Dealing with directors’ loans
For accounting purposes, cash transactions between a director and a personal or family company are recorded through the director’s account. At the end of an accounting period, if the director owes the company money (i.e. the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators)), there will be tax consequences to consider.
A tax charge will arise under the Corporation Tax Act 2009, s 455 where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge is the liability of the company and is calculated as 32.5% of the amount of the loan. The rate of the charge is equivalent to the higher dividend rate.
Kim is the sole director of her personal company K Ltd. The company’s financial year end is 31 March.
On 31 March 2020, Kim’s loan account is overdrawn by £20,000 and it remains overdrawn by this amount on 1 January 2021 (the date on which corporation tax for the period is due). The company must pay a tax charge under s 455 of £6,500 (£20,000 @ 32.5%).
Can the charge be avoided?
Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:
• the director can pay funds into the company to clear the loan;
• the company can declare a dividend to clear the loan balance;
• the director’s salary can be credited to the account to clear the loan balance; or
• the company can pay a bonus to clear the loan balance.
It should be noted however, that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.
Two further points are also worth highlighting here:
• Clearing the loan may not always be beneficial and paying the s 455 charge may be preferable. For example, if the tax on a dividend or bonus credited to clear the loan is more than the section 455 charge.
• Once the loan is cleared, the s 455 tax is repayable. This happens nine months and one day after the end of the tax year in which the loan is cleared.
It should also be noted that anti-avoidance rules apply to prevent the director clearing a loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.
In summary, the section 455 tax is essentially a holding tax payable by the company. The rules apply all shareholders, even if they are not directors. The charge is specifically designed to be equal to the higher rate tax on a dividend to deter shareholders from taking money from a company when it isn’t owed to them.
Tax charge on company vans
If the employer also pays for petrol for private journeys in a company van, a separate van fuel scale charge arises.
Business use only - If the van is only used for business journeys, there is no tax to pay and no employer’s Class 1A National Insurance. This would be the case if, say, an employee drove to the employer’s premises in his or her own vehicle, picked up the van and drove the van for work purposes, returning it to the employer’s premises at the end of the day. Journeys to a temporary workplace also count as business journeys and where this is the case, the employee can start the van journey from home.
Unrestricted private use - Private use is use of the van other than business use. When the employee has unrestricted private use of a van, a tax charge arises. The amount that is charged to tax is £3,490 for 2020/21 and £3,430 for 2019/20 where the van is not an electric van. Consequently, a higher rate taxpayer will pay £1,396 in tax for 2020/21 and a basic rate taxpayer will pay £698.
The employer also pays Class 1A National Insurance on the van and fuel charge.
Restricted private use - There is no tax charge if the restricted private use condition is met. There are two tests that must be satisfied for this to be the case – the commuter use requirement and the business travel requirement.
The commuter use requirement stipulates that the terms on which the van is made available to the employee prohibit private use other than for home to work travel and the van is not used otherwise for private travel. Insignificant private use, such as stopping to buy a newspaper on the way to work, is ignored in determining whether this condition is met.
The business travel requirement stipulates that the van is mainly available to the employee for the purposes of the employee’s business travel.
Where the restricted private use condition is met, there is no tax to pay, and also no fuel benefit if the employer pays the cost of the fuel for home to work travel.
Zero-emission vans - For 2020/21, zero-emission vans are charged at 80% of the full charge, i.e. £2,792 (80% of £3,490). For 2019/20, the charge was 60% of the full charge, i.e. £2,058 (60% of £3,430).
At the time of the March 2020 Budget, the Government announced that legislation is to be introduced to reduce the van benefit charge to zero for zero-emission vans with effect from 6 April 2021.
Pool vans - No charge arises in respect of a van that meets the conditions for a pool van. To qualify, the van must be:
• available for use and used by more than one employee;
• available to each employee because they need it to do their job;
• not ordinarily used by one employee to the exclusion of others;
• not normally kept at or near and employee’s home;
• used only for business journeys (although limited private use is allowed if incidental to the business use).
Pool vans do not need to be reported to HMRC.
Furnished holiday lettings & the Covid-19 pandemic
Lets that qualify as furnished holiday lettings (FHL) enjoy special tax rules compared to other types of let, allowing landlords to benefit from certain capital gains tax reliefs for traders and to claim plant and machinery capital allowances for items such as furniture, fixtures and equipment. Profits from an FHL business also count as earnings for pension purposes.
To qualify as an FHL the property must be in the UK or (for the time being at least) in the EEA. It must also be let furnished and meet various occupancy conditions.
Occupancy conditions - To qualify as an FHL, all three occupancy conditions must be met. Where the let is continuing, the tests are applied on a tax-year basis; for a new let, the must be met for the first 12 months of letting.
Test 1 – Pattern of occupancy condition
This test is met if the total of all lettings that exceed 31 days is not more than 155 days in the year.
Test 2 – The availability condition
The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property).
Test 3 – The letting condition
The property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days are not counted unless the let exceeds 31 days as a result of unforeseen circumstances. Lets to family or friends on a non-commercial basis are also ignored.
Impact of Coronavirus - The hospitality and leisure sectors have been hard hit by the Covid-19 pandemic and the lockdown means that many landlords with holiday lets will fail to meet the letting condition in 2020/21. However, all is not lost and there are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a period of grace election.
Averaging election - An averaging election can be used where a landlord has more than one holiday let and one or more of the properties does not meet the letting condition. Instead of applying this test on a property by property basis, it can be applied by reference to the average rate of occupancy across all properties let as FHLs. Thus, the test is treated as met if on average the holiday lets are let for 105 days in the tax year.
While, at the time of writing, it was unclear when all the restrictions may be lifted, an averaging election may help landlords with mixed portfolios including some winter holidays lets as well as those that are popular in the summer.
Period of grace election - A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to. The Coronavirus pandemic is a prime example of where this may be the case.
To make a period of grace election, the pattern of occupation and availability conditions must be met. Also, the letting condition must have been met in the year before the first year in which the landlord wishes to make a period of grace election. If the letting condition is not met again in the following year, a second period of grace election can be made. However, if the test is not met in year 4 after two period of grace elections, the property will no longer qualify as a furnished holiday letting.
The election provides a potential lifeline to landlords of holiday lets unable to meet the letting condition in 2020/21 as a result of the Covid-19 pandemic. It can be made either on the self-assessment tax return or separately (either with or without an averaging election). A period of grace election for 2020/21 must be made by 31 January 2023.
Auto-enrolment threshold changes for 2020/21
The government has set the bands and thresholds for workplace pensions. These apply for paydays on or after 6 April 2020. For employees between 22 and 74 where you pay at the rate of:
• £6,240 per year, they are entitled to join your workplace pension and contribute to it but they do not have to.
• Between £6,241 and £10,000 per year, they can choose to join your workplace pension. If they do, both you and they must contribute to it.
• More than £10,000 per year, you must auto-enrol them in your workplace pension and both you and they must contribute.
From April 2020 you will only have to contribute to an employee’s workplace pension if they join your scheme and you pay them at the rate of £6,240 or more per year.
uring the Covid-19 pandemic, landlords may have periods when their properties have been empty. Landlords letting furnished holiday lettings were particularly badly affected due the restrictions imposed during the lockdown period, as letting of holiday homes was prohibited between 23 March 2020 and 3 July 2020. Home moves were also put on hold at the start of the lockdown.
How long can a property remain empty before the property rental business is regarded as ceasing?
Temporary pause or permanent cessation
In the life of a property rental business, rental business activities may stop and, after an interval, start again. A prime example of this during the Covid-19 pandemic when some lets may be have empty for a period, before being let again as restrictions eased.
The question as to whether the business has been paused or has ceased depends on the facts. Even if lettings start again, it is not a given that this is a continuation of the previous business – it may instead by the start of a new property rental business.
To determine whether the existing property rental business is continuing or has ceased, it is necessary to look at the facts.
In reaching a decision, consideration should be given to factors such as:
• whether the same property is let before and after the break;
• where the same property is re-let after a break, whether it been altered significantly during the empty period;
• the length of the period between lets; and
• the type of activities that constitute the property rental business before and after the pause.
For example, where the property rental business comprises a single property, the property rental business will not normally be regarded as ceasing where there is a break between lets while a new tenant is found.
HMRC’s rule of thumb
HMRC offer a rule of thumb as a guide to whether a property business has ceased. The old business is treated as stopping where there is an interval of more than three years and different properties are let in the old and new period of letting activity. A business may be regarded as continuing where the gap is more than three years, although evidence would need to be provided to show this is a case. This could be important where losses are involved, as losses from the old business cannot be set against profits of the old.
