and public sector bodies that use workers providing their services through an intermediary can use CEST to fulfil their obligation to make a determination under the off-payroll working rules.

    They should print off the determination and give a copy of it with the reasons for it to the worker and other parties in the chain. They should also keep a copy.

    Use by workers - Workers supplying their services to small end clients can use the CEST tool to check whether they need to apply the IR35 rules. Where they receive a determination under the off-payroll working rules, they can use CEST to check that they agree with it, and to challenge it if they do not.

  • HMRC to stop sending paper tax returns

    HMRC have announced that from April 2020, as part of paper-saving measures, they will no longer automatically send out blank paper Self Assessment returns.

     

    Instead, taxpayers who have filed paper returns in the past will simply receive a short notice to file telling them that HMRC will in future communicate with them digitally. If they wish to continue filing a paper return they may do so but will need to either phone HMRC to request one or download and print a blank return. Anyone already identified by HMRC as unable to file a return online may still receive a paper return for the 2020/21 tax year in April 2020.

     

    The HMRC paper-saving initiative also means that no blank P45 and P60 forms will be sent out to employers from April 2020. These forms will instead have to be obtained via payroll software.

  • Coronavirus self-employed scheme

    HMRC will pay a taxable grant to self-employed individuals and partners equivalent to 80% of their average trading profits for three months, capped at £2,500 per month.

    Who gets what? - The government has chosen to base the amount of grant for each taxpayer on the average of their trading profits as reported in their last three tax returns for the years: 2015/16 to 2018/19. If the taxpayer started trading within this three year period the monthly average of profits will be calculated from the periods in which they were trading.

    The taxpayer (or their tax agent) does not need to provide any figures at this stage. HMRC will arrive at the taxpayer’s average earnings by totalling up the reported profit for the three tax years (or shorter period as applicable) and divide by three to arrive at a typical average year. One quarter of that average annual profit will then form the basis of the SEISS grant awarded – at the 80% rate.

    The number of months covered by a SEISS grant may be extended beyond three months if the coronavirus shutdown continues beyond the end of June.

    Who doesn’t qualify - The SEISS grant will not be payable to anyone who meets any of these conditions:

    • has average annual profits of £50,000 or more – those taxpayers will get nothing
    • has not submitted a tax return for 2018/19
    • receive less than half of their annual taxable income from self-employed profits
    • has already ceased trading permanently.

    If the taxpayer has not submitted their 2018/19 tax return, they have until 23 April 2020 to submit it in order to qualify for the grant. Penalties for late filing and late payment of tax will apply as normal.

    Those who started trading on or after 6 April 2019 are not eligible for the SEISS grant. This seems harsh, but HMRC has to draw the line somewhere.

    The purpose of the SEISS grant is to help traders through the coronavirus crisis. To qualify for the grant the business must have traded in 2019/20 and would still be trading if it hadn’t been for the interruption to business due to the coronavirus. If the trader has taken the decision to cease trading completely, no grant is payable.

    Property letting businesses are not regarded as a trade, so landlords will not qualify for the SEISS grant even if more than half of their taxable income is from rental income.

    Similarly, the letting of furnished holiday accommodation is not strictly a trade, although it is treated as a trade for certain pensions and CGT purposes. HMRC are unlikely to consider income from furnished holiday lets as qualifying for the SEISS grant, although these landlords will be among the hardest hit of all “self-employed”.

    How will the grant be delivered? - HMRC will contact those taxpayers who are eligible for this grant and will invite them to apply for the payment online. It is not clear if this contact will be made by letter, but it certainly won't be by email or text message.

    The taxpayer may need to confirm to HMRC that they were trading in 2019/20 and expect to continue to trade in 2020/21. Some indication of the business turnover for 2019/20 may have to be provided at that point.

    When will the money arrive? - The SEISS grant for three months will be payable in one lump sum into the taxpayer’s bank account, but the money will not be available until early June.

    The grant will be treated as taxable income, and will have to be reported on tax returns for 2020/21. Taxpayers in receipt of working tax credits or universal credit will have to treat the SEISS grant as part of their self-employed income for 2020/21. coyle cave

  • Winding up your personal service company

    Come April, many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because they fall within the off-payroll working rules, with the result that because tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies on the payroll.

    Where the personal service company is not needed, the question arises as how best to wind it up and extract any remaining cash.

    Striking off

    Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.

    The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.

    If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.

    Members’ voluntary liquidation (MVL)

    Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.

    An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.

