Extracting income - family company with no retained profits
The Covid-19 pandemic has had an adverse effect on millions of family companies, potentially reducing or eliminating profits. Where there is cash in the business that can be withdrawn, possibly because the business has received a Coronavirus Bounce Back Loan or a Coronavirus Business Interruption Loan, and the family need to withdraw funds to meet their living costs, the lack of retained profits may affect how those funds are withdrawn.
No retained profits, no dividends
A popular and tax-efficient strategy is to pay a small salary and extract further profits as dividends. For 2020/21, the optimal salary is £9,500 (equal to the primary threshold for Class 1 National Insurance purposes) where the employment allowance is not available and £12,500 (equal to the personal allowance) where it is.
Dividends can only be paid out of retained profits, so where there are no retained profits, no dividends can be paid.
If funds are needed to meet personal living costs, other routes must be taken.
Higher salary or a bonus
Unlike dividends, profits are not needed to pay a salary or bonus; indeed these can still be paid even if doing so creates or increases a loss. Paying an additional salary or a bonus will come with a personal tax bill once the personal allowance has been utilised and will attract primary and secondary Class 1 National Insurance where earnings exceed the relevant thresholds, set, respectively, at £9,500 and £8,788 per year, and where secondary contributions are not sheltered by the employment allowance. It should be remembered that company directors have an annual earnings period for Class 1 National Insurance purposes.
However, on the plus side, salary payments and any associated secondary National Insurance contributions are deductible when working out the company’s taxable profits.
Take a loan
Rather than paying a higher salary, it may be preferable to take a loan from the company. Most family companies are close companies, such that if the loan is not repaid within nine months and one day of the end of the accounting period in which it was taken, a section 455 charge arises and 32.5% of the outstanding balance must be paid by the company over to HMRC (although if the loan is repaid, this is repayable nine months and one day after the end of the accounting period in which the loan is paid). A benefit in kind tax charge will also arise on the director if the loan balance tops £10,000 at any point in the tax year, even if only for one day. The amount charged to tax is the interest that would be payable at official rate (set at 2.25% from 6 April 2020), less any interest actually paid.
Taking a loan can be tax efficient, particularly if paid back before the trigger date for the s. 455 charge. It may be an attractive option to get over a difficult period where a return to profitability is anticipated, allowing a dividend to be declared to clear to loan balance.
The provision of benefits in kind can also be attractive as the recipient will pay tax on the cash equivalent value rather than having to meet the full cost personally. Benefits in kind are even more attractive where an exemption can be utilised allowing them to be provided tax free. The trivial benefits exemption can be put to use here where the cost is not more than £50 (and the total cost of trivial benefits is not more than £300 for the tax year).
From the company’s perspective, Class 1 National Insurance will be payable on the cash equivalent amount, but the cost of the benefit and the NIC cost is deductible in computing taxable profits for corporation tax purposes.
Tax implications of uncommercial lets
There are various circumstances in which a landlord may let a property at rate which is below the current market rate or, indeed, allow the property to be used rent-free. For example, during the Covid-19 pandemic, landlords may have agreed a reduced rent with tenants who are struggling financially and are unable to meet the normal rental payments in a bid to help them out and on the basis that some rent is better than none. Where a landlord has properties that would otherwise be empty, these may have been occupied by family and friends either at a low rent or rent-free.
When reaching the decision to allow the property to be occupied rent-free or at a rate below the market rate, the impact on the deductibility of expenses was probably overlooked.
Restriction on relief
While the landlords motives might have been philanthropic, unfortunately this approach is not shared by HMRC when it comes to allowing a deduction for expenses incurred in a period when the property when not let at a commercial rent.
For expenses to be deductible in computing the profits of the property rental business, those expenses must have been incurred wholly and exclusively for the purposes of the property rental business. HMRC take the view that if the landlord does not charge the full market rent or impose normal market lease conditions, it is unlikely that this test is met. A strict interpretation would mean that expenses could not be deducted.
Deductions capped at level of rental income
Where a property is let for a rent which is less than the market rent that the landlord could obtain, HMRC permit expenses to be deducted up to the level of the rental income received. It is therefore not possible to create a loss in relation to an uncommercial let. Where the expenses exceed the rental income, no relief is given for the excess expenses – they cannot be carried forward to the following year, even if the property is let at a commercial rate in that year. No deduction is permitted for expenses relating to a period when the property is occupied either by the landlord or by family or friends rent-free.
Where the period for which the property is let at an uncommercial rate is temporary, if possible, delay significant expenditure to a future period when the property is let commercially so that full relief for the expenditure can be obtained.
In the situation where a friend or relative house sits while a property is empty, expenses incurred in that period can be deducted if the property genuinely remains available for commercial letting and the landlord is actively seeking a tenant. HMRC guidelines suggest relief will not be lost if a relative house sits for one month over a three-year period.
However, no deduction is available for expenses incurred while a property is occupied rent-free by a friend or relative who is essentially using the property to take a holiday. Where a holiday home is let commercially for some of the time and used rent-free by the landlord or by his or her friends or relatives some of the time, the expenses should be apportioned between the commercial and uncommercial use. Expenses related to the commercial use can be deducted in excess of the rent for commercial lets; however, expenses apportioned to uncommercial use can only be deducted up to the level of the rent received, if any.
Winding up a company - Overview
Disposing of a limited company usually involves a considerable amount of forethought, planning and paperwork because a number of possible exit routes exist and each company situation is different. In general however, the directors usually sell their shares to someone else, who continues to run the business, or sell their assets and shut down the company.
Once it has been determined that a company is to be wound up, there are a number of relationships and obligations which must be terminated. Whether a company is solvent or insolvent, obligations to customers, suppliers and employees must be brought to a close.
Closing down - Once the directors have voted to cease trading, closing down a limited company begins with preparing final trading accounts. For corporation tax, when the winding up period begins, the current accounting period comes to an end and a new one begins. From that point on, the company’s accounting periods run for periods of 12 months until the winding up is complete.
Final accounts will be submitted to HMRC along with form CT600 (company tax return) and the computation of corporation tax. HMRC will be advised that these are the final accounts and that the company is to be dissolved. If final liabilities are not paid in full, HMRC may object to dissolution of the company.
Disposal of shares and/or assets - Where shares are disposed of, the sale consideration flows directly to the shareholder, whereas on a disposal of assets, the money flows to the company, and further tax may be payable when the money is subsequently extracted. The effective double charge to tax on gains arising in companies where the money is extracted by shareholders has been mitigated over the years by:
• business asset disposal relief for shareholders in computing their gains on the shares;
• the relatively recent reductions in the standard rate of capital gains tax to 18%, and now 10%, for basic rate taxpayers; and
• indexation relief available up to 31 December 2017 and frozen from that date.
If the vendors are individuals and they want to receive the sale consideration personally, a simple sale of the company is generally likely to result in lower tax liabilities than a sale by the company of its assets followed by a distribution to the shareholders (whether by way of a dividend or in a winding-up or a combination of both).
BADR - Business asset disposal relief (BADR) (formerly known as Entrepreneurs’ Relief (ER)) may be available to individuals who dispose of shares in their personal company. There is a lifetime limit on the amount of BADR available to an individual – for disposals on or after 11 March 2020, the lifetime limit is £1m. 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.
To qualify, both of the following must apply for at least two years up to the date 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 also other rules depending on whether or not the shares are from an Enterprise Management Incentive (EMI).
If the shares are not from an EMI, for at least two years before the sale of shares, the business must be a ‘personal company’. This means that the individual has at least 5% of both the:
• shares; and
• voting rights
They must also be entitled to at least 5% of either:
• profits that are available for distribution and assets on winding up the company; or
• disposal proceeds if the company is sold
If the number of shares held falls below 5% because the company has issued more shares, the individual may still be able to claim BADR.
Early planning - Early planning and preparation will be the key to a successful exit strategy. In some cases, the disposals make be phased gradually over a number of years. Seeking professional advice when thinking about disposing of a business is always recommended.
Off-payroll working rules (IR35) update
The off-payroll working rules, known as IR35, were introduced in 2000 to ensure that someone working like an employee, but through a limited company, pays similar levels of tax to other employees.
