Time to pay
As part of the Chancellor's Coronavirus support package taxpayers were permitted to defer payment of the July 2020 income tax Payment on Account instalment until 31 January 2021. However, three lockdowns later and HMRC have become increasingly aware that a large number of taxpayers are still needing to delay not only that payment but also the tax payments that would normally be due on 31 January 2021 namely:
- the balancing income tax payment for 2019/20,
- the first income tax payment on account for 2020/21,
- any capital gains tax for 2019/20 and
- classes 2 and 4 NIC for 2019/20.
Therefore HMRC have set up a method by which further deferment may be applied for online, separate from their usual 'Time to Pay' arrangements facility. Taxpayers unable to pay their tax bills would normally need to call HMRC to discuss a payment plan but this method of applying online makes the process easier.
To use this automatic process the taxpayer needs to set up a Government Gateway account and agree to pay the tax in monthly instalments by direct debit, with the aim of clearing the debt within 12 months. Other conditions include:
- the 2019/20 tax return must have already been submitted,
- the submission of all tax returns must be up to date,
- the debt must be of at least £32 but less than £30,000 and,
- no other tax instalment plans must be in place (i.e. under the usual "Time to Pay" arrangements).
Although payments are expected to be made monthly the system does allow flexibility such that the taxpayer can make additional payments should circumstances allow. However, should the arrangement need to be amended later then HMRC will need to be contacted by phone to discuss revised arrangements. The instalment plan must be set up no later than 60 days after the due date for the tax, which realistically means that it needs to be in place by 31 March 2021. All the late paid tax will accrue interest at 2.6% to the date of full repayment. Should the taxpayer not keep to the arrangement and fall behind with the payments then HMRC has the right to ask for the outstanding amount to be repaid in full.
The facility may be a lifeline for many but it should be noted that care needs to be taken should the application include deferment of class 2 NIC due for 2019/20. The rules covering NIC payments mean that if this NIC is not paid by 31 January 2021, then the year will not count as a completed year in the taxpayer’s NIC record for state pension purposes.
Care also needs to be taken as to when to apply. Tax return submissions normally take up to 72 hours to be processed. Therefore, should the taxpayer apply at the same time as submitting their return for example, then the application may be rejected.
Should the total tax debt be more than £30,000 or the 31 March 2021 deadline is missed then the taxpayer cannot take advantage of this online facility and must go through the normal 'Time to Pay' process. There is also no specific online facility for corporation tax payments and as such the general 'Time to Pay' arrangements will need to be sought. However, it would appear that HMRC are being flexible with these arrangements and in some cases are agreeing to three months interest free extensions on payment dates.
Beware the capital gains tax connected person rules
Although it is possible to transfer assets between spouses at a value that gives rise to neither a gain nor a loss, giving a property to children or other family members may trigger an unwelcome capital gains tax bill, even if nothing was received in return.
The market value rule
Where assets are disposed of to a connected person, the transfer is deemed to take place at market value, regardless of whether any consideration is actually received and the amount of that consideration.
The list of connected persons includes:
- spouses and civil partners;
- relatives (siblings, ancestors or lineal descendants);
- spouse or civil partners of relatives;
- relatives or spouses or of civil partners; and
- spouses or civil partners of those relatives.
However, as noted above, the no gain/no loss rule applies to transfer between spouses and civil partner rather than the market value rules.
The following case study illustrates the potential cost of being caught out by the market value rule.
Adrian has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.
At the time that he gifted the property to his daughter, the house was valued at £300,000.
Adrian purchased the property ten years earlier for £200,000. Costs of acquisition and disposal are £5,000.
As his daughter is a connected person, Adrian is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £95,000 (£300,000 – (£200,000 + £5,000)).
Assuming Adrian is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £26,600 (£95,000 @ 28%). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.
Despite not receiving a penny for the property, Adrian must find £26,600 to pay in capital gains tax.
The gift will also be a potentially exempt transfer for IHT purposes.