Where a rental business comprises the letting of several properties, it will normally be regarded as having ceased when the last property has been sold or is used for another purpose, for example as a private residence. If there is only one property in the property rental business, the business would cease when the property was no longer available for letting. However, it would continue if the taxpayer bought a different property to let and lived in the original let property as his or her home.
Stamp duty on share transactions
Stamp duty is the oldest of our surviving taxes – dating as far back as 1694 – although the scope of the tax has considerably reduced over time and is now entirely limited to paper transactions in shares.
Stamp Duty is generally payable on non-electronic share deals on transactions valued over £1,000. Stamp Duty Reserve Tax (SDRT) is charged on share purchases made electronically (e.g. an online share dealing account).
Until recently, the payment of stamp duty was evidenced as it had been for over 300 years, namely by impressing a stamp on a paper document. This made it extremely simple but cumbersome, and began to cause unacceptable delays in the modern commercial world. In response to a review by the Office for Tax Simplification (OTS), regulations made in March 2019 finally removed the necessity for an impressed stamp. With effect from 22 April 2019, the payment of duty is denoted by stamps produced by means of a die - and the definition of ‘die’ has been extended to include any machine used under the direction of HMRC for denoting duty.
Stamp duty is a tax on ‘instruments’ specified in the legislation, including:
• stock transfers;
• other documents transferring a beneficial interest in stock or marketable securities;
• Companies House returns for purchase of own shares;
• creation of bearer instruments;
• sale of a partnership interest;
• certain court orders that act as a document of transfer.
Standard rate of stamp duty
Stamp duty is referred to as an ad valorem tax – meaning it is payable in proportion to the estimated value of goods or transaction concerned.
A transfer on sale of stocks or marketable securities is subject to stamp duty at the standard rate of 0.5% and is calculated by reference to the amount or value of the consideration paid.
Where the amount of value of the consideration for the sale is £1,000 or under, no 0.5% stamp duty charge will apply if the instrument contains a ‘certificate of value’.
A certificate of value is a statement that the transaction effected by the instrument does not form part of a larger transaction or series of transactions in respect of which the amount or value, or aggregate amount or value, of the consideration exceeds that amount.
An instrument representing a share sale for consideration of £1,000 or less which does not contain a certificate of value is subject to stamp duty at 0.5%.
Stock transfer forms
Stamp duty is unique among UK taxes in that the legislation does not specify a person who is liable to pay the duty. In practice, it is usually the person who needs the instrument to prove title (e.g. to register ownership of shares) or the person’s agent (such as a solicitor or stockbroker) who presents it for stamping and pays the duty.
A stock transfer form can be obtained from a broker, a lawyer or an accountant who deals in shares, or it can be downloaded from the internet. In normal circumstances the form would be posted to HMRC for review, but temporary measures have been introduced due to the coronavirus pandemic which mean that forms should currently be sent in electronic format.
The deadline for paying Stamp Duty and getting stock transfer documents to the Stamp Office is no later than 30 days after they have been dated and signed. Interest and penalty charges may be imposed for late stamping and/or payment.
Different rules apply to documents relating to UK land.
If there is an overpayment of stamp duty on a transaction a refund may be claimed. Refunds must be claimed within two years of the date of the stamped document. If the document is undated, a refund can be claimed within two years of first execution.
Running a business from home
Small businesses can choose to be taxed on the basis of the cash that passes through their books, rather than undertaking the more complex accounting calculations designed for larger businesses. This is known as the ‘cash basis’, and where a business opts to use it, it will also be possible for that business to use certain simplified arrangements for claiming expenditure in working out taxable profits for income tax purposes. Flat rate expenses can be claimed for business costs for vehicles, working from home, and living at the business premises.
Working from home - Where a business owner runs the business from home they will be able to claim flat rate expenses for business use of the property. This means that it will not be necessary to work out the proportion of personal and business use, for example, how much of their utility bills relate to business use. Instead a monthly deduction will be allowable provided certain criteria are satisfied. The current rates are as follows:
Number of hours worked per month Applicable amount
25 or more £10.00
51 or more £18.00
101 or more £26.00
HMRC's view is that ‘number of hours worked’ means hours spent wholly and exclusively on ‘core business activities’ in the home with core business activities comprising the provision of goods and/or services, the maintenance of business records and marketing and obtaining new business.
Example - John worked 60 hours from home for a period of 10 months, and worked 110 hours during two particular months. He can claim the following amount against his income for tax purposes:
10 months x £18.00 = £180.00
2 months x £26.00 = £52.00
Total amount claimed = £232.00 - Living at the business premises
Some businesses use their business premises as their home, for example, hotels and guesthouses. Where a premise is used for both business and private use, the business owner may, instead of making the standard deduction outlined above, make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:
Number of relevant occupants Applicable amount
3 or more £650
A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.
Example - Sandy runs a guesthouse and also lives there all year round with her husband. Her overall business expenses are £10,000. She can claim a flat rate deduction for private use as follows:
12 months x £500 per month = £6,000
Expenses claimed against income £10,000 - £6,000 = £4,000
Where a person claims a flat rate deduction, they are still able to claim a separate deduction for fixed costs such as council tax, insurance and mortgage interest.
Expenses checker - You don’t have to use simplified expenses. You can decide if it suits your business. HMRC provide a simplified expenses checker, which can be used to compare what you can claim using simplified expenses with what you can claim by working out the actual costs. The checker can be found online at https://www.gov.uk/simplified-expenses-checker.
Claims - Anyone wishing to utilise the simplified expenses regime should ensure that they keep records of business miles for vehicles, the number of hours worked at home, and details of people living at the business premises over the year. At the end of the year, work out how much can be claimed and include these amounts of your self-assessment tax return.
Rental expenses – when can you claim relief
Landlords incur various expenses when letting out a property. These may be directly related to the property itself, such as repairs and maintenance, or in relation to finding tenants and managing the let. To ensure that tax is not paid unnecessarily, it is important that the landlord claims relief for all allowable expenses.
General rule - The general rule is that a deduction is allowed for revenue expenses that are incurred wholly and exclusively for the purposes of the property rental business. Relief for capital expenditure depends on whether the cash basis or the accruals basis is used. Under the default cash basis, capital expenditure can be deducted unless a deduction is specifically prohibited, as is the case for land, property and cars.
Common expenses - Although the exact expenses will vary from let to let, the following is a list of common expenses which a landlord may incur and which may be deducted in computing profits as long as the wholly and exclusively rule is met:
• general maintenance and repairs to the property (but not improvements);
• water rates;
• council tax;
• gas and electricity;
• insurance (such as landlord’s insurance for buildings and landlord’s contents);
• cleaning costs;
• gardening costs;
• letting agents’ fees;
• property management fees;
• legal fees for lets of less than a year or for renewing a lease of less than 50 years’
• accountant’s fees;
• office costs, such as stationery, paper, printing and postage;
• advertising costs;
• phone calls; and
• rent where the property is sub-let.
Relief is not available if the tenant incurs the expense rather than the landlord (as may be the case with council tax and utilities, for example).
Vehicle costs - Where the landlord uses his or her own car for the purposes of the property rental business, a deduction can be claimed on a mileage basis using the simplified expenses system. The rate for cars and goods vehicles is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter.
Interest and other finance costs - Relief can be claimed for interest costs where the property was funded with borrowings, but not for any capital repayments on the mortgage. Interest costs are allowable on borrowings up to the cost of the property when first let. The mortgage does not need to be secured on the let property.
For 2020/21 relief for interest and associated finance costs is given fully as a tax reduction at the basic rate. For 2019/20, 25% of the costs were deductible in computing profits, with relief for the remaining 75% being given as a tax reduction at the basic rate.
Keep records - To ensure that deductions for expenses are not overlooked, the landlord should keep a record of all expenses incurred in relation to the let, together with receipts and invoices. Failing to claim allowable deductions means that tax will be paid unnecessarily.
Preparing for 2021 changes: Customs grants available
In June 2020, the Government announced that it was making funding available to customs intermediaries and businesses to help increase their capacity to make customs declarations. Broadly, businesses need to prepare ahead of new procedures coming into play in 2021 following the end of the UK’s EU withdrawal transition period.
As well as injecting a substantial amount of cash to support businesses with recruitment, training and supplying IT equipment to handle customs declarations, the Government is also changing rules which will remove the financial liability from intermediaries operating on behalf of their clients, and will also allow parcel operators to continue declaring multiple consignments in a single customs declaration.
In August, to help accelerate further growth of the customs intermediary sector and help meet the increased demand it will see from traders at the end of the transition period, the Government confirmed that the next phase of the customs grant scheme is now open for application.