Broadly, the IR35 rules require an individual to determine whether they would be employed or self-employed for tax purposes, if they were working directly for their client, without an intermediary company in the contractual chain. The rules only apply to individuals who are working like employees under the current employment status tests, and do not apply to the self-employed.
Over the past ten years, various steps have been taken to improve the effectiveness of the IR35 rules, with limited success. In April 2017 the Government reformed the way in which the rules operate in the public sector. The reform shifted the responsibility for determining employment status from an individual contractor to the organisation engaging them.
Extension of rules
The rules for public sector organisations are now being extended to medium and large organisations in all sectors of the economy. The relevant legislation for this is included in Finance Act 2020, which has now received Royal Assent.
The changes were intended to take effect from April 2020, but due to the impact of the coronavirus on the economy, this extension has been delayed until 6 April 2021. From that date, non-public sector organisations caught by the rules will become responsible for assessing the employment status of individuals who work for them through their own limited company.
HMRC expect the changes to impact some 170,000 freelancers and 20,000 agencies that provide workers to medium and large-sized organisations.
Employers need to get ready for the changes ahead of the 6 April 2021 implementation date, and many organisations have already begun doing so. HMRC have confirmed that they will re-launch their package of customer education and support later this year, and the next HMRC Employer Bulletin publication in October will include a full timetable for the support available including webinars, updated guidance and helpful communications resources for employers to cascade to contractors and organisations they engage with.
Preparation work to be undertaken before the changes come in may include the following:
• Looking at the current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies
• Determining if the off-payroll rules apply for any contracts that will extend beyond April 2021. The CEST tool can be used to do this.
• Communicating with contractors about whether the off-payroll rules apply to their role.
• Implement processes to determine if the off-payroll rules apply to future engagements. These might include who in an organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
The Check Employment Status for Tax tool (CEST) is already available for organisations and contractors to consider the appropriate employment status for tax for contracts running beyond 6 April 2021.
HMRC have confirmed that they will stand by the results given by the CEST tool, provided it is used in accordance with their guidance and the information entered is accurate, and remains accurate. This is regardless of when the tool is used ahead of April 2021, and means employers can already use the tool for engagements that start in April 2021 onwards.
HMRC have also said that they will continue to refine and improve the support available ahead of April 2021 based upon customer feedback, but any preparation done now will remain valid for April 2021.
Employment allowance – Have you claimed it?
The National Insurance employment allowance enables eligible employers to reduce the amount of employer’s National Insurance that they pay over to HMRC. The allowance, which is set at £4,000 for 2020/21, is available to most employers whose Class 1 National Insurance liability was less than £100,000 in 2019/20, with some notable exceptions, including companies where the sole employee is also a director.
The employment allowance must be claimed, but this can be done at any point in the tax year. There is no obligation to claim the allowance from the start of the tax year.
The allowance is set against employer’s Class 1 National Insurance until it is used up. It cannot be used against Class 1A or Class 1B liabilities, or to reduce the amount of National Insurance payable by employees.
Employment allowance and the CJRS - The Coronavirus Job Retention Scheme (CJRS) enabled employers to place employees on furlough and claim a grant from the Government to pay them furlough pay of 80% of their wages (capped at £2,500 per month) while on furlough.
Payments made to furloughed employees are liable for tax and Class 1 National Insurance as for usual payments of wages and salary. For pay periods up to an including 31 July 2020, employers were able to claim the associated employer’s National Insurance on grant payments, to the extent that it was not covered by the employment allowance.
This meant that if an employer had claimed the employment allowance form the start of the tax year, they would not be able to reclaim the associated National Insurance on grant payments until the employment allowance had been used up. By contrast, employers who delayed claiming the employment allowance could reclaim the employer’s National Insurance on grant payments from the Government under the CJRS and use the employment allowance against their secondary liability once the reclaim option came to an end. This was a beneficial strategy and one that HMRC have not raised objections to.
Remember to claim - If the employment allowance was not claimed at the start of the tax year to make the most of the CJRS, and has still not been claimed, eligible employers should now look to claim the allowance so that they can benefit from it.
The allowance must be claimed each year – claims do not roll forward automatically. HMRC guidance confirms that claims can be made ‘at any time in the tax year’.
Claims can be made via the payroll software.
Late claims - If the claim is made late in the tax year and the full amount of the available employment allowance (set at the lower of £4,000 and your employer Class 1 National Insurance liability for the year) is not used, any unclaimed allowance at the end of the year to pay any tax (including VAT and corporation tax) or National Insurance that you owe. Where no tax is paid, the employer can ask HMRC for a refund. Employers can check their HMRC online account to see how much of their employment allowance for the year they have used.
Where the employment allowance has not been claimed for previous years, claims can be made retrospectively for the previous four tax years.
Paying back deferred VAT
At the start of lockdown, the Government announced a number of measures to help businesses weather the pandemic. One of those measures was the option for VAT-registered businesses to defer VAT payments that fell due between 20 March 2020 and 30 June 2020. This window meant payment of VAT for the following quarters could be deferred:
• quarter to 29 February 2020 – due by 7 April 2020;
• quarter to 31 March 2020 – due by 7 May 2020; and
• quarter 30 April 2020 - due by 7 June 2020.
However, businesses opting to defer payments were still required to file their VAT returns on time.
VAT due after 30 June 2020
Normal service is resumed in respect of VAT which falls due after 30 June 2020. This must be paid on full and on time. Consequently, VAT for the quarter to 31 May 2020 must be paid by 7 July 2020, even if the trader has yet to pay their VAT for the quarter to 29 February 2020. This applies for successive VAT quarters too.
Set up cancelled direct debits
Where VAT is normally paid by direct debit but the direct debit was cancelled to enable the trader to take advantage of the deferral option, the direct debit needs to be set up again so that payments can be taken automatically. If this has not yet been done, payments will need to be triggered manually to ensure that VAT reaches HMRC on time until the direct debit is back up and running.
Paying VAT that has been deferred
Deferred VAT remains due – the measure simply provides a longer payment window; it does not cancel the liability. VAT that fell due in the period from 20 March 2020 to 30 June 2020 was originally due to be paid in full by 31 March 2021.
However, in delivering his Winter Economy Plan on 24 September 2020, the Chancellor, Rishi Sunak, announced that instead, he will allow businesses to spread the repayment of deferred VAT over 11 smaller repayments during 2020/21, with no interest to pay.
Struggling to pay?
Businesses in certain sectors, such as hospitality and leisure, are still not able to operate normally. Where, despite the longer repayment period, a business thinks that it may struggle to repay its deferred VAT, it should contact HMRC to set up a time to pay agreement, which can spread the repayments over a longer period. This should be done before the first payment becomes due.
Reduced payment window for residential property gains
Currently, capital gains on the sale of residential property in the UK are reported on the self-assessment tax return and the total capital gains tax liability for the tax year is payable by 31 January after the end of the tax year. Thus, the capital gains tax on residential property gains arising in the 2019/20 tax year must be reported to HMRC on the 2019/20 self-assessment return by 31 January 2021 and the associated capital gains tax paid by the same date.
However, from 6 April 2020 this will change. From that date, gains arising on disposals of residential property by UK residents must be notified to HMRC with 30 days of the completion date, and a payment on account of the eventual tax liability made by the same date.
What disposals are affected? - The new rules will apply from 6 April 2020 to disposals by UK residents of UK residential property which give rise to a residential property gain. The rules applied to disposals by non-residents from April 2019.
A new return - Rather than notifying HMRC of the gain on the self-assessment return, there will be a new return for advising HMRC where a gain arises on the disposal of a residential property. If there is no taxable gain, for example if the property is disposed of to a spouse or civil partner on a no gain/no loss basis, there is no requirement to make a return.
The return must be submitted to HMRC within 30 days from the date of completion.
Payment on account of tax due - The taxpayer must also make a payment on account of the capital gains tax liability within 30 days of the completion date. This is considerably earlier than now, where the lag is at least nine plus months and may be as much as almost 22 months.
Amount to pay - The amount to pay is effectively the best estimate of the capital gains tax at the time of the disposal, taking into account disposals to date in the tax year.
Example 1 - Paul sells a second home, completing on 31 May 2020 realising a gain of £50,000. He has made no other disposals in 2020/21 at the time that the property is sold.