Advantages of using a property LLP
A limited liability partnership (LLP) can be used for a property business and offers some advantages over unincorporated businesses and limited liability companies. A property LLP is something of a halfway house, providing the comfort of limited liability with the flexibility as to how profits are shared.
The use of a property LLP can be particularly useful in a family situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.
Setting up a property LLP
Like a company, a property LLP must be registered at Companies House.
An LLP can hold property in its own right. The LLP can acquire property or the partners can transfer property that they already own into the LLP.
Transferring property into the LLP can be advantageous from a tax perspective. The property is held on trust in the LLP, but the underlying legal ownership is unchanged, meaning there is no SDLT to pay. Where a member transfers property into the LLP, the value of that property at the time of transfer forms the opening balance on their equity account.
Flexibility to share profits and losses
One of the key benefits of the LLP is the flexibility to share profits and losses. This provides the potential for a tax efficient distribution.
The default position is to share profits and losses in accordance with the ratios on the members’ capital accounts. However, the ability to pay salaries in a different ratio provides flexibility to tailor the distribution in a tax efficient manner. Providing or withdrawing capital will also change the default profit sharing ratio.
From a tax perspective, an LLP is transparent for tax purposes.
This means that the individual partners are treated as being self-employed and must pay income tax on their share of the profits, and also Class 2 and Class 4 National Insurance contributions where relevant.
Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.
Each individual partner must return their income from the LLP on their personal tax return. The LLP must file a partnership return.
It is important that the LLP is carried on with a view to making a profit as anti-avoidance rules may apply which have the effect of switching the tax transparency off.
Dissolving a partnership
A partnership can be either an ordinary partnership or a limited liability partnership (LLP); both forms comprise more than two people setting up in business sharing the risks, costs and responsibilities, as well as the profits. One consequence of being a member is that each is liable for the partnership's debts and obligations. There is no limit of liability for an ordinary partnership meaning that a claimant can sue either one or all of the partners for the full amount of their claim. LLPs have similar flexibility and tax status to ordinary partnerships. With the benefits of limited liability each partner is liable only for the amount of capital they invest.
The vast majority of partnerships are set up informally without a written partnership agreement and if this is the case, then dissolution is covered by the Partnership Act 1890. With just two members the partnership will dissolve automatically should one member die, is made bankrupt or resigns. Partnerships can also be forcibly dissolved when an event occurs that makes it unlawful for the business to continue or for partners to carry on as a partnership e.g., if an accountant has their practising certificate withdrawn. In this case the partnership will be dissolved, and a new one can be formed of the remaining members. If the partnership comprises two members or more then it can continue. In comparison, unlike ordinary partnerships, LLPs do not have to be dissolved on the resignation, death or bankruptcy of a member. Instead, the Limited Liability Partnerships Act 2000 applies a modified form of the law relating to companies’ insolvency and winding up.
Individual partners are taxed as sole traders but with their income being a share of the profits declared on the partnership tax return. If the partnership ceases, then the same cessation rules apply as if the partner was a sole trader such that if the final period of trading produces a loss for the partner leaving then that loss can be carried back for three years preceding the beginning of the accounting period in which the loss was incurred, provided part of that accounting period falls within the 12 months prior to cessation.
Should the partnership dispose of assets held on dissolution (e.g. a property or properties), the partner is deemed to be disposing of his proportionate share of those properties. If a partner takes over ownership of an asset on dissolution then the partner receiving the asset is not regarded as disposing of his share. A computation will first be necessary of the gains which would be chargeable on the individual partners as if the asset had been disposed of at its current market value. Where the calculation results in a gain being attributed to the partner receiving the asset, then that gain is 'rolled over' (deferred) by reducing their cost by the amount of the gain. In this way the cost carried forward will be the market value of the asset at the date of distribution less the amount of gain attributed.
On cessation, assets qualify for capital allowances that are not actually sold but taken over by one or more of the partners. These assets are deemed to be disposed of and immediately re-acquired at market value (unless the assets are actually disposed. Balancing allowances may be claimed if the market value is less than the written-down value. A balancing charge will be made if the market value is greater than the written-down.