  • Annual tax on enveloped dwellings

    The annual tax on enveloped dwelling applies in the main to companies that own residential property in the UK. The amount of the tax depends on the value of the property, and only applies where the property is valued at more than £500,000.

    Scope of the ATED

    A liability to the ATED arises where a property that is classed as a ‘dwelling’ is owned completely or partly by a company, a partnership where any of the partners is a company, or by a collective investment scheme (for example, a unit trust or an open-ended investment vehicle), and that property is worth more than £500,000.

    A property is classed as a dwelling if all or part of it is used, or could be used, as a residence. The definition of dwelling includes houses and flats. Where the property has a garden or grounds, these too form part of the dwelling.

    However, the definition of ‘dwelling’ excludes hotels, guest house, boarding house accommodation, student halls of residents, care homes, hospitals, military accommodation and prisons.

    In some circumstances it may be possible to claim relief from the charge, for example if it is let to a third party on a commercial basis or open to the public for at least 28 days a year. Details of the reliefs and exemptions can be found on the Gov.uk website.

    Valuing the property

    To ascertain whether the ATED applies and if it does, the amount of the tax, the property’s value must be known. For ATED purposes, properties are revalued every five years; from 1 April 2018 the charge is based on the value as at 1 April 2017. The next revaluation date is 1 April 2022.

    The value of the property is the price that it would fetch in the open market with a willing buyer and a willing seller. If help is needed in working out how much ATED is due, HMRC can provide a pre-return banding check. Applications can be made on the Gov.uk website using the PRBC form.

    Chargeable period

    The chargeable period for the ATED runs from 1 April to the following 31 March.

    ATED returns

    Where the property in respect of which a liability to the ATED is held on 1 April, a return for the period that commences on that date must be filed by 30 April in that year. Thus, where a property within the ATED is held on 1 April 2020, a return for the chargeable period that runs from 1 April 2020 to 30 March 2021 must be filed by 30 April 2020. Returns must be filed online.

    Amount of the charge

    The amount that charged depends on the value of the property. The charge for the period from 1 April 2020 to 31 March 2021 is shown in the table below. It must be paid by 30 April 2020.

    Property value                                            Annual charge

    More than £500,000 up to £1 million          £3,700

    More than £1 million up to £2 million          £7,500

    More than £2 million up to £5 million          £25,200

    More than £5 million up to £10 million        £58,850

    More than £10 million up to £20 million      £118,050

    More than £20 million                                 £236,250

  • Case study: Coronavirus Job Retention Scheme claims

    The COVID-19 pandemic has brought an unprecedented challenges for businesses. Information has been changing on a daily basis, making it difficult to keep up-to-date with support measures and where to find the necessary guidance. This article focuses on claims for wages under the Job retention Scheme (CJRS), which is now up and running.

    Broadly, the scheme is available to all UK employers with a PAYE scheme that started on or before 19 March 2020. It covers part of the salary of employees who would otherwise be laid off because of the crisis – known as ‘furloughing’. Employees on any type of employment contract, including full-time, part-time, agency, flexible or zero-hour contracts can be included.

    To access the support, employers have to ‘furlough’ employees, which means asking them to stop working but retaining them on payroll. This is a formal process with employment law implications and needs to be followed through carefully. Only furloughed employees on the payroll on or before 19 March who have received some pay in 2019/20 can be covered. HMRC will pay a grant worth 80% of an employee’s usual wages, up to £2,500 a month, and associated employer NICs and minimum automatic enrolment employer pension contributions on the subsidised wage. Note that furloughed employees cannot carry out work for their employer during furlough and there are also rules around volunteer work and training.

    General requirements for making claims are summarised as follows:

    • the employer must agree with the employee that they are a furloughed worker;

    • employees must be notified that they have been furloughed;

    • employees must be furloughed for a minimum of three weeks;

    • the employee cannot do any work for the employer that has furloughed them;

    • the scheme allows claims for 80% of wages, up to a maximum of £2,500 per month per furloughed employee;

    • separate claims are needed for each PAYE scheme;

    • only employees who were on the PAYE payroll on or before 19 March 2020 may be furloughed;

    • an HMRC RTI submission notifying payment in respect of the employee claimed for must have been made on or before 19 March 2020; and the employer must have a UK bank account.