He can take into account his annual exempt amount (for purposes of illustration this is assumed to be £12,000 for 2020/21) when working out his liability. Paul is a higher rate taxpayer.
The payment on account is therefore £10,640 ((£50,000 - £12,000) @ 28%).
Where a capital loss has been realised before the residential property gain, this can be taken into account when calculating the payment on account.
The return must be filed and the payment on account made by 30 June 2020.
Example 2 - Rebecca sells her city flat, which is a second property, on 1 August 2020, realising a gain of £100,000. In May 2020, she sold some shares, realising a loss of £10,000. Rebecca is a higher rate taxpayer.
The loss can be set against the residential property gains of £100,000, leaving a net gain of £90,000. As her annual exemption is available, the chargeable gain is £78,000 and the payment on account is £21,840.
No account is taken of a loss realised after the residential gain. - Final capital gains tax liability for the year
The final capital gains tax liability for the year is computed via the self-assessment return taking into account all gains and losses for the year. The payment on account is deducted from the final bill and the balance payable by 31 January after the end of the tax year.
If the payment on account is more than the final liability, for example if losses were realised later in the tax year, a refund can be claimed once the self-assessment return has been submitted.
Utilise the trivial benefits exemption to provide tax-free Xmas gifts
The Covid-19 pandemic has placed the office Christmas party firmly off the menu this year. Regardless of what restrictions are in place over the Christmas season, many employers will want to take the opportunity to spread some seasonal cheer amongst workers, who may have been furloughed or working from home for much of 2020.
The impact of any goodwill gesture is somewhat diminished if it comes with an associated tax bill. This is where the trivial benefits exemption can come into its own, enabling employers to provide employees with tax-exempt Christmas gifts, while keeping the costs low at a time when many businesses are struggling financially. Personal and family companies can similarly make use of the exemption.
Nature of the exemption
Under the trivial benefits exemption, a benefit is exempt from income tax and National Insurance if all of the following conditions are met.
• The cost of providing the benefit does not exceed £50.
• The benefit is not in the form of cash or a non-cash voucher.
• The employee is not contractually entitled to the benefit.
• The benefit is not provided in recognition of, or in anticipation of, services performed as part of the employee’s employment duties.
Where a benefit is provided to a group of people and it is impracticable to work out the exact cost of providing it to each recipient, the average cost is used to determine whether the benefit is trivial.
Directors of close companies (together with members of their family or household) can only receive tax-free trivial benefits to a maximum value of £300 in a tax year. For other recipients, there is no annual limit (but each individual trivial benefit must cost £50 or less).
The following example illustrates how the trivial benefits exemption can be utilised to provide tax-free Christmas gifts to employees.
An employer purchases 100 turkeys to be given to employees at Christmas. The total bill is £4,800. The turkeys vary slightly in weight but are not priced individually.
As it would be impracticable to work out the exact cost of the turkey provided to each individual employee, the average cost of £48 is taken as the cost of the benefit. Assuming all the other conditions are met, the gift of the turkey falls within the trivial benefit exemption and is free from tax.
Gift card trap
Care should be taken using gift cards which are topped up on several occasions. Rather than evaluating each use of the card separately for the purposes of the trivial benefits exemption, HMRC look at the total cost of providing benefits via the card in the tax year in question. The following example illustrates the trap.
An employee is given a gift card at Christmas which can be exchanged in a particular store for a gift. The card costs the employee £30 to provide. The card is topped up by a further £30 on the employee’s birthday. Although each top-up costs the employer less than £50, the total cost of providing the employee with a gift card is £60 for the tax year. As this exceeds the £50 trivial benefit limit, the exemption does not apply.
Instead, the employer should give the employee separate gifts costing £30 each, both of which would be exempt.
Profit extraction in 2020/21 – What is the optimal salary?
A popular tax-efficient profit extraction strategy used by personal and family companies is to take a small salary and extract further profits as dividends. Where this approach is adopted, the starting point is to determine the optimal salary. While this will depend on personal circumstances and there is no excuse for not doing the sums, there are some general guidelines.
Where the director does not have the requisite 35 qualifying years to provide access to the full single tier state pension paying a salary at least equal to the lower earnings limit for Class 1 National Insurance purposes (set at £120 per week; £520 per month and £6,240 per year) will ensure that the year is a qualifying one.
Maximum salary that can be paid free of tax and National Insurance - The first question to consider is what is the maximum salary that can be paid free of income tax and employer’s and employee’s National Insurance. For 2020/21, the key numbers are:
• the personal allowance – set at £12,500;
• the primary threshold – set at £9,500 per year; and
• the secondary threshold –set at £8,788 per year.
Assuming the personal allowance has not been used elsewhere, the maximum salary that can be paid without triggering a tax or National Insurance liability is one equal to the secondary threshold of £8,788.
However, if the director is under 21, there is no secondary Class 1 liability until earnings exceed £50,000 and in this scenario, the maximum salary that can be paid free of tax and National Insurance is one equal to the primary threshold of £9,500 per month. The same is true where the director is over 21 but the employment allowance extinguishes any secondary Class 1 liability.
Is a higher salary tax-efficient? - Salary payments and any associated employer’s Class 1 National Insurance contributions are deductible for corporation tax purposes and there will therefore be an associated 19% reduction in the corporation tax bill. Where paying a higher salary triggers a National Insurance liability, this will be worth paying if it is more than offset by the corporation tax reduction. The sums differ depending on whether the employment allowance is available.
Employment allowance unavailable - In a personal company scenario, it is unlikely that the employment allowance is available as companies where the sole employee is also a director, as would be usual in a personal company do not qualify.
Where this is the case, assuming the director is over 21, a salary in excess of £8,744 will attract a secondary Class1 National Insurance liability. However, there is no primary Class 1 liability until the salary reaches the higher primary threshold, set at £9,500 for 2020/21. At 13.8%, the rate of employer’s National Insurance is less than the corporation tax rate – the corporation tax saving on the salary and employer’s National Insurance of £163 (19% (£756 x 1.138)) is more than the employer’s National Insurance on the additional salary of £104 (13.8% of £756), meaning it is tax efficient to pay a salary of £9,500. However, the employer’s NIC will need to be paid over to HMRC, incurring admin costs.
However, beyond this level, the combined effect of employer’s and employee’s National Insurance outweighs any corporation tax saving. The optimal salary in this case is therefore £9,500 a year.
Employment allowance available - In a family company scenario, the employment allowance may be available, making it possible to pay a salary of £9,500 free of tax and National Insurance. Paying an additional £3,000 to bring the salary up to the level of the personal allowance will trigger an employee Class 1 liability of £360 (12% of £3,000). However, the additional salary of £3,000 will reduce the corporation tax bill by £570 (19% of £3,000), making the additional salary worthwhile. However, once income tax at 20% is brought into the mix, this is no longer the case, meaning the optimal salary is one equal to the personal allowance of £12,500.
Switch to dividends - Once the optimal salary has been paid, it is tax efficient to extract further profits as dividends.
Late or unpaid rent – calculation of taxable profits
As with other sectors, landlords may be adversely affected by the Covid-19 pandemic. Tenants suffering cashflow difficulties may be unable to pay their rent in full or on time. The impact that unpaid or late paid rent has on the calculation of taxable profits depends on whether the landlord prepares accounts on the cash basis or under the accruals basis.
Cash basis - The cash basis is the default basis of preparation for most landlords whose cash receipts for the tax year are £150,000 or less. Under the cash basis income is recognised when the money is received not when it is earned, and expenses are accounted for when the money is paid not when the expenses is incurred. Receipts are income of the period in which the money is received, and expenses are outgoings of the period in which they are paid. Consequently, there are no debtors or creditors.
This provides automatic relief where rent is not paid or is paid late, protecting the landlord from having to pay tax on money he or she has yet to receive.
Example 1 - Harry is a landlord and lets a flat for £800 a month, payable on 25th of each month. Due to the Covid-19 pandemic, his tenant does not pay the rent that was due on 25 March 2020. The tenant eventually pays £200 of the overdue rent in June 2020 and the remaining £600 in September 2020.