Who can apply? - To qualify for a grant a business must:
• have been established in the UK for at least 12 months before the submission of the application and when the grant is paid; and
• not have previously failed to meet its tax obligations.
In addition, the businesses must meet one of the following descriptions:
• complete or intend to complete customs declarations on behalf of clients;
• be an importer or exporter and complete or intend to complete declarations internally for their own good
• be an organisation which recruits, trains and places apprentices in businesses to undertake customs declarations.
The grant can cover salary costs for new or redeployed staff, up to a limit of £12,000 per person and £3,000 for recruitment costs for new employees. This will help them to recruit new staff and train them up ahead of July 2021, when all traders moving goods will have to make declarations.
In relation to training, the grant can provide businesses with up to 100% of the actual costs of externally-provided training for employees, up to a limit of £1,500 for each employee on the course. It will also cover the cost of internal training, up to a limit of £250 for each employee on the course.
The grant for IT covers expenses for increasing capacity or productivity for customs declarations, customs software, set-up costs, and related hardware.
There is a state aid restriction, which applies a cap on total grants received in the last three years at 200,000 euros (which is the maximum amount of state aid available).
Funding - The business will receive the funding for the cost of recruitment then 50% of the eligible salary costs once the grant offer is issued. The remaining 50% of salary costs will be paid when details of the new employee’s contract have been submitted along with a copy of their first pay slip.
Evidence of expenditure on IT improvements or training will need to be submitted within two months of receiving a grant offer letter. The grant will then be paid directly to the business within 30 days.
Tax treatment - For tax purposes, the treatment of the grant will need to be matched to the expense and offset accordingly.
If the business has spent more on capital expenditure (like IT equipment) than is covered by the grant, capital allowances can be claimed on the amount not covered by the grant.
Early action - Eligible businesses should consider applying for a grant as soon as possible. Funding will be allocated on a first-come-first-serviced. Applications must be made by 3 June 2021, although the scheme, which is being administered by PricewaterhouseCoopers (PwC) on behalf of HMRC, will close earlier if all funding is allocated before that date.
Hardship loans to employees
To help employees out during the Covid-19 pandemic, employers may provide ‘hardship’ loans to employees. Where loans are provided, what are the tax implications?
No special rules
There are no special relaxations to deal with loans provided to help employees meet financial obligations during the Covid-19 pandemic; the usual rules for employment related loans apply.
Exemption for small loans
Under the beneficial loan rules, no tax charge arises if the outstanding loan balance does not exceed £10,000 at any point in the tax year. This limit applies to the total of all loans made to the employee, not to each separate loan.
As long as this limit is not exceeded, there is no tax to pay and nothing to report to HMRC.
If the outstanding loan balance is £10,000 or more at any point in the year, the loan is a taxable cheap loan and the employee is taxed on the benefit of the loan. The amount charged to tax is the difference between the interest payable on the loan at the official rate and the interest, if any, payable by the employee. The official rate of interest is set at 2.25% from 6 April 2020.
Where a loan is taxable, the taxable amount can be worked out on the average loan balance or by reference to the amount outstanding each day if this produces a better result.
The loan must be reported to HMRC on the employee’s P11D, and the taxable amount included in the employer’s Class 1A National Insurance computation.
Where hardship loans are made to employees, ensure that they understand the associated tax implications.
Paying for school fees
In the UK, paying for education affects many parents and their student offspring at some point. Thousands are already paying college and university fees, and the trend of rising fees and falling grant facilities is likely to continue for the foreseeable future. Research suggests that putting a child through a 14-year private education in the UK can currently cost up to £300,000. This article looks at some of the options for saving for education costs.
There are four basic ways of paying school fees:
• saving from an early age so that enough capital has been accumulated when the child starts school;
• taking out a loan when the child starts school;
• paying school fees out of income; or
• using a combination of these methods.
Saving capital - Whether a particular investment is suitable will largely depend on the investor’s attitude to risk, the investment term, and the taxation situation. Some of the investments that are typically used for saving school fees include Individual Savings Accounts (ISAs), fixed term annuities, and National Savings.
Currently, the annual ISA allowance enables individuals to save up to £20,000 a year tax-free. This means that there is scope for a couple to save £40,000 a year between them. Junior ISAs also enable tax-free savings for children under the age of 18 years. All children living in the UK are generally eligible for a Junior ISA and the annual savings limit is £9,000 in 2020–21. Where a parent saves money for their child, unless the income arising is below the de minimis limit of £100 per parent per child, all income arising is generally assessable on the parent. However, income from a junior ISA is specifically excluded from this rule.
Children aged 16 and 17 years effectively have two ISA allowances. They have the Junior ISA allowance, plus they are eligible to open an adult cash ISA.
By investing the maximum amount permitted in a stocks and shares ISA and selecting well-managed funds, a very worthwhile sum may be accumulated. Of course, choosing which funds to invest in is not always easy, so it may be worthwhile seeking professional advice on the options available. It is also worth noting that tax rules could change in the future and the value of any favourable tax treatment will depend on individual circumstances.
Educational Trusts and Composition Fees, which are generally paid to the independent school of choice, have tax advantages, but only if the child eventually goes to that school. The rules regarding these types of trusts are highly complicated and quite inflexible.
Loans - There are various ways to take out a loan to finance school fees, including some specialist school fees plans. For homeowners, given current low interest rates, the most cost-effective way of raising capital may be to extend an existing mortgage. However, individuals should always be aware that if they do this their home will be at risk if they do not keep up the repayments. Mortgage payment protection cover may be worth considering for coping with potential unexpected changes to circumstances such as redundancy. Borrowers also need to be sure that they can meet repayments if interest rates increase. Professional advice is always recommended prior to undertaking any transactions.
Paying out of income - A parent or guardian may be lucky enough to have sufficient income to pay school fees entirely out of his or her income. However, school fees also have a habit of increasing faster than earnings, so provision will have to be made to ensure that the fees can be met throughout the child’s period of education. The effect of redundancy on ability to pay fees should also be considered. Consideration should also be given to protecting the ability to fund or pay for private education in the event of death, critical illness or being unable to work through accident or illness.
With education costs rising faster than inflation, parents are staring down the barrel of a pretty big savings target. The earlier parents - or expecting parents - can start saving, the better.
Start early - To minimise the impact of borrowing, saving for school fees should be started as early as possible. In very basic terms, parents with a new-born baby would currently need to save around £120 a month to cover the cost of a three-year university course starting in 18 years time. For parents with a child of 10 years who have not yet started to save, the required monthly figure will have already risen to over £200 a month.
How to calculate statutory redundancy pay
While some help is available to employers through the Coronavirus Job Retention scheme to help them keep staff on during the COVID-19 pandemic, in some cases, it may not be possible to avoid making staff redundant.
Where staff are made redundant and have at least two years’ continuous service, they may be entitled to statutory redundancy pay.
To be eligible for statutory redundancy pay, an individual must:
• be an employee with a contract of employment;
• have at least two years’ continuous service;
• have been dismissed, laid off or put on short-time working.
Employees who take early retirement are not eligible for statutory redundancy pay.
How much does an employee get?
The amount of statutory redundancy pay to which an employee is entitled depends on the length of their service and their age.
An employee is entitled to:
• 1.5 weeks’ pay for each full year of employment after their 41st birthday;
• one weeks’ pay for each full year of employment after their 22nd birthday; and
• half a weeks’ pay for each full year of employment up to their 22nd birthday.
Service is counted backwards from the date of dismissal.
Cap on redundancy pay - Statutory redundancy pay payable to an employee is capped at 20 years’ service. Weekly pay is capped at £538 per week (rate from 6 April 2020). This means that the maximum amount of statutory redundancy pay is £16,140 (20 x 1.5 x £538).
Working out a week’s pay - Where an employee is paid an annual salary, a week’s pay will simply be the annual salary divided by 52. If an employee’s pay varies, the average weekly pay over a 12-week period is used.
Is statutory redundancy pay taxable? - Statutory redundancy pay is not taxable as earnings. It is treated as a termination payment and counts towards the £30,000 tax-free threshold.
Example - An employee is made redundant on 1 May 2020. They celebrated their 45th birthday on 1 February 2020. The employee started work in 1 January 2006 (aged 30).
The employee has an annual salary of £36,400.
The employee has 4 complete years of service from their 41ist birthday (1 February 2016 to 30 January 2020).
The employee has a further ten years complete years’ service after their 22nd birthday and before their 41st birthday.
The employee has an annual salary of £36,400. This is equivalent to weekly pay of £700 per week. As this is more than the maximum weekly pay for statutory redundancy pay purposes, the calculation is based on £538 per week.