    The majority of employers with full-time or part-time employees on a set salary will need to work out the following:

    1. total amount being paid to furloughed employees - 80% of your employee’s wages up to a maximum of £2,500 a month

    2. total employer NICs

    3. total employer pension contributions (up to 3%)

    Example  - An employee who has been working for an employer for many years is paid a fixed gross monthly salary of £2,400 per month, with the last payment received on the last day of February 2020. The employee has agreed to be placed on furlough from 21 March 2020, at 80% of their salary.

    The employer can claim a CJRS payment for Mach as follows:

    £2,400 divided by 31 (days in March) = £77.42

    £77.42 x 11 days (21 March to 31 March) = £851.62

    £851.62 x 80% = £681.30

    The maximum amount test is: monthly maximum of £2,500 divided by 31 days in March = £80.65

     £80.65 x 11 days of furlough = £887.15. This employer’s claim of £681.30 is a lower amount, so this is the amount that may be claimed.

    The employee’s gross pay at the end of the month is made up of £1,548.40 of salary funded by the employers for 1 to 20 March (20 days), plus £681.30 of pay funded by CJRS for the remaining 11 days of March. The employer NICs due on the total gross pay of £2,229.70 is £208.48

     Step 1: £208.48 divided by 31 days in March = £6.73

     Step 2: Daily employer NIC amount of £6.73, multiplied by 11 furlough days = £74.03.

    The employer claims £74.03 for employer NIC’s due on the employee’s March pay.

    Claiming - Employers need to be registered for PAYE before CJRS claims can be made. Once the employer has gathered together the relevant information, the claim can be made at https://www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme.

    HMRC advise that payment will be received six days after making an application. Employers who wish to receive a payment from the scheme by the end of the month will therefore need to submit their claim at least six working days in advance for the money to clear into their bank account.

  • New reporting procedure for cars

    New tax rates for zero and low emission company cars mean that from 6 April 2020 employers must provide more information to HMRC.

    Lower tax bills.

    There is a significant reduction in tax bills for drivers of electric and hybrid company cars which will apply for 2020/21. The changes will also benefit employers by reducing the amount of car benefit on which you have to pay Class 1A NI. As a result, HMRC is making changes to its reporting procedures for employers.

    New Forms P46 car.

    If after 5 April 2020 an employee’s company car is changed or they have use of one for the first time, and it’s a zero or low emissions car, you’ll need to notify HMRC in the new box that will be added to the P46 car. If it’s a hybrid with CO2 emissions of between 1g/km and 50g/km you must enter the vehicle’s zero emission mileage, i.e. the maximum distance it can be driven in electric mode without recharging. If you payroll your company car benefits, there will be a new field on the PAYE full payment submission in which to enter the mileage details.

    If you use a paper P46 car rather than the online version, make sure that you download and use the new-style form. Destroy any old-style forms. The new forms will be available to download from 6 April 2020.

    Hybrid information.

    If you’re leasing a hybrid vehicle, the leasing firm is required to provide you with the mileage information. If you own the vehicle, the zero emission mileage figure can be found on its “certificate of conformity”. If this isn’t available you can obtain the figure from the manufacturer.

    Existing company car users.

    You aren’t required to notify HMRC about employees who currently use electric or hybrid cars and continue with the same vehicle after 5 April 2020. However, it would be helpful if you notified the employees that their tax bills might reduce and that they should contact HMRC as soon as possible to check if their code number needs to be amended.

    There will be a new P46 car (online and paper versions) from 6 April 2020. Destroy any old paper versions. For hybrid cars you must provide details of the vehicle’s electric only range as shown on the certificate of conformity.

  • FRS for VAT – Who is it for?

    The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations, although some VAT experts would argue that the scheme is not simple to use.

    Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more.

    If the business incurs few expenses, and it operates in a sector with a relatively low FRS percentage, it will pay out less VAT to HMRC under the FRS than it would outside the scheme. Most VAT-registered business can use the FRS if it is expected that VAT taxable turnover in the next 12 months to be £150,000 or less. Certain other eligibility criteria apply.

    The business must leave the scheme if:

    • it is no longer eligible;

    • on the anniversary of joining, turnover in the last 12 months was more than £230,000 (including VAT) - or if it is expected to be in the next 12 months;

    • total income in the next 30 days alone is expected to be more than £230,000 (including VAT)

    The VAT flat rate used usually depends on the business type.

    Common percentages used by service-related businesses in recent years include:

    • Accountancy and legal services 14.5%

    • Computer or IT consultancy 14.5%

    • Estate agents and property management 12%

    • Management consultancy 14%

    • Business services not listed elsewhere 12%

    A 1% discount on the relevant flat rate is given in the first year as a VAT-registered business.