Harry prepares the accounts for his rental property business on the cash basis, accounting for rental income only when the rent has been received. The rent due for March 2020 (falling in the 2019/20 tax year) is not received until June and September 2020 – which fall in the 2020/21 tax year. As a result, the rent for March is taken into account in computing Harry’s taxable profits for 2020/21 rather than 2019/20.
Accruals basis - Rental profit must be determined under the accruals basis in accordance with UK GAAP where the landlord is not eligible for the cash basis (for example, because rental receipts for the tax year are more than £150,000) or because the landlord elects for the cash basis not to apply. Under the accruals basis, rental income is taken into account in the period to which it relates, rather than when the rent is paid. Likewise, expenses are deducted when the expense is incurred not when the bill is paid, if different. There is no automatic relief if rent is not paid on time as under the cash basis.
Example 2 - Louisa has a number of rental properties and as her rental receipts exceed £150,000 a year, she prepares the accounts of her rental business under the accruals basis. One of her tenants fails to pay the rent of £2,000 for March 2020 which was due on 1 March 2020. The tenant eventually pays the late rent in September 2020.
As accounts are prepared under the accruals basis, the rent due for March 2020 is taken into account in working out the taxable profit for 2019/20, regardless of the fact that it was paid in 2020/21 rather than in 2019/20.
There is, however, relief available where the rent remains unpaid and is not recovered, as opposed to being paid late – a deduction is permitted for a debt which is genuinely bad or doubtful.
Grants for businesses affected by national restrictions
Many businesses have been forced to close as a result of the national and local restrictions introduced to slow the spread of Coronavirus. Where this is the case, the business may be eligible for a grant from their local authority.
The following grant support is available to businesses in England during the second national lockdown. Grants to businesses in Wales, Scotland and Northern Ireland are subject to devolved rules.
Businesses closed due to national retractions
Business that were previously open as usual, but which were required to close between 5 November 2020 and 2 December 2020 as a result of the second national lockdown in England may be eligible for a grant from their local council for the 28-day period for which the national lockdown applies.
A business may qualify for a grant if it meets the following conditions:
• it is based in England;
• it occupies premises in respect of which it pays business rates;
• it has been required to close between 5 November 2020 and 2 December 2020 as a result of the national lockdown; and
• it has been unable to provide its usual in-person service from those premises as a result.
Businesses that qualify may include non-essential shops, leisure and hospitality venues and sports centres.
Business that normally operate as an in-person venue but which have had to modify their services as a result of the lockdown also qualify. An example here would be a restaurant that is not allowed to provide eat-in dining but which stays open for takeaways.
Businesses are only entitled to claim one grant for each non-domestic property.
Amount of the grant
The amount of the grant is based on the rateable value of the business premises on the first day of the second national lockdown.
Where the rateable value of the business premises is £15,000 or less, the business will receive a grant of £1,334 for each 28-day period for which the restrictions apply.
Where the rateable value of the business premises is between £15,000 and £51,000, the business will receive a grant of £2,000 for each 28-day period for which the restrictions apply.
Where the rateable value of the business premises is £51,000 or above, the business will receive a grant for each 28-day period for which the restrictions apply.
Applications should be made to the local council following the application procedure on the relevant council’s website.
A business is not eligible for a grant if it can continue to operate during the restrictions because the business does not depend on providing in-person services from their premises. Businesses that would fall into this category would include accountants and solicitors.
Businesses that are not required to close, but which choose to, are also ineligible for a grant.
A business which has exceeded the permitted state aid limit – set at €200,000 over a three-year period – is not eligible for further funding but may qualify for help under temporary Covid-19 measures.
Where local restrictions are in force, businesses may qualify for separate grants if they are either forced to close or, where they can remain open, their business is severely impacted as a result of those restrictions. Details of the grants available where local restrictions apply can be found on the Gov.uk website.
Paying inheritance tax in instalments
Inheritance tax is normally payable by the end of the sixth month following that is which the person died. So, for example, if someone died on 4 April 2020, any inheritance tax due on their estate would be due by 31 October 2020.
Often the deceased estate will include non-cash assets, such as property, shares and suchlike and the beneficiaries may need to sell some of the assets to realise the cash with which to pay the inheritance tax bill. The tax system recognises this and allows the inheritance tax on assets that may take some time to sell to be paid in instalments.
The executors must state on form IHT400 if they wish to pay inheritance tax in instalments. Inheritance tax on certain assets that take time to sell can be paid in equal annual instalments over 10 years.
However, if the assets have been sold, the tax must be paid in full.
Assets qualifying for payment in instalments
Inheritance tax can be paid in instalments on:
• Land, for example a house that a beneficiary keeps to live in or rent out;
• shares or securities where the deceased controlled more than 50% of the company;
• unlisted shares and securities worth more than £20,000 that represent either 10% of nominal value of the shares or 10% of the value of the ordinary share capital of the company.
Payment can also be made in instalments where at least 20% of the inheritance tax owed by the estate is on assets qualifying for payment in instalments and paying them in a single lump sum will cause financial difficulty.
Where there is inheritance tax still to pay on gifts in the form of buildings, shares or securities or all or part of a business, this too can be paid in instalments.
If the deceased estate includes a business that is run for profit, if IHT is due, this can be paid in instalments on the net value of the business, but not on the business assets.
The first instalment is due on the normal IHT due date – the end of the sixth month after the month in which the deceased died. Subsequent instalments are due on this date each year for the next nine years.
Where the instalment route is taken, interest is payable on the second and subsequent instalments on both the full balance of the outstanding tax. Where an instalment is paid late (including the first instalment), interest is also payable on the instalment from the due date to the date of payment.
Clearing the bill
The outstanding bill and any associated interest can be paid off at any time. Clearing the outstanding debt may be a preferred option if the assets are sold at a later date. A final settlement figure can be obtained from HMRC.
Letting a property at less than market rent
This year has been difficult for many and landlords may not have been able to secure the full market rent for a property. Landlords may have reduced the rent charged to long-standing tenants struggling as a result of the pandemic. Alternatively, they may have allowed family or friends to occupy the property, either rent-free or for a notional rent.
Letting a property at a rent that is below the commercial rent will reduce the landlord’s income. It will also impact on the extent to which they can claim a deduction for expenses associated with the property and the let.
General rule for deduction of expenses
The general rule is that expenses can be deducted in calculating the taxable profit for the property income business to the extent that they are revenue in nature and incurred wholly and exclusively for the purposes of the business.
Where the expenditure is capital in nature, relief will depend on whether the accounts are prepared under the cash basis or accruals basis. Under the cash basis, which is the default basis for most unincorporated landlords, most capital expenditure can be deducted in working out profits, unless it is of an excluded type, such as cars or land.
Lets not at a commercial rent
If a landlord does not charge the full market rent for a property, HMRC take the view that it is unlikely that the expenses of the property are incurred wholly and exclusively for the purposes of the business. As a result, the general rule for deductibility is not met. This means that, strictly, they cannot be deducted in arriving at the taxable profit. Taking the strict position would mean that the landlord would be taxed on any rental income received without relief for any associated expenses.
However, fortunately, HMRC do not take such a harsh line. Where a property is let at below market rent, the landlord can deduct expenses incurred up to the level of the rent received. Where the expenses are more than the rent, the net result is neither a profit nor a loss. However, no relief is given for expenses in excess of the rent – these cannot be deducted to create a loss, nor can they be carried forward to be used in a later tax year. Consequently, no relief is available to the extent that the expenses exceed the rent.
A landlord may allow a friend or relative to house sit between commercial lets. If expenses are incurred in this period, they will be deductible as long as the property remains genuinely available for commercial letting and the landlord is actively seeking tenants. However, expenses incurred in a period where the property is occupied by a friend or relative rent-free and the property is not available for commercial letting are not deductible.
Timing of expenses
If there are likely to be periods where the property is occupied rent-free orf at below market rent, where possible the landlord should seek to incur expenses related to the property while it is being let at a commercial rent to preserve their deductibility.
Period of grace election
Where the landlord intended to let the property at full want but was unable to do so, for example, as a result of the pandemic, a period of grace election could be considered.
SEISS extended again
The Self Employment Income Support Scheme (SEISS) provided help the self-employed whose businesses were adversely affected by Coronavirus. The second payment under the scheme, which was payable from mid-August, was due to be the final payment under the scheme.