The employee is entitled to statutory redundancy pay of £8,608 ((1.5 x 4 x £538) + (10 x £528).
Contractual redundancy pay - If the employer operates a contractual redundancy pay scheme, the employer can pay contractual redundancy pay instead, as long as the employee receives at least what they would be entitled to as statutory redundancy pay.
30-days reporting for CGT
Certain changes regarding payment of CGT took effect from April 2020 which align the position of UK residents with that of non-UK residents. Broadly, from 6 April 2020, a UK resident who sells a residential property in the UK will have 30 days to tell HMRC and pay any capital gains tax (CGT) owed. Failure to notify HMRC within 30 days of completing a sale may result in penalty and interest charges.
A CGT report and accompanying payment of tax may be required where the taxpayer sells or otherwise dispose of:
• a property that they have not used as their main home;
• a holiday home;
• a property which has been let out for people to live in;
• a property that has been inherited and not used as a main home.
There is no requirement to make a report make a payment of tax when:
• a legally binding contract for the sale was made before 6 April 2020;
• the individual satisfies the for Private Residence Relief (generally a main residence);
• the sale was made to a spouse or civil partner;
• the gains (including any other chargeable residential property gains in the same tax year) are within the tax free allowance known as the annual exempt amount (£12,300 in 2020/21);
• the property is sold for a loss; or
• the property is outside the UK.
Calculation - Subject to certain exceptions, where there has been a disposal of a residential property, payment on account of the CGT will be due on the filing date for the return, which is generally within 30 days of the day after the date the property sale is completed.
The payment on account required is the amount of CGT notionally chargeable at the filing date. This is the tax that would be due if, under the normal rules for calculating chargeable gains for a tax year, the tax year ended at the time the disposal is completed.
In calculating the amount, any unused allowable losses for capital gains purposes incurred by the time the disposal is completed can be used. Available reliefs and the annual exempt amount are applied in the normal way.
The amount of CGT payable on account is the amount after applying the applicable rate of tax to the net gain.
Multiple disposals - Where there is more than one residential property disposal in the same tax year, the amount of CGT notionally chargeable must be calculated after each disposal.
This is, however, done by taking into account that all of the gains (or losses) on those disposals are taken into consideration and any new losses that have arisen on disposals of other assets can also be used.
Where there has been a previous return and payment on account for the tax year and the amount notionally chargeable contained in a later return is more than the amount of tax already paid on account, the difference is payable to HMRC.
Provisional figures - Since the 30-day payment window can make it difficult for some people to provide exact figures, HMRC allow for certain estimates and assumptions to be made. The taxpayer can make a correction once the exact figures are known. If the resulting amount is higher than the amount previously paid, the difference becomes payable to HMRC and interest may be due. No penalty will however, be charged. If the amount is lower, the difference becomes repayable along with repayment interest from HMRC.
HMRC are currently developing a new online service to allow taxpayers to report and pay any CGT owed.
Claiming the NI employment allowance for 2020/21
The National Insurance employment allowance is available to eligible employers and can be set against the employer’s secondary Class 1 National Insurance liability. In the 2020 Budget, the Chancellor announced that the allowance would be increased to £4,000 for 2020/21. However, from 6 April 2020, it is only available to employers whose Class 1 National Insurance liability in the previous tax year was less than £100,000. Existing exclusions continue to apply, including that for companies where the sole employee is also a director -- meaning that personal companies rarely qualify.
If an employer has more than one PAYE scheme, the employment allowance can only be claimed in respect of one of the PAYE schemes.
Maximum amount of the allowance
For 2020/21, the National Insurance employment allowance is the lower of:
• the employer’s secondary Class 1 National Insurance liability for the year; and
Thus, where the secondary Class 1 National Insurance liability for the year is more than £4,000, the employment allowance is £4,000. It is set against the employer’s Class 1 National Insurance liability until it is used up. It cannot be set against Class 1A (payable on benefits in kind) or Class 1B (payable on items within a PAYE settlement agreement) liabilities – only secondary Class 1.
Remember to claim
The National Insurance employment allowance is not given automatically and must be claimed. A claim can be made through the employer’s payroll software; the claim is made in the Employment Payment summary by putting a ‘Yes’ in the Employment Allowance indicator field. It only needs to be claimed once for the tax year – once claimed it is available until the allowance has been used up. Any unused balance is carried forward to the next tax month.
The claim can be made at any time in the tax year, but it is advantageous to make the claim as soon as possible. If a claim is made too late to enable it to be fully offset against the employer’s secondary Class 1 National Insurance liability, the employer can either ask HMRC for a refund, providing that they do not owe anything to HMRC. Alternatively, the unused amount can be set against other tax bills which the employer has to pay – including VAT and corporation tax.
Employers eligible for the employment allowance should not only remember to claim it for 2020/21 – they should also check that they utilised the allowance in full in 2019/20.
Selling the buy-to-let property at a loss
The Covid-19 pandemic has caused financial hardship for many and the need to release funds may lead to a decision to sell a buy-to let or second property. While the temporary increase in the residential SDLT threshold may give the property market a boost, it is still possible that the sale of the property may result in a loss.
Where a loss is realised, how can this be used?
No private residence relief means loss is an allowable loss
Investment properties and those which have never been an only or main residence do not benefit from private residence relief. While any gain on the sale of a property that has been the taxpayer’s main residence throughout the period of ownership is covered by private residence relief, the flip side is that if the main residence is sold at a loss, the loss is not an allowable loss for capital gains tax purposes. By contrast, the realisation of a loss on a property that does not benefit from full private residence relief is an allowable loss.
Chargeable gains in same tax year? - Capital gains tax is charged on net gains (chargeable gains less allowable losses) in the tax year after deducting the annual exempt amount. Thus, if the taxpayer realises any gains in the same tax year as that in which the loss arises, the loss must be set against those gains before applying the annual exempt amount.
Example - Tony owns a number of rental properties. To help him survive the Covid-19 pandemic, he sells two properties in 2020/21, realising a gain of £20,000 on one property and a loss of £15,000 on the other. He also sells some shares realising a gain of £500.
He must set the loss of £15,000 against his gains of £20,500 for the year, leaving him with net chargeable gains of £5,500. This is covered by his annual exempt amount of £12,300, so he has no tax to pay. The balance of his annual exempt amount is lost.
Unfortunately, he cannot set the gains against the annual exempt amount first to reduce gains £8,200 and use only £8,200 of the loss, leaving the balance to set against other gains.
Carrying loss forward - If there are no gains in the year or the loss exceeds other gains in the tax year, the loss (or any unused balance) can be carried forward. This can be useful as the loss only needs to be set against gains in the same tax year in the first instance. Where a loss is brought forward, the taxpayer can choose how much of the loss is used, so that the annual exempt amount is not lost.
Example - Tim sold a buy-to-let property in March 2020, realising a loss of £12,000. He makes no gains in the 2019/20 tax year, so carries the loss forward.
In July 2020, he sells another property realising a gain of £16,000. This is his only disposal in 2020/21. The annual exempt amount for 2020/21 is £12,300.
Tim uses £3,700 of the loss to reduce the gain to the annual exempt amount of £12,300, carrying the balance of £8,300 forward to set against future gains.
Where a gain is to be realised, delaying the sale so that it does not fall in the same tax year as the loss may be beneficial.
Report the loss - To make sure that the loss is not lost, it must be claimed. This is done by reporting it on the self-assessment tax return. This should be done within four years of the end of the tax year in which the asset giving rise to the loss was sold.
New-style lettings relief
Lettings relief provides additional relief for tax where a property that has been occupied as a main residence is let out. For disposals prior to 6 April 2020, relief was available where a property was let as long as that property had at some time been the owner’s only or main residence. However, availability of the relief is seriously curtailed in relation to disposals on or after 6 April 2020. From that date, relief is only available where the owner shares the property with the tenant.
Amount of the new-style relief
For disposals on or after 6 April 2020, lettings relief is available where:
• part of the property is the individual’s only or main residence and
• another part of that property is let out by the individual, otherwise than in the course of a trade or a business.
The gain relating to the let part is only chargeable to capital gains tax to the extent that it exceeds the lesser of:
• the amount of private residence relief; and
Spouses and civil partners can take advantage of the no gain/no loss rules to transfer the property or a share in it to each other without a loss of lettings relief. Where lettings relief would be available to a transferring spouse or civil partner for the period prior to the transfer, it remains available to the recipient.
Henry brought a three-bedroom house in 2015. He lived in the property for five years until it was sold in May 2020, realising a gain of £90,000. Throughout the time that he lived in the property, he let out two rooms. The let rooms comprised one-third of the property by floor area.