Auto-enrolment - Re-enrolment & re-declaration
The Covid-19 pandemic has introduced many challenges for employers. However, despite the pandemic, their responsibilities in relation to auto-enrolment remain the same. The employer’s on-going duties include their re-enrolment and re-declaration obligations.
Every 3 years, the employer must put certain members of staff back into their auto-enrolment pension scheme and complete a declaration to tell the Pensions Regulator that they have done so. This is known as re-enrolment and re-declaration.
The key date is the third anniversary of the employer’s staging date or start date. Thereafter, the re-enrolment and re-declaration processes must be undertaken at three-year intervals.
Under re-enrolment, the employer must check:
whether they have staff to put back into the pension scheme and re-enrol them; and
write to staff who have been re-enrolled.
To do this, the employer will need to assess staff who have left the scheme or who have reduced their contributions.
Staff must be enrolled in a pension scheme automatically if:
they are aged between 22 and State Pension Age.
they earn over £10,000 a year (£833 a month, £192 a week).
If staff who meet the above criteria have previously opted out, they need to be re-enrolled.
Staff who need to be re-enrolled should be put back into the pension scheme within 6 weeks of the re-enrolment date. If this date is missed, it should be done within 6 weeks of the date on which staff were assessed.
If an employee does not want to be a member of the scheme, they can opt out. However, they must be re-enrolled if they are eligible at the re-enrolment date; once re-enrolled they can opt out. Opting out lasts only until the next re-enrolment date, at which time they must be put back in (but can then opt out again if they want to). Employers must re-enrol eligible staff even if they know they want to opt out.
Once staff have been re-enrolled, the employer must deduct employee contributions from their pay and pay them over to the scheme with the employer contributions.
The employer must write to staff who have been re-enrolled to let them know, and also to inform them of the contributions that will be paid and that they can opt out if they want to.
The final stage of the re-enrolment and re-declaration process is to submit the re-declaration of compliance. This has to be done regardless of whether or not staff have been put back into the pension scheme.
The re-declaration of compliance is an online form which confirms to the Pensions Regulator the employer has met their legal obligations in relation to auto-enrolment. The re-declaration of compliance must be filed no later than 5 months from the third anniversary of the duties start date, or staging date, as appropriate. The deadline is the same regardless of whether staff within 6 weeks are assessed within of the re-enrolment date, or at a later date.
Residence nil rate band frozen until April 2026
The residence nil rate band (RNRB) is an additional nil rate band that is available for inheritance tax purposes when a main residence is left to a direct descendant, such as a child or grandchild. Adopted children, stepchildren, children fostered at any time by the deceased and a child for whom the deceased was appointed a guardian or special guardian when the child was under 18 all count equally as direct descendants.
As with the nil rate band, it can be transferred to the surviving spouse or civil partner. Like the nil rate band, the surviving partner inherits the unused percentage of the deceased’s RNRB. However, this must be claimed by their executor on their death.
High value estates
The RNRB is available in full where the value of the estate is £2 million or less. For estates valued at more than £2 million, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million.
RNRB for 2021/22
The RNRB remains at its 2020/21 level of £175,000 for 2021/22. With a nil rate band of £325,000, a married couple or civil partners can pass on £1 million free of IHT as long as a main residence worth at least £350,000 is left to a direct descendant. They each have nil rate bands totalling £500,000 available to them. Special provisions apply to preserve the availability of the RNRB where the deceased has downsized or gone into care.
For 2021/22, the RNRB is not available to estates valued at more than £2.35 million.
RNRB frozen until April 2026
In common with many other thresholds, the RNRB is frozen until April 2026, remaining at its 2021/22 level of £175,000 for 2022/23, 2023/24 and 2025/26.
The lack of inflationary rises in the RNRB and the nil rate band may necessitate some forward planning if the value of the estate is likely to exceed the available nil rate bands. Giving away property in advance will not only open up the possibility of taking it outside the charge to inheritance tax if the deceased survives seven years and reducing the charge if the deceased survives at least three years from the date of the gift, it also protects against inflationary increases.