However, as cases continue to rise and many businesses continue to be adversely affected by the virus, the scheme has been extended. The extension will run for six months from 1 November and will provide for two further grant payments, albeit at a much lower level than previously. Following the announcement of the national lockdown in England from 5 November 2020 to 2 December 2020, the level of the first grant was further increased.
To claim a grant under the extended SEISS, self-employed individuals (including individual members of partnerships) must:
• be currently eligible for the SEISS scheme (although it is not necessary to have claimed either the first or the second grant);
• declare that they are currently actively trading and intend to continue to trade; and
• declare that they are impacted by reduced demand due to Coronavirus in the qualifying period, which is between 1 November and the date of the claim).
To recap, to be currently eligible under the SEISS, the trade 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; and
• intend to continue to trade in 2020/21.
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. Profits from self-employment must also comprise at least 50% of the individual’s income.
Amount of the grant
Each grant will cover a three-month period. The first grant will cover the period from 1 November 2020 to 31 January 2021 and the second grant will cover the period from 1 February 2021 to 30 April 2021.
Self-employed traders will receive 80% of their average monthly profits for November and 40% of their average monthly profits for December and January. This means that the The first grant will be worth 55% of three months’ average trading profits over 2016/17, 2017/18 and 2018/19, capped at £5,150. The level of the second grant has yet to be set. Grant payments are taxable and liable for National Insurance.
HMRC are to provide details as to how claims can be made in due course.
What tax do I need to pay by 31 January 2021?
The self-assessment tax return for 2019/20 must be filed by midnight on 31 January 2021. If you miss this deadline, you will automatically receive a late filing penalty of £100, regardless of whether you owe any tax, unless you are able to convince HMRC that you have a reasonable excuse for filing your tax return after the deadline.
You must also pay any outstanding tax that you owe for 2019/20 by 31 January 2021, unless you have agreed a Time to Pay agreement with HMRC. The amount of tax that is outstanding for 2019/20 will depend on whether you opted to defer payment of the second payment on account for 2019/20, which would ordinarily have been due by 31 July 2020.
To help taxpayers who were struggling financially as a result of the Covid-19 pandemic, self-assessment taxpayers could opt to delay payment of the second payment on account for 2019/20, paying it instead by 31 January 2021. Where this option was taken, the balance owing for 2019/20 will be the total liability for the year (tax plus, where relevant, Class 2 and Class 4 National Insurance), less any amount paid on account by 31 January 2020.
If you decided instead to pay your July payment on account as normal (or if you paid it later than normal but have now paid it in full), you will only owe tax for 2019/20 if the total liability is more than what has already been paid on account.
Payments on account
If your total tax and Class 4 National Insurance liability was at least £1,000 for 2019/20 and less than 80% of your total liability is collected at source, for example, under PAYE, you will need to make payments on account for 2020/21. Each payment is 50% of the 2019/20 tax and Class 4 National Insurance liability. The first payment is due by 31 January 2021, along with any tax owing for 2019/20. The second payment should be paid by 31 July 2021.
Struggling to pay
For many, 2020 has been a difficult year financially. Where the option to delay the July 2020 payment on account has been taken, taxpayers may struggle to pay the higher than normal January tax bill in full by 31 January 2021. Where this is the case, they can agree with HMRC to pay the tax that they owe in instalments over the year to 31 January 2021.
If the amount that is owed is £30,000 or less, an agreement can be set up online. Where the amount outstanding is more than £30,000 or the taxpayer needs more than 12 months to pay, contact HMRC to discuss setting up an arrangement to suit.
As payments on account for 2020/21 are based on pre-pandemic profits, consider reducing the payments if profits for 2020/21 are likely to be lower.
Capital gains tax implications of selling the buy-to-let
There may come a time when a landlord no longer wants to hold a buy-to let property and puts the property on the market. When selling an investment property, such as a buy-to-let, it is important to be aware of the capital gains tax implications, and also the changes that came into effect from 6 April 2020.
Any private residence relief? - If the property had been occupied as a main residence for some of the period of ownership, some private residence relief will be available. The gain will be sheltered to the extent that it relates to the period where the property was occupied as a main residence and also for the final period. From 6 April 2020 this is the last nine months of ownership (reduced from 18 months prior to that date).
Curtailment of lettings relief - Where the disposal takes place on or after 6 April 2020, lettings relief is only available where the landlord occupies the property with the tenant (for example, by letting out a number of rooms in the landlord’s main residence).
The previous, more generous rules, do not apply where disposal is on or after 6 April 2020 even if the property was let out prior to that date and would have qualified for lettings relief under the old rules – it is the date of disposal that is relevant in determining which rules apply, not the period for which the property was let.
No gain, no loss transfers - The capital gains tax rules allow assets to be transferred between spouses and civil partners at a value which gives rise to neither a gain nor a loss. This can be very useful in mitigating the capital gains tax liability, particularly where a spouse or civil partner has not used their annual exempt amount or pays tax at a lower marginal rate. The optimal ownership shares will depend on individual circumstances. It is prudent to review how the property is owned prior to sale.
Paying tax at the residential property rates - Capital gains tax is charged at a higher rate on residential property gains. The rate of tax is 18% to the extent that income and gains fall within the basic rate band, and at 28% thereafter.
Notifying residential property gains and paying tax on account - From 6 April 2020, chargeable gains on residential property must be notified to HMRC within 30 days of the date of completion. The gain can be notified online. Capital gains tax due on the gain must be paid within the same time frame. A return is only required where a gain arises; no return is needed if the property is sold at a loss.
HMRC have confirmed that due to coronavirus, they will not charge a penalty for transactions completed on or after 6 April and 1 July reported up to 31 July 2020 which are reported outside the 30-day window. However, a late filing penalty will be charged for transactions which are completed on or after 1 July 2020 if these are not reported within 30 days.
Interest is charged where tax is paid late. This applies where the completion date is on or after 6 April 2020 – there is no relaxation in respect of Coronavirus.
In working out the capital gains tax on residential property gains, the annual exempt amount can be taken into account, as can any allowable losses brought forward or realised prior to the disposal. However, losses arising after the disposal cannot be taken into account, even if these are realised in the 30-day window for filing the return and making the payment on account.
The taxpayers overall capital gains tax position for the year is finalised when filing the self-assessment return.
Tax implications of providing PPE to employees
The Covid-19 pandemic has seen many employees being required to wear personal protective equipment (PPE) at work. The way in which this is provided and the extent that it is needed to enable the employee to undertake the duties of their employment will determine the associated tax implications.
HMRC have published guidance on the treatment of certain expenses provided to employees during the Coronavirus pandemic. While this covers the provision of PPE, there are some gaps.
PPE is required and employer provides it
If an employee is working in a situation where transmission of Coronavirus is high and the employer’s risk assessment is that the employee needs PPE, the employer must provide this to their employees free of charge. In this situation, HMRC’s guidance confirms that the provision of PPE is not taxable. As such it does not need to be included on the employee’s P11D.
Employee provides PPE and employer reimburses the cost
In a situation where the employee requires PPE to do their job and the employer is unable to provide it, but the employee purchases it themselves and claims the cost back from their employer, HMRC confirm in their guidance that the reimbursement of the PPE is not taxable.
Employees meet cost of required PPE
Where the PPE is required for the employee to perform the duties of their employment, the employer should provide this. Consequently, the issue of the employee meeting the cost of necessary PPE should not arise. In their guidance, HMRC state that employees are not entitled to tax relief on the expense of providing PPE needed to undertake their role. However, this conflicts with statutory position which allows tax relief for expenses wholly, necessarily and exclusively incurred in the performance of the duties of the employment. HMRC also confirm in their Employment Income Manual (at EIM 32480) that where the duties require protective clothing to be worn, a deduction is permitted.
Nice but not necessary
However, where the duties do not require the employee to wear PPE and the employer provides it as a gesture of goodwill (for example, the provision of facemasks where the law does not require these to be worn), a taxable benefit will arise. However, if the cost is less than £50, the trivial benefits exemption will prevent the employee being taxed on the provision.
Likewise, if an employee meets the cost of PPE that is not required for them to perform the duties of their employment, they will not be entitled to tax relief for the costs. Any reimbursement by the employer will similarly be taxable.