Two-third of the property was occupied as Henry’s main residence, and thus two-thirds of the gain qualifies for private residence relief. This equates to £60,000 (2/3 x £90,000).
The remaining gain of £30,000 is attributable to letting.
As Henry occupied the property with the tenants, he can claim lettings relief. Thus, the gain attributable to the letting is only chargeable to capital gains tax if, and to the extent, that it is greater than the lower of:
• 60,000 (the amount of the private residence relief); and
As the gain attributable to the letting is less than £40,000, lettings relief is available to shelter the full amount of the gain.
Consequently, the entire gain is free from capital gains tax
Relief for replacement domestic items
A landlord may provide domestic items in a property which is let out. This may include white goods, such as fridges, freezers and washing machines, and also furniture and furnishings where the property is let furnished. Fixtures, such as fitted bathrooms and kitchens are outside the scope of the relief.
The tax system has rules governing relief for the cost of domestic items.
Replacement not initial cost - There is no relief for the initial cost in kitting out the property with domestic items. Instead, relief is given when the items are replaced. As long as the associated conditions are met, the landlord can deduct the cost of the replacement domestic item when working out the profits of the property rental business.
Conditions - Condition A is that the person or company is carrying on a property business that includes the letting of residential property.
Condition B is that an old domestic item that has been provided for use in the residential let has been replaced with the purchase of a new domestic item. The new item must have been provided for the exclusive use of the tenant and the old item must no longer be available to them.
Condition C is that expenditure on the new item must not be prohibited by the wholly and exclusively rule but would otherwise be prohibited by the capital expenditure rule. The wholly and exclusively rule limits deductibility of expenditure to that incurred wholly and exclusively for the purposes of the business. The prohibition on deduction under the capital expenditure rules (whether those applying to the cash basis where this is used or the accrual basis otherwise) prevents a deduction being given twice for the same expenditure.
Condition D is that capital allowances must not have been claimed in respect of expenditure on the new domestic item.
Excluded lets - The relief is not available for replacement domestic items in the commercial letting of furnished holiday accommodation, or in a room let in the landlord’s home where rent-a-room relief is claimed.
Amount of the relief - Where the replacement is on a like-for-like basis, a deduction can be claimed for the full cost of the replacement item. The item does not need to be the exact same model and HMRC do allow for an element of technological innovation. The test is whether the replacement is equivalent rather than superior to the original.
Where the item is replaced with a superior item, either of a better quality or an enhanced product (for example, if a fridge is replaced with a fridge/freezer), the deduction is capped at the cost of an equivalent item.
A deduction is allowed for any incidental costs, such as delivery costs or costs of disposing of the old item. Any proceeds from the sale of the old item must also be taken into account when computing the profits of the property rental business.
In a part-exchange situation, the deduction is the amount that the landlord pays in addition to the trade-in allowance for the old item.
Example - Tim replaces the washing machine in a buy-to let property with a washer-drier costing £400. An equivalent washing machine would cost £250. He also pays £20 delivery costs and £15 to dispose of the old machine.
Tim can claim a deduction of £285 (£250 + £20+ £15).
As the replacement is superior to the original, he is not able to deduct the enhancement element of the cost of the washer-drier, equal to £150.
Check your tax code – And what to do if it is wrong
The tax code is fundamental to the operation of the PAYe system. The tax code represents the allowances (or ‘tax-free pay’) to which an employee is entitled, or, where the code is a K-code, the additional income that the employee is treated as having received.
Most tax codes comprise a letter and a number, but there are also special codes with a different format.
The numbers - The number element is the net allowances to which the employee is entitled. This is difference between the personal allowance to which they are entitled for the tax year, less any deductions. Deductions may be made to collect tax on items from which tax has not or cannot be deducted, such as benefits in kind which are not payrolled, or to collect unpaid tax. The last digit from the resulting number is removed, to arrive at the number element of the code.
Where the deductions exceed the allowances, the number element represents notional additional pay.
The letters - The letters in the tax code reflect the taxpayer’s personal circumstances and how this impacts on the personal allowances that they receive. The suffix codes are as follows:
• L – the employee is entitled to the standard tax-free personal allowance.
• M – the employee has received the marriage allowance from their spouse or civil partner.
• N – the employee has transferred the marriage allowance to their spouse or civil partner.
• T – the tax code includes other calculations in order to work out the personal allowance.
Where deductions exceed allowances, the code has a K prefix (a ‘K code’).
The standard personal allowance is set at £12,500 for 2020/21. The marriage allowance is 10% of the personal allowance -- £1,250 for 2020/21.
Special codes - Instead of the usual letter and number format, an employee may have one of the following special codes:
• BR – indicates all income from the job or pension is taxed at the basic rate (20% for 2020/21). It is usually used where the employee has more than one job or pension).
• D0 – indicates all income is taxed at the higher rate (40% for 2020/21).
• D1 – indicates that all income is taxed at the additional rate (45% for 2020/21).
• 0T – indicates that the personal allowance has been used up (so receive no allowances). It may also be used where an employee starts a new job and the employer does not have the details to determine the tax code to use).
• NT – indicates no tax is being paid on the income.
Emergency Code - An employee or pensioner may be given an emergency code if they start a new job, start working for an employer after being self-employed or if they receive the state pension. The emergency code will be 1250 W1, 1250 M1 or 1250X and indicates that PAYE is to be worked out on a non-cumulative basis.
Scottish and Welsh taxpayers - The tax code also indicates whether a taxpayer is a Scottish or a Welsh taxpayer, and whether they should be taxed at the Scottish and Welsh rates of tax, as appropriate. Scottish taxpayers’ codes have an ‘S’ prefix, while Welsh taxpayers’ codes have a ‘C’ prefix.
Check your code - Make sure that you understand the different elements of the tax code and check that they are correct. Problems often arise where an employee has changed jobs or has multiple jobs and the allowance may be allocated between them. HMRC adjust codes in year as a person’s circumstances change. For example, if an employee has one job in which they earn £8,000 a year, they may be given a code of 800L. If they take on a second job, the remainder of the allowance for the year will be allocated to that job, so HMRC will allocate a 450L code to that job. A third job may have a BR or D0 code.
If you think your tax code is wrong, you can contact HMRC by phone on 0300 200 3300. Changes to your personal circumstances can also be updated via your Personal Tax Account.
Deferring self-assessment POA – is it is good idea?
To help those suffering cashflow difficulties as a result of the Covid-19 pandemic, the Government have announced that self-assessment taxpayers can delay making their second payment on account for 2019/20. The payment would normally by due by 31 July 2020.
Under self-assessment, a taxpayer is required to make payments on account of their tax and Class 4 National Insurance liability where their bill for the previous tax year is £1,000 or more, unless at least 80% of their tax liability for the year is deducted at source, such as under PAYE. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. The payments are made on 31 January in the tax year and 31 July after the end of the tax year. If any further tax is due, this must be paid by 31 January after the end of the tax year. In the event that the payments on account are more than the final liability for the year, the excess is set against the tax due for the next tax year or refunded.
The normal payment dates for payments on account for the 2019/20 tax year are 31 January 2020 and 31 July 2020, with any balance due by 31 January 2021.
Delay not cancellation
The option on offer is a deferral option not a cancellation. Where this is taken up, the payment on account must be paid by 31 January 2021. As long as payment is made by this date, no interest or penalties will be charged.
Should I pay if I can?
The deferral option is clearly advantageous to those who have taken a financial hit during the Covid-19 pandemic, particularly those operating in sectors where working is not possible during the lockdown, such as hairdressers and beauticians and those operating in the hospitality, leisure and retail sectors.
For those who have not taken a financial hit or who are otherwise able to pay, from a cashflow perspective it may be attractive to defer the payment. However, this may simply be a case of delaying the pain; not only will the delayed payment on account be due on 31 January 2021 together with any Class 2 National Insurance liability, but also the first payment on account for 2020/21. This may amount to a sizeable bill.
The decision as to whether to pay or defer is a personal one; but the option to choose is a welcome one.
Reporting expenses and benefits for 2019/20
Employers who provided taxable expenses and benefits to employees in 2019/20 need to tell HMRC about them by 6 July 2020, if they have not opted to tax them via the payroll.
Non-payrolled taxable expenses and benefits are reported to HMRC on form P11D. Employers must also file a P11D(b) by the same date. This is the employer’s declaration that all required P11Ds have been submitted, and also the statutory Class 1A return.