Where the main residence is owned as tenants in common, consideration could be given to each spouse/civil partner leaving their share to their children or grandchildren on their death, rather than to the surviving spouse/civil partner as this will offer some protection against rising property values.
If you commenced self-employment after 5th April 2019
If you started your self-employment after 5 April 2019, you were initially denied support under the Self-Employed Income Support Scheme (SEISS) and the first three quarterly payouts to 31 January 2021.
Thanks to a change in the recent Budget, you may be eligible – for the first time – to grants that will be made available for the quarter end 30 April 2021 and a final period to 30 September 2021.
HMRC are adding a further security check
To counter fraudulent use of the SEISS scheme, HMRC have decided to contact taxpayers who became self-employed during 2019-20, and who submitted a self-assessment return for that period.
What will the letter say?
The letter will tell you to expect a telephone call on the number provided on your tax return. If our contact details were added to your return, HMRC will ask us to pass on your contact number.
On this occasion we cannot deal directly with HMRC and they will need to speak with you to obtain proof of identity and evidence of trade in the form of bank statements.
Why a letter and then a phone call?
Here’s what HMRC said:
We are aware of increased scam activity related to HMRC’s coronavirus support schemes. The purpose of the letter is to explain to you that this is a genuine call, and to give customers details on how to recognise it as such.
Worried about HMRC calling you?
HMRC’s reason for this added layer of security seems to be to exclude fraudsters from making claims. But if you have any concerns regarding this process, please call.
Tax allowances frozen until April 2026
The financial impact of the Covid-19 pandemic is unprecedented and borrowing levels in 2020/21 of 16.9% of GDP represent the highest level of peacetime borrowing. To meet some of this cost, the Chancellor, Rishi Sunak, announced in the 2021 Budget that various thresholds and allowances would remain at their 2021/22 levels until April 2026.
The personal allowance is increased to £12,570 for 2021/22 – an inflationary increase of £70 over the 2020/21 level of £12,500. However, the allowance will remain at this level for 2022/23, 2023/24, 2024/25 and 2025/26. As incomes rise with inflation, people who currently do not pay tax may start to pay tax once their income rises above £12,570.
Income tax rates and bands
The basic rate band is increased to £37,700 for 2021/22. This means that where someone is in receipt of the personal allowance of £12,570, they will start paying higher rate tax once their income exceeds £50,270. This remains the case for tax years up to and including 2025/26.
The basic rate band and higher rate threshold will remain at these levels until April 2026. As incomes rise in line with inflation, more people will pay tax at the higher and the additional rates. Tax is payable at the additional rate of 45% on taxable income in excess of £150,000.
Capital gains tax annual exempt amount
The capital gains tax annual exempt amount remains at £12,300 for 2021/22 and is frozen at this level until April 2026.
However, there may be changes to capital gains tax on the horizon as this is something that the Government are looking at.
The upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 contributions are aligned with the rate at which higher rate tax becomes payable. Both are set at £50,270 for 2021/22. For Class 1 purposes, this is equivalent to £967 per week and £4,189 per month. These too will remain unchanged until April 2026.
All other National Insurance thresholds will be reviewed at the appropriate time.
The nil rate band has been frozen at its current level of £325,000 since 2008/09. It will remain at this level up to and including 2025/26. The freezing of the threshold brings more estates within the ambit of inheritance tax.
The residence nil rate band (RNRB) remains at its 2020/21 level of £175,000 for 2021/22. It too will remain at this level for the 2023/24 to 2025/26 years inclusive. The RNRB is reduced where the value of the estate is £2 million or above by £1 for every £2 by which the value of the estate exceeds £2 million.
Pension lifetime allowance
The pension lifetime allowance places a cap on the value of tax relieved pension savings. The tax relief on pension savings in excess of the lifetime allowance is recovered in the form of a 25% tax charge where the excess is taken as a pension and a 55% tax charge where the excess is taken as a lump sum. The lifetime allowance remains at £1,073,100 for 2021/22 and will stay at this level until April 2026. This will limit the ability of anyone with pension savings at or near this level to make further tax-relieved pension contributions during 2021/22 and the following four tax years.