In the July Economic Statement, as part of his Plan for Jobs, Chancellor Rishi Sunak announced that a new Kickstart Scheme would shortly be launched with the aim of creating hundreds of quality jobs for young people aged between 16 and 24 years old. The details of the scheme have been slow coming, but it has now been confirmed that the first placements are likely to be available from November.
The Kickstart Scheme can be used to create new 6-month job placements for young people who are currently receiving Universal Credit. The jobs must be new jobs - with the funding conditional on the firm proving these jobs are additional. The jobs must not replace existing or planned vacancies and must not cause existing employees or contractors to lose or reduce their employment.
Under the scheme, the Government will pay 100% of the relevant National Minimum Wage (NMW) for 25 hours a week. Rates for 16 to 24-year olds are currently as follows:
Age under 18 - £4.55 per hour
Age 18 to 20 - £6.45 per hour
Age 21 to 24 £8.20 per hour
The Government will also pay the associated employer National Insurance Contributions (NICs) and employer minimum automatic enrolment pension contributions.
Employers will be able to top up National Minimum Wage rates.
There is also £1,500 per job placement available for setup costs, uniforms, support and training.
The employer will need to show in their application how they intend to help the participants to develop their skills and experience, including:
• support to look for long-term work, including career advice and setting goals;
• support with CV and interview preparations; and
• supporting the participant with basic skills, such as attendance, timekeeping and teamwork
Once a job placement is created, it can be taken up by a second person once the first successful applicant has completed their 6-month term.
According to the Department for Work and Pensions (DWP), there will also be extra funding to support young people to build their experience and help them move into sustained employment after they have completed their Kickstart scheme funded job. Details of such funding have not yet been published.
Applications for funding must be for a minimum of 30 job placements. However, employers who are unable to offer this many job placements can partner with other organisations to reach the minimum number requirement. The representative applying on behalf of the group can claim additional funding of £300 per job placement to support with the associated administrative costs of bringing together the employers.
Smaller businesses may also be able to apply through an intermediary, such as a Local Authority or Chamber of Commerce, who will then bid for 30 or more placements as a combined bid from several businesses. This will make the process easier and less labour intensive to apply for these smaller companies who can only consider hiring one or two Kickstarters.
The scheme, which will be delivered by the DWP, will initially be open until December 2021, with the option of being extended. With the availability of a grant for a 24-year old worth around £6,500, employers may wish to review their business with a view to becoming involved.
Lockdown 2.0 – Can your holiday let still count as a FHL?
Hard on the heels of a series of local lockdowns, England entered into a second national lockdown from 5 November 2020 to 2 December 2020. Separate restrictions applied to Scotland, Wales and Northern Ireland. The restrictions dealt a further blow to the hospitality and leisure industry and landlords letting holiday cottages were once again faced with empty properties.
The FHL rules
Properties that count as furnished holiday lettings (FHL) benefit from more advantageous tax rules than those available to other landlords, offering access to certain capital gains tax reliefs available to traders and entitlement to plant and machinery capital allowances. However, to count as a FHL, a number of tests must be met:
• the property must not be occupied for more than 155 days in the year by lets exceeding 31 days in length;
• the property is available for letting as furnished holiday accommodation for at least 210 days in the year.
• the property is let to members of the public as furnished holiday accommodation for at least 105 days in the tax year.
The property must be furnished and let commercially – days when the landlord stays in the property or on which it is occupied by family or friends rent-free or for a reduced rent are ignored when determining if the conditions are met.
Tests not met
National and local restrictions may mean that the conditions are not met this year. While no special dispensations have been announced to help landlords hit by the effects of the pandemic and associated restrictions, the FHL legislation provided two lifelines.
Lifeline 1 – Averaging election
Making an averaging election can help landlords with more than one holiday let if the tests are not met in relation to each individual property. Where an election is made, the average letting and occupancy rates are used instead, and the tests are treated as met by all properties as long as the average rates are high enough. For example, if a landlord has five holiday cottages which in total were let for l less than 31 days for 550 days in the year, the average occupancy would be 110 days. If an averaging election was made, the condition is treated as met for all properties, even if one property was only occupied as a FHL for, say, 90 days in the year.
An averaging election for 2020/21 must be made by 31 January 2023.
Lifeline 2 – 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, for example, because of the imposition of Covid-19 restrictions.
A period of grace election can be made as long as the first two conditions set out above have been met. Also, the property must actually have been let for 105 days as furnished holiday accommodation in the year before the first year in which the landlord wishes to make a period of grace election. If this test is not met again in the following year, a second period of grace election can be made. However, a failure to meet it in year 4 after two period of grace elections will mean that the property will no longer qualify as a FHL.
A period of grace election for 2020/21 must be made by 31 January 2023.
Use both lifelines
Landlords with more than one holiday property can use both the averaging and period of grace elections to ensure that, as far as possible, a property continues to qualify as a FHL.
Maintaining your NIC contributions record during Covid-19
The Covid-19 pandemic has meant that many people will suffer a reduction in income in 2020/21. Not all individuals are eligible for support under the Coronavirus Job Retention Scheme or the Self-Employment Income Support scheme, and those who are eligible for the grants will not generally receive their full pay.
Where income drops this may have an effect on the National Insurance contributions payable and the individual’s contributions record, which in turn determines their entitlement to the state pension and contributory benefits. A person reaching state pension age on or after 6 April 2016 needs 35 qualifying years to receive the full single tier state pension.
Employees build up their entitlement via the payment of primary Class 1 National Insurance contributions. For a year to be a qualifying year, the employee must have been paid or credited with National Insurance on earnings equal to 52 times the lower earnings limit. For 2020/21, the lower earnings limit is £120 per week – 52 times this is £6,240. Where earnings are between the lower earnings limit and the primary threshold (set at £189 per week for 2020/21) contributions are payable at a notional zero rate, so the employee gets the benefit but does not have to pay anything.
Missed weeks need not be a problem in themselves, as long as contributions are paid or deemed to have been paid on earnings of £6,240 for 2020/21. However, where the employee earns just above the lower earnings limit, being furloughed or taking unpaid leave can cause earnings on which contributions are paid to drop below the magic level, with the result that the year is not a qualifying year.
Where a person is out of work for a period, depending on whether they receive benefits and what benefits they receive, they may get Class 1 National Insurance credits, which will serve to protect the year. Credits are also paid to those claiming child benefit.
Although the self-employed pay both Class 2 and Class 4 National Insurance contributions, it is the payment of Class 2 contributions (at £3.05 per week for 2020/21) that provides state pension and benefit entitlements. Where earnings are below the small profits level, set at £6,475, the self-employed earner is entitled but not liable to pay Class 2 contributions. If the earner opts not to pay Class 2 contributions (and does not pay sufficient Class 1 or receive NIC credits), the year will not be a qualifying year.
To pay voluntarily or not to pay
If a person already has 35 qualifying years or is likely to do so by the time that they reach state pension age, missing a year will not adversely affect their state pension entitlement. However, if they have less than 35 years (and will be able to reach the minimum 10 years needed for a reduced state pension by the time that they reach state pension age) making voluntary contributions can be worthwhile.
Those with earnings from self-employment of less than the small profits threshold (£6,475 for 2020/21) can pay Class 2 contributions voluntarily. At only £3.05 per week for 2020/21 this is a cheap and worthwhile option.
Where there are no earnings from self-employment, paying voluntary contributions means paying Class 3 contributions at £15.30 per week for 2020/21.
Paying family members
More than one home – Private residence relief
Private residence relief removes the charge to capital gains tax on the taxpayer’s only or main residence.
For the purposes of the relief, a taxpayer can generally only have one residence qualifying for the relief at any one time, subject to the final period exemption for properties which have been the only or main residence at some time, set at nine months from 6 April 2020 (unless the taxpayer goes into care, in which case the final 36 months count).
Married couples and civil partners can only have one main residence between them.
More than one residence
Where a taxpayer has more than one residence, they can nominate which of them counts as the main residence for the capital gains tax purposes. However, to be nominated, the property must be lived in as a ‘residence’ – a property which is let out cannot be nominated.
The nomination must be made within two years of the date on which the particular combination of residences changes. If a nomination is not made, which property qualifies as the main residence for capital gains tax purposes will be determined in accordance with the facts.