Taxable value - The taxable value of the benefit is normally the cash equivalent value. However, where the benefit has been provided under an optional remuneration arrangement, such as a salary sacrifice scheme, and is one to which the alternative valuation rules apply, the taxable amount is the relevant amount. Broadly, this is the salary foregone where this is higher than the cash equivalent value calculated under normal rules.
Exempt benefits - Benefits and expenses that are exempt from tax do not need to be included on the P11D. However, remember to check that all associated conditions have been met.
The exemption for paid and reimbursed expenses means that no tax liability arises where the employer meets or reimburses expenditure which would have qualified for tax relief if met by the employee. Paid and reimbursed expenses falling within the scope of the exemption do not need to be reported on the P11D.
PAYE Settlement Agreements - An employer can use a PAYE Settlement Agreement (PSA) to meet the tax liability on certain benefits and expenses on the employee’s behalf. Items included in a PSA do not need to be returned on the P11D. A PSA is a continuing agreement and remains in place until revoked. Review PSAs before 6 July 2020 to ensure they remain valid and to add any new items that you wish to include.
Payrolled benefits - Employers can opt to tax benefits through the payroll (‘payrolling’) instead of reporting them to HMRC on the P11D. This option is available for all benefits excluding low-interest and interest-free loans and living accommodation. However, the employer must register before the start of the tax year to payroll.
Payrolled benefits do not need to be included on the P11D; however if other benefits are also provided, these must be included.
Remember to include payrolled benefits in the calculation of the Class 1A liability on the P11D(b).
Online or paper forms - Expenses and benefits returns can be filed online using HMRC’s Expenses and Benefits Online Service, PAYE for Employers or commercial software.
However, there is no requirement to file online and paper returns can be filed if this is preferred.
The deadline is 6 July 2020. Employees should be given a copy of their P11D by the same date.
A nil return is required where HMRC have sent a P11D(b) or a P11D(b) reminder letter. It can be made online at www.gov.uk/government/publications/paye-no-return-of-class-1a-national-insurance-contributions.
Pay Class 1A National Insurance - Class 1A National Insurance contributions for 2019/20 should be paid by 22 July 2020 if payment is made electronically. If payment is made by cheque, as 19 July falls on a Sunday, the cheque should reach HMRC by Friday 17 July.
P45 procedures – What to do when an employee leaves
When an employee leaves, there are various procedures that need to be followed from a payroll perspective. These include telling HMRC that the employee has left and issuing the employee with a P45.
When an employee leaves, it is important to let HMRC know. This is done via the RTI system.
The employee’s leaving date should be entered on the Full Payment Submission when reporting pay and deductions for the final time. The leaving date should not be before the date on which they receive their final salary, which will normally be their last working day.
Issuing a P45
The P45 is an important document as it is the way in which pay and deduction details are transferred from one employer to the next. As PAYE is operated on a cumulative basis, this transfer of information is crucial, particularly where an employee changes jobs during the tax year.
There are four parts to the P45 – Parts 1, 1a, 2 and 3.
Historically, Part 1 of the P45 had to be sent to HMRC. However, the information contained on the P45 is now sent to HMRC electronically via RTI.
The employer must give parts 1A, 2 and 3 of the P45 to the leaving employee. The employee should retain part 1A and give parts 2 and 3 to a new employer.
However, it should be noted that when an employee retires and is paid a pension by the same employer, the employee is not regarded as having ‘left’ and should not be given a P45.
Paying an employee after the P45 has been issued
If a payment has to be made to the former employee after the P45 has been issued, the following procedure should be followed:
• deduct tax using code 0T (rather the employee’s previous code) on a ‘week 1’ or ‘month 1’ basis;
• deduct National Insurance contributions (unless the payment is a redundancy payment) and any student loan repayment as normal, but treating it as a weekly payment if it is an irregular payment, such as accrued holiday;
• report the payment and deductions in the next FPS, using the employee’s original ‘date of leaving’ and, where relevant, ‘payroll ID’, setting the payment indicator to ‘payment after leaving’;
• provide the employee with written confirmation of the payment, showing the gross amount of the payment and the deductions; and
• add the additional payment to the ‘year to date’ field where it falls in the same tax year.
The employee should not be given a new P45.
Waiver of dividends and remuneration
Many companies are experiencing financial difficulties brought about by the coronavirus pandemic and there will be many instances where directors and shareholders will be considering waiving their right to company dividends and/or remuneration. Whilst this can be a straightforward process, there are certain administrative obligations that will need to be attended to.
Dividends - The tax treatment of a dividend will depend on when it has been paid. The legislation specifies that a dividend will be treated as being paid on the date when it becomes due and payable. A dividend is not paid, and there is no distribution, unless and until the shareholder receives money or the distribution is otherwise unreservedly placed at the shareholder’s disposal, for instance by being credited to a loan account on which the shareholder has power to draw.
Companies’ Articles often provide that:
• final dividends may be declared by the company in general meeting; and
• interim dividends may be paid by directors from time to time.
The significance of this is that a final dividend which has been properly declared and which does not specify a date for payment creates an immediately enforceable debt. If a final dividend is declared under the terms of a resolution that states that it is payable on a future date then the debt is enforceable, and the dividend is due and payable, only on that later date. An interim dividend, on the other hand, may be varied or rescinded at any time before payment and may therefore only be regarded as due and payable when it is actually paid.
Directors or other shareholders, including employees, are able to waive their right to be paid a dividend. For this to be effective, a Deed of Waiver must be formally executed, dated and signed by shareholders and witnessed and returned to the company.
A waiver properly made before payment involves more formality than a simple request not to pay dividends or to pay them elsewhere. A waiver can be effective for all future dividends, or for any future period of time, or for specific dividends.
The waiver must be in place before the right to receive a dividend arises. For final dividends, this is before they are formally declared and approved by the shareholders. For interim dividends, the waiver must be in place before the dividends are paid.
An act that purports to be a waiver after payment will be treated as an assignment or transfer of income, and may be liable to tax under the settlements legislation.
Remuneration - A ‘waiver of remuneration’ happens when a director or employee gives up rights to remuneration and gets nothing in return. If an employee and employer agree to a reduction in the employee’s remuneration before they are paid, for example to support company cash flow during the pandemic, then no income tax or National Insurance contributions (NICs) will be due on the amount given up. This is provided the agreement is not part of any wider arrangement to divert the amount to a particular recipient or a cause. For example, if it was waived on condition that the sum would be donated to a particular charity, this would still be liable to tax.
Waiver of remuneration should be formalised in a deed of waiver or a contract variation. The employee or director is likely to require clarification in the agreement on exactly what is to be waived (and for how long), as well as confirmation that the other terms and conditions (and any benefits) of the employment will continue unaffected. The variation instrument should also address the effect of a temporary salary waiver on those benefits which are referable to salary (for example, pension contribution).
In the current climate, if lockdown restrictions present a challenge to formally executing paperwork, confirmation in an email of the intention to waive and confirming the new position on both sides should be acceptable.
Mortgage payment holidays and interest relief for landlords
In March, the Government announced that homeowners struggling to pay their mortgages due to Coronavirus would be able to take a three-month mortgage payment holiday. They confirmed that this option would also be available to buy-to-let landlords, who may suffer cashflow difficulties if, as a result of the virus, their tenants were unable to meet their rent in full when it is due. In May, the Government announced that those struggling to pay their mortgages because of the impact of Coronavirus would be able to extent their mortgage payment holiday by up to three months.
Where a landlord opts to take a mortgage payment holiday, what impact does this have on tax relief for interest payments?
Interest continues to accrue
The first point to note is that interest continues to accrue during the period of the mortgage holiday, although the landlord will not be required to make any payments during this time. This is important and will impact on the timing of the associated interest relief, which will depend on whether accounts are prepared on a cash basis or on the accruals basis.
At the end of the holiday, the missed payments and interest may be recovered by extending the term of the mortgage or by making higher payments once payments restart.
Relief as a basic rate tax reduction - From 2020/21 onwards, tax relief for finance costs (such as mortgage interest) on residential properties is given only as a tax reduction at the basic rate. This means that 20% of the allowable finance costs are deducted from the tax that is due.
Impact of a mortgage holiday – Cash basis - Most landlords whose rental receipts are £150,000 a year or less will prepare the accounts for their property rental business under the cash basis. As expenditure under the cash basis is recognised when paid, if the landlord does not make a payment, there will be no relief for that expense until the payment is made.
Where the landlord takes a mortgage, no interest will be paid during the period of that holiday. As a result, a landlord may pay less in interest in 2020/21 than in 2019/20. The interest rate reduction is calculated by reference to the interest paid in the year.