Making a formal complaint against HMRC
Sometimes a taxpayer may find themselves in a position whereby HMRC seem to be taking an inordinate amount of time to settle a particular issue or the service received as a 'customer' does not meet the standards expected or even that they feel they are being discriminated against. Although complaints can be made in several ways, ('informal' being where a taxpayer only wishes to express their dissatisfaction without seeking compensation), should the taxpayer want to formalise the complaint HMRC has a set complaints procedure under the 'HMRC Charter'.
The starting point for any formal complaint is either a phone call or completion of the online iForm that can be found on the taxpayer's own government gateway or by writing a letter. The complaint will be dealt first by the original point of contact whenever possible. HMRC has empowered complaint handlers to make decisions without needing to refer to a higher-level policy unit. In the month to February 2021, 4,149,407 complaints were received.
If, after further correspondence with that person the taxpayer is still dissatisfied then HMRC can be asked to review the matter again (termed 'Tier 1'). This time the review is undertaken by an impartial special complaints officer separate from whoever responded to the initial complaint. That officer will review the file, analysing each stage so that any errors in procedure may be identified. This review should take approximately a month although currently it may take longer due the impact of the coronavirus on staffing levels. Even so, HMRC statistics show that in February 2021 a total of 5,497 complaints were elevated to 'Tier 1' with approximately 45% being upheld.
If, after receiving the result of their review, the taxpayer is still not satisfied, then they can ask for another review to be undertaken by a different member of the complaints team who will give a final response (termed 'Tier 2'). In February 2021, 402 such complaints were re-reviewed, 34% being upheld.
Should the file have gone through the steps above, with the complaint being fully investigated but the taxpayer still not satisfied, then the next step is to complain to the independent adjudicator. This department is independent of HMRC but has an office within HMRC as part of their service level agreement.
The final step is to take the complaint to the parliamentary ombudsman via the taxpayer’s MP in a letter for the attention of the Parliamentary and Health Service Ombudsman if the taxpayer is still not satisfied.
The aim of HMRC's complaints procedure is first and foremost to put things right and apologise if it is found that the case has been acted upon incorrectly. However, the Charter allows financial compensation in some instances, for example, reimbursement costs which have been reasonably incurred by the complainant as a direct result of HMRC's actions, or compensation for the worry and distress that the mistakes and/or delays may have caused the taxpayer.
These costs include basic quantifiable amounts such as 'out of pocket' expenses (travel, stationery, postage and telephone costs). Professional fees for advice given to a taxpayer as to the complaint are only considered where the taxpayer would face extreme hardship by paying the invoice and the situation is likely to continue for an uncertain period. Other more relative costs depend on the circumstance and not designed to put the taxpayer in a better position financially than would be the case if everything has gone smoothly. The Charter states that payments are for 'demonstrable financial loss, but not for any loss which is hypothetical, speculative or insubstantial'. In the context of our policy on remedy, the term 'demonstrable' should be understood to mean 'evidenced beyond reasonable doubt'.
Consolatory payments are not the taxpayers’ by right and will only be considered where it is proved that there has been a serious (or persistent) error. A complainant is certainly not going to get rich on such proceedings as there are strict monetary limits. Payment will usually be within the range of £50 to £250 although payments of up to £1,000 or even £2,000 will be considered.
Reduced rate of VAT for hospitality and leisure
The hospitality and leisure industries have been severely affected by the Coronavirus pandemic. To help businesses in these sectors to get back on their feet, a reduced rate of VAT of 5% rather than the standard rate of 20% will apply to certain supplies for a limited period, from 15 July 2020 to 12 January 2021.
Food and drink supplied for consumption in the premises, for example by a restaurant or a bar, and hot takeaway food and beverages are normally liable for VAT at the standard rate of 20%. During the support period, the 5% rate will apply instead to:
• hot and cold food for consumption on the premises on which they are supplied;
• hot and cold non-alcoholic beverages for consumption on the premises on which they are supplied;
• hot takeaway food for consumption off the premises on which it is supplied;
• hot takeaway non-alcoholic beverages for consumption off the premises on which they are supplied.