Bertie has lived in a cottage in Shropshire since December 2012. In October 2019 he starts a new job in London, buying a flat in January 2020 to live in during the week. He has until January 2022 to nominate which of his residences is his main residence for capital gains tax purposes.
Where a couple marry or enter into a civil partnership and each partner owned a residence which the couple continue to use after the date of their marriage of civil partnership, they must nominate which residence is their joint main residence as married couples and civil partners can only have one main residence between them. The nomination must be made within two years of the date of their marriage or civil partnership.
However, unmarried couples can each have their own main residence.
Using your own car in your property business
A landlord running an incorporated business is likely to need to use their own car for the purposes of the business. Where this is the case, what can they claim by way of expenses?
Costs incurred wholly and exclusively for business purposes can be deducted when working out the profits of a property business. When it comes to cars, a deduction can be claimed for the cost of fuel and associated running costs. There are two options for working out the deductible amount:
Depending on the method used to work out the deductible amount, it may also be possible to claim capital allowances in respect of the cost of the car.
As the name suggests, the simplified expenses system is an easy way to work out the allowable deduction. The landlord only needs to keep a record of business mileage for the year and calculate the deduction by reference to the permitted mileage rates. However, it is not an option if capital allowances have been claimed for the car – the rates include an element to reflect depreciation.
The system can also be used where a van or motorcycle is used for the purposes of the property business.
The mileage rates used to calculate the deduction are as follows:
Vehicles Rate per mile
Cars and vans First 10,000 business miles 45p
Subsequent business miles 25p
The landlord can instead claim a deduction by reference to the actual costs. This will necessitate more work but may give a higher deduction.
Where the car is used for both the business and privately, the costs must be apportioned – a deduction is only given to the extent that they relate to the business.
When working out a deduction based on running costs, the following should be taken into account:
If the cash basis is used to prepare the accounts, the deduction is given in the period when the expenditure is incurred; if the accruals basis is used, the expenditure must be matched to the period to which it relates.
Capital allowances can only be claimed if simplified expenses have not been used to work out the deductible amount. Where the deduction is based on actual costs, writing down allowances can be claimed for the cost of the car. As with expenses, if the car is used both for business and private mileage, an apportionment is necessary.
Cars do not qualify for the annual investment allowance or a deduction under the cash basis capital expenditure rules.
Virtually time for the office Christmas party
Directors and employees can still celebrate Christmas in tax-free style – even it does have to be in the form of a ‘virtual’ office Christmas party.
Although there is no specific allowance for a Christmas party, or any other employer-provided social function, HMRC do allow tax relief against the cost of holding an ‘annual event’ for employees.
A staff event will qualify as a tax-free benefit if the following conditions are satisfied:
• the total cost must not exceed £150 per head, per year
• the event must be primarily for entertaining staff
• the event must be open to employees generally, or to those at a particular location, if the employer has numerous branches or departments
The exemption should therefore apply if, say, an employer meets the cost of meals delivered to each employee’s home and the staff ‘party’ is held virtually via video conferencing or similar.
The ‘cost per head’ of an event is the total cost (including VAT) of providing:
a) the event, and
b) any transport or accommodation incidentally provided for persons attending it,
divided by the number of those persons.
Provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year, for example, there could be three parties held at various times, each costing £50 per head.
The £150 is a limit, not an allowance - if the limit is exceeded by just £1, the whole amount must be reported to HMRC.
The £150 exemption is mirrored for Class 1 NIC purposes, (so that if the limit is not exceeded, no liability arises for the employees), but Class 1B NICs at the current rate of 13.8%, will be payable by the employer on benefits-in-kind which are subject to a PSA.
If there are two parties, for example, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.
The cost of staff events is generally tax deductible for the business. Specifically, the legislation includes a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses will be shown separately in the business accounts – usually as ‘staff welfare’ costs or similar.
There is no monetary limit on the amount that an employer can spend on an annual function. If a staff party costs more than £150 per head, the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.
The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using a HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE, or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.
The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.
In recent months radical measures have been put in place by governments across the world to try and control the spread of coronavirus, and almost all businesses and their employees will have been affected in some way. The staff Christmas party will probably look quite different this year, but with a tweak here and there to meet with current restrictions, it should still be possible for employers to provide some festive cheer.
Homeworking equipment and returning to the office
Before the Government U-turn, many employees had started to return to office-based jobs. Where the employee had previously worked from home and had been provided with homeworking equipment, there may be tax implications to consider if the employee is allowed to keep the equipment for personal use.
The tax implications will depend on the way in which the equipment was made available to the employee.
Employer provided the equipment
If the employer provided equipment to enable the employee to work from home, no tax charge arises in respect of the provision, as long as the main reason for providing the employment was to enable the employee to work from home, any private use is insignificant and the employer retains ownership of the equipment. This remains the case if the employee retains the equipment to enable them to work from home on a more flexible basis.
If, at the end of the working from home period, the employee simply hands back the homeworking equipment to the employer, there are no tax implications. However, if ownership of the equipment is transferred to the employee, there will be tax to pay unless the employee pays at least the market value at the date of transfer for the equipment. The amount charged to tax is the market value of the equipment at the date of transfer, less any contribution from the employee.
Employer reimburses the cost of the equipment
At the start of lockdown, many employees were required to work from home at very short notice. As a result, it was often easier for the employee to buy their homeworking equipment, and the employer to reimburse the cost. The reimbursement is tax-free as long as the employee acquired the equipment to allow them to work from home and any private use is insignificant.
However, if the employee buys the equipment, the title remains with the employee (unless it is transferred to the employer as a condition of the reimbursement). Consequently, if the employee no longer needs to work from home when they return to the office, but keeps the equipment for personal use, there is no tax charge – the employee is simply keeping equipment they already own.
Employee buys equipment
If the employee buys their own homeworking equipment and the employer does not meet the cost, the employee can claim tax relief for their expenditure. If the employee uses the equipment personally once they return to the office, there are no associated tax implications as the employee already owns the equipment.
Terminal loss relief
Sadly, not all businesses will survive the Covid-19 pandemic, and many may take, or be forced to take, the decision to close where losses make the business untenable.
The tax legislation provides various relief for losses including a special relief for losses made in the last 12 months of trading, known as terminal loss relief. A form of the relief is available for both income tax and corporation tax.
Under the income tax rules, a terminal loss can be set against profits of the same trade for the year of cessation and against profits of the same trade for the three tax years prior to that in which the business was discontinued, with relief being given against profits of a later year before those of an earlier year.
The terminal loss comprises:
• the loss made in the tax year in which the trade ceases; and
• the loss make in that part of the previous tax year beginning 12 months before the date that the trade ceased.
If either component is a profit, it is treated as nil in computing the terminal loss.
Where there is unused overlap relief, this will increase the terminal loss.
Tina runs a café as a sole trader. She prepares accounts to 31 March each year. Her business failed to survive the Covid-19 pandemic and she ceases trading on 30 September 2020, making a loss of £20,000 for the period from 1 April 2020 to 30 September 2020.
She made a profit of £18,000 in 2019/20, a profit of £20,000 in 2018/19 and a profit of £15,000 in 2017/18.
She has unused overlap profits of £2,000.
Her terminal loss for the last 12 months of trading is £20,000:
• 1/4/2020 to 30/9/2020: £20,000
• 1/10/2019 to 31/3/2020: £nil (profit of £4,000 for the period).
The loss is increased by the overlap profits of £2,000 to give a terminal loss of £22,000.
She has no other income in 2020/21.
The loss is relieved as follows:
• £18,000 against the profits of 2019/20; and
• the remaining £4,000 against the profits of 2018/19 of £20,000, reducing the taxable profits to £16,000.
It is not possible to tailor the claim to preserve personal allowances.
A similar relief is available for corporation tax, allowing companies to claim terminal loss relief when they stop trading.
Any trading losses occurring in the final 12 months of trading can be carried back and set against the profits made in the previous three years. The loss must be set against the profits of the most recent year first.
Electric company vans and the benefit in kind charge
If an employee is able to use a company van privately, a benefit in kind tax charge may arise. The exception to this is if the van meets the conditions for a pool van (basically one used by several employees and not generally taken home overnight by any of them) or if the private use is limited to the journey between home and work, any other private use being insignificant.