Example - Kevin has a buy-to-let property on which he has buy-to-let mortgage, the interest on is £500 per month. As a result of the Covid-19 pandemic, his tenant struggles to pay his rent on time. Kevin takes a three-month mortgage payment holiday. To mortgage term is extended as a result.
In 2020/21, Kevin only makes nine mortgage payments instead of the usual 12, paying interest of £4,500 rather than £6,000. The tax reduction for 2020/21 is £900 (£4,500 @ 20%) rather than £1,200 (£6,000 @ 20%).
Impact of mortgage payment holiday – Accruals basis - Under the accruals basis relief is given for the period in which the expense arises rather than when payment is made. As interest continues to accrue throughout a mortgage holiday, the landlord will be able to claim the full tax reduction on the interest accruing in the 2020/21 tax year, even if the interest was not paid in full in the year because the landlord took advantage of a mortgage payment holiday. If, in the above example, Kevin prepared his accounts for 2020/21 on the accruals basis, he would be able to claim a tax reduction of £1,200 rather than £900.
Reclaim SSP for Covid-19 absences
Small employers can now reclaim statutory sick pay (SSP) paid to employees who were absent from work due to the Coronavirus. The online claim service went live on 26 May 2020.
Employers can use the scheme to claim back SSP paid to an employee who is eligible for SSP due to Coronavirus if:
• they have a PAYE payroll scheme that was in operation on 28 February 2020; and
• they had fewer than 250 employees at that date.
SSP can only be reclaimed where the employee’s absence relates to Covid-19; where the absence is for another reason, the employer must meet the cost of any SSP paid. An absence counts as a Covid-19 absence if the employee is unable to work because:
• they have Coronavirus;
• they are unable to work because they are self-isolating because they live with someone who has Coronavirus symptoms; or
• they are shielding and have a letter from the NHS or GP telling them to stay at home for at least 12 weeks.
Claims can be made for periods of sickness on or after 13 March 2020 where the employee has Coronavirus symptoms or is self-isolating because a member of their household has symptoms and for absences on or after 16 April 2020 where the employee was shielding.
The employer can claim back the SSP paid in respect of qualifying Covid-19 absences up to a maximum of two weeks’ SSP per employee. Where the employer pays more than the weekly rate of SSP, rebates must be claimed at the SSP rate -- £95.85 per week from 6 April 2020 and £94.25 per week previously.
Evidence and records
Employers do not need to get a Fit note where an employee is off work due to Coronavirus. However, you can ask for an isolation note from NHS111 where the employee is self-isolating or a letter from the NHS or the employee’s GP where the employee is shielding.
Records should be kept of the dates of absence, the SSP paid to each employee, their National Insurance number, the reason for their absence and, where provided, evidence in support of their absence. Records should be kept for three years from the date that the rebate is received.
Making the claim
Claims can be made online on the Gov.uk website. To make a claim, the employer will need:
• their employer PAYE scheme reference;
• contact name and phone number;
• bank details (where a BACS payment can be accepted);
• total amount of SSP paid to employees in the claim period in respect of Covid-19 absences;
• number of employees in respect of whom the claim relates; and
• the start and end date of the claim period.
Claims can be made for multiple periods and multiple employees at the same time. The end date of the claim is the end of the most recent pay period for which a claim is being made.
What can be done with property rental losses?
During the COVID-19 pandemic, landlords may find that tenants are unable to pay their rent, and, when a let comes to an end, that they are unable to re-let the property, or have to accept lower rent. As a result, they may make a loss on their property rental business.
Calculating the loss
Any loss arising from the property rental business is calculated in the same way as profits. Where the cash basis is used, as will generally be the case being the default basis of preparation for most smaller landlords, the loss for the period will be the cash received by the property rental business less the cash paid out.
Automatic set off against properties in the same property rental business
As profits and losses are calculated for the property rental business as a whole, if there is more than one property in the rental business, a loss on one property is automatically set against any profit from other rental properties in the same business.
A landlord has three properties that he lets out. In 2019/20 he makes a loss of £3,000 on property A, a profit of £2,000 on property B and profits of £1,500 on property C.
The loss on property A is set against the profits on property B and C when calculating the overall result for the property business as a whole. Overall, the property business has a profits of £500 (-£3,000 + £2,000 + £1,500).
Utilising a loss
The general rule is that a loss on a property rental business can be carried forward and set against profits from the property rental business in the following year. If there is a loss in the next year or profits are not sufficient to fully utilise the loss, any unused part of the loss can be carried forward to the next year and so on until it can be used. There is no limit on the number of years for which the loss can be carried forward.
The same property business
Losses can only be set against the future profits of the same property business. If the landlord has more than one property business, for example a UK property business and an overseas property business, the losses from one cannot be set against the profits of another. Losses from a furnished holiday letting business can only be carried forward and set against profits of that business.
A landlord has a property rental business. In 2017/18 he makes a loss of £5,000, in 2018/19 he makes a profit of £4,000 and in 2019/20 he makes a profit of £3,000.
The loss of £5,000 is carried forward and £4,000 of it is set against the profits of 2018/19, reducing the profits for that year to nil. The balance of the loss of £1,000 which cannot be used is carried forward and set against of 2019/20, reducing the taxable profit for that year to £2,000.
Losses lost if property rental business ceases
If the property rental business ceases before the losses have been used up, the losses are lost. This remains the case if the landlord starts a new property business after a gap as the new business will be a different property rental business.
Tax implications of Covid-19 support payments
Various support payments are available to individuals and businesses to help mitigate the effects of the Covid-19 pandemic. Are the payments taxable and how should they be treated?
Payments under the Coronavirus Job Retention Scheme?
Grants payments made under the Coronavirus Job Retention Scheme (CJRS) for fully furloughed and flexibly furloughed employees are included in the calculation of the employer’s profits. However, they can deduct payments made to employees and associated employer’s National Insurance and pension contributions.
As far as the employee is concerned, grant payments paid over to them are treated in the same way as normal payments of wages and salary. They are taxable under PAYE and liable to Class 1 National Insurance contributions.
Grants under the Self-employment Income Support Scheme
The self-employed, can, if eligible, claim grants under the Self-employment Income Support Scheme if their business has been adversely affected by the Covid-19 pandemic. The first grant could be claimed in May and the second can be claimed in August.
The grants should be taken into account in computing profits for 2020/21, returned on the self-assessment tax return due by 31 January 2022. As they are included in profits, where these exceed £9,500 for 2020/21, Class 4 National Insurance contributions are payable. If profits exceed £6,475, the trader must also pay Class 2 contributions.
Where profits are below £6,475 for 2020/21, there is no obligation to pay Class 2 contributions. However, it can be beneficial to pay them voluntarily to ensure that 2020/21 remains a qualifying year for state pension and contributory benefit purposes.
Various other grants were also paid to particular types of business, such as those eligible for small business rate relief and grants to those in specific sectors, such as those payable to businesses in the hospitality, retail and leisure sectors and to Ofsted registered nurseries.
Where the business operates as a company, the grants should be taken into account in calculating the profits chargeable to corporation tax.
If the grants were payable to a sole trader or unincorporated business, they should be taken into account in computing the profits chargeable to income tax.
SDLT and linked transactions
Special stamp duty land tax (SDLT) rules apply where there are multiple sales or transfers between the same buyer and seller.
Linked transactions - Where two or more property transactions involve the same buyer and seller, they may be ‘linked’ for SDLT purposes. HMRC may treat a person connected to the buyer, such as a spouse or civil partner, a child or a sibling, as the same buyer and persons connected to the seller as the same seller when seeking to apply the linked transaction rules.
Transactions count as ‘linked’ if:
• there is more than one transaction;
• the same transactions are between the same buyer and seller (or people connected to them); and
• the transactions are part of a single arrangement or scheme or part of a series of transaction.
Transactions may be linked because they form part of the same single arrangement or scheme, regardless of whether they are documented separately. So, transactions would be linked if the husband purchases a house and his wife purchases associated land from the same seller. The buyers are connected and purchasing the property and land from the same seller is part of the same deal.
Transactions may also be linked where they form a series. There is no limit to the time between transactions for them to be regarded as linked.
The whole picture - Where transactions are linked, it is necessary to look at the whole picture - the buyer pays SDLT by reference to the total value of all the linked transactions rather than separately on the value of each individual transaction. This may mean that more SDLT is payable than if each transaction is assessed individually – only one threshold is available and the SDLT may be payable at the higher rates.
The approach is to work out the SDLT on the total value of all the linked transaction and apportion it to the individual transactions.
SDLT rate - Where all the linked transactions are residential, SDLT is charged using the residential rates, including the 3% additional property supplement where relevant. The residential SDLT threshold is increased to £500,000 from 8 July 2020 to 31 March 2021.