Hotel and holiday accommodation
For businesses supplying hotel and holiday accommodation, the 5% rate VAT applies during the support period to:
• supplies of sleeping accommodation in a hotel or similar establishment;
• certain supplies of holiday accommodation;
• charge fees for caravan pitches and associated facilities;
• charge fees for tent pitches and camping facilities.
Meals provided to guests in long-term holiday accommodation (more than 28 days) will also benefit from the reduced rate, but the hire of motor caravans will not.
Admission to attractions
The reduced rate of 5% also applies during the support period in respect of admission to certain attractions which would normally be liable for VAT at the standard rate. However, if the admission fee is exempt from VAT, this will take precedence over the 5% charge and the admission charge will remain exempt.
The temporary reduction will apply to admissions to shows, theatre, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events where these are not included in the existing cultural exemption.
Impact on flat rate scheme
VAT registered businesses using the flat rate scheme should note that some of the flat rate percentages have been reduced to take account of the temporary reduction in the rate of VAT.
Directors’ loan accounts
A 'Directors Loan Account' (DLA) is an account in the company’s financial books that records all transactions between a director who is a participator (or another participator) and the company.
Transactions through the account include:
Salary paid directly to a director under a contract is not recorded in the DLA as the monies will have been paid and therefore not owed by the company.
DLA in credit - When a company incorporates it is not unusual for directors to lend money to the business and this will show in the DLA as a 'loan' from the director to the company. As the DLA will be in credit, the director can draw on the credit balance at any time with no tax or National Insurance implications for either him/herself or the company. However, if the company pays interest on the loan, the director will be liable for tax on that interest, declaration being on the personal tax return. The company also needs to declare the payment to HMRC.
A DLA may also have a credit balance should salary or dividends be allocated to a director, but they do not draw payment. Non take-up may be for various reasons e.g. the company may be experiencing cash flow problems or the director may receive other income that might take him into higher rate tax and he does not want that to happen.
DLA in debit/overdrawn - Company - Invariably the DLA will be overdrawn throughout the accounting year as directors withdraw payments on account of dividends and expenses from the company bank account - each payment being recorded in the DLA. The directors may be liable to pay a benefits-in-kind tax charge if the outstanding balance on the director’s loan account is more than £10,000 at any point in the tax year. The company will be liable to Class 1A employers NIC.
At the end of the year, it is not unusual to find that insufficient profits have been generated to cover the amount that has been withdrawn, even after taking the salary and dividends into account, the net result being that the director will owe money to the company as the account will be overdrawn.
This overdraft must be repaid if there are to be no tax implications for both the director and the company. Should the loan exceed £15,000 and be made to a full-time working director whose interest in the company is more than 5% of the share capital then the loan needs to be repaid by the due date of payment of corporation tax (i.e. within nine months and one day of the accounting period). If this does not happen then the company is liable to a tax charge at 32.5% (a 'section 455' charge) on the outstanding loan at that date. If the loan is subsequently repaid after the charge has been paid then the tax is refunded (although not until nine months and one day after the end of the company's accounting period in which the loan is repaid or reduced).
Director - Should the total of all outstanding loans from the company exceed £10,000 at any time during a tax year then the director is considered to have received a 'benefit in kind' from his employment. The charge is on the difference between the interest paid (if any) and interest payable at the 'official rate'. The company will pay employers NIC on the charge and be required to declare the 'benefit' on the annual P11D form.
HMRC is taking an increasingly dim view of such loans not least because remuneration or dividends are taxable as income when a loan is not. They will commonly ask for a detailed analysis of the DLA looking for such discrepancies as failure to notify liability to a section 455 charge. 'Bed and breakfasting’ transactions (where the DLA loan is correctly repaid within the nine months stated but then the money is redrawn shortly after repayment through another separate loan) are also an area of interest as is failure by the company to apply PAYE at the correct time to bonuses credited to the DLA.