Van benefit charge
Unlike cars, the benefit in kind charge in relation to a private van is unaffected by the value of the van and, with the exception of zero-emission vans, its CO2 emissions. For 2020/21, the taxable amount for a van other than an electric one is set at £3,490. This means that where an employee has unrestricted private use of a company van, for 20202/21 they will pay tax of £698 for the privilege if they are a basic rate taxpayer and tax of £1,396 if they are a higher rate taxpayer.
Separate fuel charge
Where the employer also provides fuel for private mileage in the company van, a separate fuel benefit charge arises. For 2020/21, this is set at £666, costing a basic rate taxpayer a further £133.20 in tax and a higher rate taxpayer an additional £266.40.
Zero-emission vans – Policy reversal
Since 2015/16, the charge for a zero-emission van has been a percentage of the full charge, and that percentage has been increasing. For 2015/16, the taxable benefit of a zero-emission van was 20% of the full charge. By 2020/21, it had increased to 80% of the full charge and was due to increase further to 90% for 2021/22, being aligned with the full charge from 2022/23.
As a result, for 2020/21, the taxable benefit of an electric company van available for private use is £2,792; by contrast, an employee can enjoy the benefit of an electric company car tax-free in 2020/21.
At the time of the 2020 Budget it was announced that from 6 April 2020, to encourage employers to embrace electric vans, the benefit in kind charge for an electric van will fall to zero from 6 Aril 2021. Consequently, from that date, where an employee has an electric company van, they can enjoy unrestricted private use of that van without triggering a benefit in kind tax charge, rather than paying 90% of the full charge as had previously been the plan. This is quite a reduction.
Employers investing in new vans will be rewarded for choosing zero-emission models. Not only will employees be able to use the vans privately without having to pay tax on the benefit, there will be no Class 1A National Insurance for the employer to pay either. As an added bonus, because HMRC do not regard electricity as a ‘fuel’ for car and van benefit purposes, if the employer pays the cost of electricity for private mileage in a company van, there is no fuel charge to worry about either.
Should I reduce my payments on account?
The deadline for filing your 2019/20 tax return is fast approaching, as is the due date for the first payment on account for 2020/21. Now is the time to think about whether you can reduce your payments on account.
Need to make payments on account
If you pay tax under self-assessment you may need to make payments on account. These are advance payment towards your tax and Class 4 National Insurance bill.
You will need to make payments on account if your last self-assessment bill was at least £1,000 unless you paid at least 80% of what you owe under deduction at source, for example, under PAYE.
Payments on account based on previous year’s liability
When making payments on account, the assumption is that the current year’s liability will be roughly the same as the previous year’s liability. Thus each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Class 2 National Insurance contributions are not taken into account in working out payments on account.
When are they due?
Payments on account are due on 31 January in the tax year and 31 July after the end of the tax year. Consequently, payments on account for 2020/21 are due on 31 January 2021 and 31 July 2021.
Payments on account for 2020/21 are based on profits for 2019/20. Thus, where a business has been adversely affected by the Covid-19 pandemic, the payments on account will not reflect this because they will be based on pre-pandemic profits.
Where pandemic has taken its toll, cashflow is likely to be tight and there is little sense in making higher payments on account than are needed. You can elect to reduce your payments on account so that they better reflect your likely taxable profits for 2020/21. However, when working out your projected profits for 2020/21, remember to take into account any SEISS grants and other taxable Government support payments that you received.
Reduce your payments on account
There are various ways in which you can tell HMRC that you want to reduce your payment on account. This can be done by signing into your online personal tax account via the Government Gateway and using the ‘reduce payments on account’ option or by completing form SA303 and sending it to HMRC. You can also tell HMRC that you want to reduce your payments on account in the other information box on the self-assessment tax return. You will need to specify what you want to pay and the reason for the reduction.
Beware paying too little
Where cashflow is tight, it may be tempting to reduce payments on account to reduce your outgoings in January and July. However, if you reduce your payments below the actual amount that is due (i.e. 50% of the liability for that year), you will be charged interest on the shortfall between what you should have paid and what you have paid. Remember, if you are struggling to pay tax due on 31 January 2021, you can set up a 'Time to Pay' agreement to pay your tax in instalments. As long as you do not owe more than £30,000, this can be done online.
Leaving the VAT Flat Rate Scheme
The VAT Flat rate scheme is a simplified scheme for smaller businesses.
Under the flat rate scheme, VAT-registered traders pay a fixed percentage of their VAT inclusive turnover to HMRC instead of the difference between the VAT that they charge and the VAT than they incur. The flat rate percentage depends on the business sector within which the trader operates. With the exception of certain capital assets costing more than £2,000, the trader cannot reclaim the VAT on purchases; the flat rate percentage includes an allowance for input VAT.
Joining the scheme
Traders can apply to join the flat rate scheme if their turnover, excluding VAT, is £150,000 or less.
Leaving the scheme
Once in the flat rate scheme, a trader must leave it if:
they are no longer eligible to be in the scheme;
on the anniversary of joining turnover in the last 12 months (including VAT) was more than £230,000;
turnover in the next 30 days is expected to be more than £230,000 (including VAT);
they become a tour operator and have to account for VAT using the Tour Operator’s Margin Scheme;
the trader intends to buy capital goods covered by the Capital Goods Scheme;
the trader becomes eligible to join an existing VAT group; or
the trader becomes associated with another business.
Traders also choose to leave the scheme if they decide it is no longer for them.
Once a trader has left the scheme, they cannot rejoin it for at least 12 months.
It the scheme still worthwhile?
The flat rate percentage for limited cost businesses is 16.5% of VAT-inclusive turnover. This equates to 19.8% of VAT-exclusive turnover, which means that virtually all the VAT charged to customers is paid over to HMRC, with very little allowance to cover input VAT. A business is a limited cost business if the cost of its relevant goods is less than 2% of its turnover. However, the list of relevant goods excludes all service and fuel. Consequently, a business that has significant expenditure on non-relevant goods, may not recover the associated input VAT in full. In this situation, the trader may be better off using traditional VAT accounting and opt leave the flat rate scheme voluntarily.
How to leave
Traders wishing to leave the Flat Rate Scheme should write to HMRC at the following address:
BT VAT, HM Revenue and Customs, BX9 1WR
HMRC would normally expect traders to leave at the end of a VAT accounting period, although they can leave voluntarily at any time. HMRC will confirm the leaving date in writing.
Once a trader has left the scheme, they must not account for VAT using the flat rate percentages.
Property repairs and maintenance
Anyone who owns a property will need to carry out repairs and maintenance from time to time. Where the property is let out, the question arises as to whether the landlord can deduct the expense in calculating the profits of their property rental business.
What is a repair?
A distinction is drawn between repairs and improvements. From a tax perspective, repairs are revenue expenditure and improvements are capital expenditure. A repair will essentially keep the property in the same state, while an improvement will enhance it. For example, repointing brickwork would be a repair, whereas building an extension would be an improvement. Other examples of common repairs include:
• painting the exterior;
• interior painting and decorating;
• replacing roof tiles;
• cleaning masonry;
• replacing broken windows;
• mending furniture; and
• damp or rot treatment.
This list is not exhaustive.
As revenue items, repairs are deductible in computing the profits of the property rental business.
Expenditure that enhances the property is capital expenditure rather than revenue. However, where a repair is undertaken with modern materials that give a sense of improvement, this remains a repair rather than an improvement as long as the materials used are broadly equivalent; consequently, the expenditure is revenue expenditure rather than capital and remains deductible. An example of where this may be the case is the replacement of wooden beams that are rotting with steel girders.
Where the expenditure is capital rather than revenue, as would be the case for significant improvements, the extent to which relief may be available depends on basis used to prepare the accounts and on the type of let.
The cash basis is the default basis for unincorporated property businesses where gross rents are less than £150,000. Where the cash basis is used, capital expenditure can be deducted in accordance with the cash basis capital expenditure rules. Where accounts are prepared on the accruals basis, there is no deduction for capital expenditure – only revenue expenditure can be deducted.
Where the let meets the furnished holiday lettings rules or is a commercial let, capital allowances may be available. However, there are no capital allowances for residential lets.
A separate relief applies to the replacement of domestic items.