If one or more property is non-residential – the non-residential and mixed property rates of SDLT apply.
Example - Harry buys two houses to let out from the same builder – one for £450,000 and one for £650,000. The builder has given him a discount for purchasing more than one property. The sales complete in July 2020 and August 2020.
SDLT @ 3% is payable on the first property – a total of £13,500 (£450,000 @ 3%).
On the second purchase, the SDLT is worked out on the total consideration of £1.1 million. The SDLT is £71,750 ((£500,000 @ 3%) + (£425,000 @ 8%) + (£175,000 @ 13%)). This equates to £35,875 per property, so Harry must pay £38,875 on completion of the second purchase and a further £22,375 on the earlier purchase.
Had the SDLT been worked out separately on the second property, the bill would have been £27,000 ((£500,000 @ 3%) + (£150,000 @ 8%)) – a total for both properties of £40,500.
Applying the linked property rules increases the bill by £31,250.
Same buyer and seller but no link - The linked rules do not apply to transactions between the same buyer and seller if there was no prior agreement or option, no special price or discount was agreed and there was nothing else to link the transactions. The additional SDLT cost should be weighed up against any discount negotiated.
Temporary cut in SDLT – Who benefits?
To boost confidence in the property market and to maintain the momentum that has been gained since the easing of lockdown, the Government has announced a temporary increase in the residential stamp duty land tax (SDLT) threshold. From 8 July 2020 until 31 March 2021, residential SDLT threshold is increased from £125,000 to £500,000. Above £500,000 the normal residential rates apply. SDLT applies to properties in England and Northern Ireland.
The rate of residential SDLT applying from 8 July 2020 to 31 March 2021 are as shown in the following table.
Property value Main home Additional properties
Up to £500,000 Zero 3%
Next £425,000 (£500,001 to £925,000) 5% 8%
Next £575,000 (£925,001 to £1.5M) 10% 13%
The remaining amount (over £1.5M) 12% 15%
Residential properties only - The increased threshold applies only to residential properties; the threshold for non-residential and mixed properties remains unchanged at £150,000.
For SDLT purposes a residential property is defined as:
The test is at the effective date of the transaction.
In deciding whether the garden and grounds form part of a residential property, remember the SDLT test differs from that for private residence relief purposes for capital gains tax purposes.
Prior to the reduction, the non-residential and mixed rates were lower than the residential rates, so it was in HMRC’s interests for the property to be classed as a dwelling. The tribunal case of P N Bewley Ltd v HMRC  TC06951, highlighted the problems that may arise in relation to dilapidated buildings and illustrates that what HMRC may consider to be a ‘dwelling’ may differ from what a lay person may regard as being suitable for use as dwelling. However, this approach may help the taxpayer to benefit from the lower residential rates applying until 31 March 2021.
Additional homes - A 3% supplement applies to second and subsequent residential properties. As this is applied to the reduced residential rates, those looking to buy a second home or an investment property in England or Northern Ireland will also benefit from the cut.
First-time buyers - Prior to the reduction a higher threshold of £300,000 applied to first-time buyers, as long as the purchase price was not more than £500,000. While first time buyers paying less than £300,000 are unaffected by the reduction, those buying residential properties costing more than £300,000 will benefit from the reduction.
Mixed-use properties - Properties that are both residential and non-residential (for example where there is both a residential and a business element) pay SDLT at the non-residential rates. This is usually beneficial but means such properties will not benefit from the temporary increase in the residential SDLT threshold.
Properties in Scotland and Wales - The residential threshold for land and buildings transaction tax in Scotland is increased 145,000 to £250,000 from 15 July 2020 until 31 March 2021 and the residential threshold for land transaction tax in Wales is increased from £180,000 to £250,000 from 27 July 2020 until 31 March 2021. However, unlike the rest of the UK, purchasers of additional properties in Wales do not benefit from the increase; the supplement is applied to the rates applying prior to 27 July 2020.
Company car ‘availability’ during Covid-19
For many, their working patterns changed as a result of the Covid-19 pandemic. Some employees were required to work from home, some were furloughed, while those with certain health conditions were required to shield.
If the employee has a company car, is a deduction available for periods during the pandemic when it was not used?
Under the legislation, a benefit-in-kind tax charge arises where the car is available for the employee’s private use. The legislation deems a car to be available for private use, unless that use is specifically prohibited and there is in fact no actual use.
Deduction for periods of unavailability
When calculating the amount charged to tax in respect of the private use of a company car, a deduction is given:
• where the car is made available during the tax year, the period from the start of the tax year to the date on which the car was first made available to the employee;
• where the car ceases to be available to the employee throughout the whole tax year, from the date that the car ceases to be available to the end of the tax year; and
• periods of 30 days or more throughout which the car was not available to the employee.
Unavailability during Covid-19: HMRC’s stance
HMRC have published guidance for employers on the tax treatment of various expenses and benefits provided to employees during the coronavirus pandemic in which they specifically address the extent to which a company car remains available for an employee’s private use.
In the guidance, HMRC state that where an employee has been furloughed or is working from home because of Coronavirus and the employee has been provided with a company car that they still have, the car should be “treated as being ‘available’” for private use during this period even if the employee is:
• instructed to not use the car
• asked to take and keep a photographic image of the mileage both before and after a period of furlough
• unable to physically return the car or the car cannot be collected from the employee
Where restrictions on the freedom of movement prevent a car from being handed back or collected, HMRC accept that the car is unavailable where the contract has terminated from the date that the keys, including the fobs, are returned to the employer or to a relevant third party. Where the contract has not terminated, HMRC only regard the car as being unavailable from the date 30 days after the keys are returned.
Worth a challenge
The unavailability tests set by HMRC are stricter than those posed by the legislation, which require only that private use is prohibited and not take place; there is no requirement in the legislation that they keys are returned. Where and employee is instructed not to use the car and evidence can be provided that it was not indeed used, there a goods grounds for a deduction where the period of unavailability exceeds 30 days, even if the keys are not returned.
Property transaction charges reduced
Property transaction charges reduced - In his Economic statement on 8 July 2020, Chancellor Rishi Sunak highlighted that property transactions fell by more than 50% in May, while house prices fell for the first time in eight years. Therefore, to help boost the housing market, he announced that there will be a temporary reduction in stamp duty land tax (SDLT) in England and Northern Ireland. The Scottish and Welsh Governments quickly followed suit announcing reductions in Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively.
SDLT - To achieve the reduction, the nil rate band threshold for SDLT payments on residential property has been temporarily increased from £125,000 to £500,000. This change applies from 8 July 2020 but only applies until 31 March 2021. Current rates are therefore as follows:
Portion of value Rate % Additional property rate %
£0 - £500,000 0 3
£500,001 - £925,000 5 8
£925,001 – 1,500,000 10 13
Over £1.5m 12 15
From 1 April 2021 the £500,000 threshold will revert to £125,000.
These rates apply equally for first time buyers as they do for those who have owned property before.
Treasury estimates suggest that the average homebuyer will see their SDLT bill fall by £4,500 as a result of this temporary measure, and nearly nine out of ten main home buyers will pay no duty at all.
LBTT - In Scotland, the LBTT nil threshold has been temporarily increased from £145,000 to £250,000 between 15 July 2020 and 31 March 2021. Current rates are therefore as follows:
Purchase price LBTT rate
Up to £250,000 0%
Above £250,001 to £325,000 5%
Above £325,001 to £750,000 10%
Over £750,001 12%
The rates for the additional dwelling supplement (ADS) and non-residential LBTT remain unchanged.
Residential transactions for consideration of £40,000 or more will still require to be notified to Revenue Scotland even if no tax is due.
The reduced charges mean that someone buying a house at the average Scottish house price of £179,541 would expect to save £690 in LBTT. Overall, it is estimated that an additional 34% of property transactions will be taken out of LBTT, taking the total to 79%.
LTT - The Welsh Revenue Authority (WRA) has also announced changes to LTT charges, which apply from 27 July 2020 onwards. The new rates and threshold are as follows:
Price threshold LTT rate
The portion up to and including £250,000 0%
The portion over £250,001 up to and including £400,000 5%
The portion over £400,001 up to and including £750,000 7.5%
The portion over £750,001 up to and including £1,500,000 10%
The portion over £1,500,000 12%
Higher residential tax rates for additional properties remain unchanged. The Welsh Government estimates that around 80% of homebuyers in Wales will pay no tax when purchasing their home, and that buyers of residential property who would have paid the main rates of LTT before 27 July 2020 will save up to £2,450 in tax.