Reporting Benefits in Kind (BiKs)
Filing deadlines and tax saving tips for 2020-21
At the end of each tax year, you will usually need to submit a P11D form to the tax office for each employee you have provided with expenses or benefits, for example, a company car.
The total taxable benefits you provide to all employees will also create a Class 1A employer’s NIC charge, and this will need to be reported to HMRC by filing a further return, P11D(b).
Note: If HMRC have asked you to submit a P11D(b), but you have no taxable benefits to report, you can tell them you do not owe Class 1A NIC by completing a formal declaration via your online government gateway account.
What are the filing deadlines for 2020-21?
What you need to doDeadline
Submit your P11D forms online to HMRC - 6 July 2021
Give your employees a copy of the information on your forms - 6 July 2021
Tell HMRC the total amount of Class 1A National Insurance you owe on form P11D(b) - 6 July 2021
Pay any Class 1A National Insurance owed on expenses or benefitsMust reach HMRC by 22 July 2021 (19 July 2021 if you pay by cheque)
Note: You will be charged a penalty of £100 per 50 employees for each month or part month your P11D(b) is late. You will also be charged penalties and interest if you are late paying HMRC.
Talk to us before you file your P11D returns
There may be tax saving opportunities you could discuss with employees that would save them income tax and you the additional NIC charge. We have outlined two ideas for company car drivers you could consider below.
Avoiding the car fuel benefit charge
Employees not only pay additional tax for the use of a company car, but they also pay a hefty additional tax charge if their employer pays for private fuel. The car fuel benefit charge can be avoided if the employee records actual private mileage and repays their employer based on an agreed rate per mile.
Were company car drivers furloughed during 2020-21?
If any of your employees that had the use of a company car were furloughed during 2020-21, and the car was not made available for private use during this period, you can advise HMRC of the “not available” period when you complete their P11D. This will reduce any benefit charges for 2020-21.
Let us help you crunch the numbers
Please call if you would like to discuss options to reduce BiK tax charges for your employees or prepare and file the necessary returns. And do not forget, if you can reduce income tax charges for employees you will not only boost their moral, but you will also lower the amount of Class 1A NIC that you will have to pay as their employer.
New system for 2019/20 late filing penalty appeals
Due to the pandemic many taxpayers missed not only the usual 31 January 2021 deadline for submitting their 2019/20 self-assessment tax returns but the extended one of 28 February. To reduce admin for agents HMRC is introducing a simplified appeal process against the resulting penalties. How will it work?
Taxpayers who missed the 28 February deadline for filing their 2019/20 self-assessment will automatically be charged a late filing penalty of £100. They have the right to appeal against the penalty if they have a reasonable excuse for filing late. This includes being prevented from meeting the deadline because of direct or indirect effects of the pandemic. HMRC expects this will apply to many taxpayers who are represented by accountants.
HMRC is therefore providing a bulk appeal process which accountants can use to file appeals on behalf of their clients where coronavirus was the root cause their returns being late. The process will be available from 24 March for a period of six months.
There are conditions and exclusions for using the bulk service, for example accountants must use HMRC’s special template.
Freezing of allowances and thresholds
To help meet some of the costs incurred in dealing with the Covid-19 pandemic, the Chancellor announced in his 2021 Budget that a number of allowances and thresholds will remain at their 2021/22 levels until 6 April 2026. Those affected are outlined below.
The personal allowance was increased to £12,570 for 2021/22, up from £12,500 for 2020/21. It will remain at this level for the following four tax years, up to and including 2025/26.
The personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. For these tax years, individuals with adjusted net income in excess of £125,140 will not receive a personal allowance.
Income tax bands
The basic rate band was increased to £37,700 for 2021/22, from £37,500 the previous year. It will remain at this level for tax years up to and including 2025/26.
With a personal allowance of £12,570, the point at which an individual in receipt of the basic personal allowance starts to pay higher rate tax is set at £50,270 until April 2026.