    Since 1 April 2017, a flat 6.5% FRS rate has applied for businesses with limited costs (see below). Since the rate of 16.5% of gross turnover equates to 19.8% of the net, the result is that there will be almost no credit for VAT incurred on purchases.

    A ‘limited cost’ business is defined as one whose VAT inclusive expenditure on goods is either:

    • less than 2% of their VAT inclusive turnover in a prescribed accounting period;

    • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

    ‘Goods’ for these purposes must be used exclusively for the purpose of the business but exclude the following items:

    • capital expenditure goods;

    • food or drink for consumption by the flat rate business or its employees;

    • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services - for example, a taxi business - and uses its own or a leased vehicle to carry out those services).

    (These exclusions are part of the test to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2%.)

    FRS and MTD - With regards to record-keeping, HMRC confirm that for compliance with Making Tax Digital (MTD) for VAT obligations businesses using the FRS do not need to keep a digital record of:

    • purchases unless they are capital expenditure goods on which input tax can be claimed;

    • the relevant goods used to determine if the business needs to apply the limited cost business rate.

    Not all software packages are configured to accommodate the FRS, and many will only permit sales to be recorded as standard rated, reduced rated, zero rated or exempt. Users should use one of the following methods to record sales:

    • record the supply as one standard rated supply and one zero rated supply (i.e. have two entries for each supply); or

    • record the sale at one rate and correct the VAT through an adjustment at the end of the period (as is suggested for cases where more than one supply is invoiced on a single invoice).

  • ER but not as we know it

    The Spring Budget 2020 announced a significant restriction on future availability of entrepreneurs’ relief (ER) for individuals who dispose of all or part of their business, individuals who dispose of shares in their personal company, and trustees who dispose of business assets.

    Broadly, the lifetime limit of £10m is to be reduced to £1m for disposals on or after 11 March 2020. The measure also provides that the lifetime limit must take into account the value of ER claimed in respect of qualifying gains in the past. The relevant legislation is included in Finance Bill 2019-21, so is currently subject to enactment.

    Qualifying gains within the lifetime allowance are charged at the rate of 10%. Gains in excess of this limit are charged at the rate of 20% rate. For disposals between 6 April 2011 and 10 March 2020, the lifetime limit on gains qualifying for ER is £10 million. The £10 million limit is a lifetime threshold and claims may be made against it on more than one occasion. Finance Bill 2019-21 also includes provisions to rename ER as ‘business asset disposal relief’ from 2020-21 onwards.

    Selling all or part of a business - To qualify for business asset disposals relief, both of the following must apply:

    • the individual must be a sole trader or business partner

    • the individual must have owned the business for at least two years before the date they sell it

    The same conditions apply if the business is closing rather than being sold. The business assets must be disposed of within three years to qualify for relief.

    Selling shares or securities - To qualify, both of the following must apply for at least two years before the shares are sold:

    • the individual is an employee or office holder of the company (or one in the same group)

    • the company’s main activities are in trading (rather than non-trading activities like investment)  or it’s the holding company of a trading group.

    There are other rules depending on whether or not the shares are from an Enterprise Management Incentive (EMI). Broadly, if the shares are from an EMI, the investor must have both:

    • bought the shares after 5 April 2013

    • been given the option to buy them at least one year before selling them

    If the shares are not from an EMI, for at least two years before the shares are sold, the business must be a "personal company". This means that the investor has at least 5% of both the shares and the voting rights in the company. The investor must also be entitled to at least 5% of either:

    • profits that are available for distribution and assets on winding up the company

    • disposal proceeds if the company is sold

    If the number of shares held falls below 5% because the company has issued more shares, the investor may still be able to claim business asset disposals relief. The investor should elect to be treated as if they had sold and re-bought the shares immediately before the new shares were issued. This will create a gain on which ER can be claimed.

    The investor can also elect to postpone paying tax on that gain until they come to sell the shares. This is usually done via the self-assessment tax return. If the company stops being a trading company, ER can still be claimed if the shares are sold within three years.

    Selling assets previously lent to the business - To qualify, both of the following must apply:

    • the investor sold at least 5% of their part of a business partnership or their shares in a personal company

    • they owned the assets but let their business partnership or personal company use them for at least one year up to the date they sold the business or shares - or the date the business closed.

    is always changing, and entrepreneur’s relief is no exception. The £10 million lifetime limit is to be reduced to £1m for disposals on or after 11 March 2020 – read the latest update here.

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