National Insurance threshold
The upper earnings limit for Class 1 National Insurance purposes and the upper profits limit for Class 4 National Insurance purposes are aligned with the point at which higher rate tax is payable. Both are set at £50,270 for 2021/22 and will remain at this level for the following four tax years, up to and including 2025/26.
Other National Insurance thresholds and limits will be reviewed at the appropriate time.
Capital gains tax annual exempt amount
The capital gains tax annual exempt amount remains at its 2020/21 level of £12,300 for 2021/22. It will stay at this level for subsequent tax years up to and including 2025/26.
Inheritance nil rate bands
The inheritance tax nil rate band has been set at £325,000 since 2008/09 and was due for review in 2021. However, it will remain at this level for 2021/22 and subsequent tax years, up to and including 2025/26.
The residence nil rate band (RNRB), which is available where a main residence is left to a direct descendant, remains at its 2020/21 level of £175,000 for 2021/22 and the following four tax years. Where the estate is valued at £2 million or more, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million. It is not available where the value of the estate is £2.35 million or above.
Pension lifetime allowance
The pension lifetime allowance limits the amount of tax-relieved pension savings that an individual can build up. The lifetime allowance remains at ££1,073,100 for 2021/22 and for the next four tax years.
Impact of freezing allowances and thresholds
By freezing allowances and thresholds, the tax take will rise and incomes and assets rise with inflation. More people will pay tax and more people will pay tax at higher rates as a result, and more estates will be liable for inheritance tax.
It may be prudent to plan ahead. For example, review the value of the pensions fund before making any further tax-relieved contributions – where the value of the fund exceeds the lifetime allowance, a tax charge is levied on the excess, at 25% where the excess is taken as a pension and at 55% where it is taken as a lump sum.
Restart Grants and Recovery Loans
As lockdown restrictions are eased, businesses may need help to re-open and to recover from the impact of the pandemic. Depending on the nature of the business, they may be eligible for a Restart Grant or a Recovery Loan.
The Restart Grant Scheme provides support to help business that were required to close to re-open as lockdown restrictions are eased. The grants are available to businesses in non-essential retail and businesses in the hospitality, accommodation, leisure, personal care and gym sectors.
The grants are available from 1 April 2021 and must be claimed from the local council. Applications can be made on the relevant council’s website.
To qualify, a business must:
be based in England;
pay rates; and
be trading on 1 April 2021.
Non-essential retail business can apply for a Restart Grant of up to £6,000, whereas businesses in the hospitality, accommodation, leisure, personal care and gym sectors can apply for a Restart Grant of up to £18,000. Local councils will use their discretion to determine whether a business is eligible for a grant.
Recovery Loan Scheme
The Recovery Loan Scheme is designed to provide access to finance for UK businesses as they recover from the impact of the Covid-19 pandemic. Businesses of any size can apply for loans under the scheme, and can benefit from a loan or overdraft of between £25,001 and £10 million per business or asset finance of between £1,000 and £10 million per business. However, the amount offered and the terms are at the discretion of the lender.
To encourage lenders to participate, the Government guarantee 80% of the finance to the lender; however, the borrower remains liable for 100% of the debt.
A business can apply for a Recovery Loan if it is trading in the UK. Applicants will need to demonstrate that their business:
would be viable were it not for the pandemic;
has been adversely impacted by the pandemic; and
is not in collective insolvency proceedings.
Businesses that meet the eligibility criteria can apply for a recovery loan, regardless of whether they also have a Bounce Back loan or a Coronavirus Business Interruption Loan. Under the scheme, no personal guarantees are taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.
The scheme is due to run until 3 December 2021.
Postponed VAT accounting from 1 January 2021
The Brexit transitional period comes to an end of 31 December 2020 and various changes come into effect from 1 January 2021. One of these changes is the introduction of postponed VAT accounting. This will affect you if you are a VAT-registered business and you import goods into the UK, particularly if you do not use duty deferment.
Nature of postponed VAT accounting
Under postponed VAT accounting, you declare and recover VAT on the same VAT return. This is beneficial as it means that you do not have to pay the VAT upfront and recover it later. Normal VAT rules continue to govern what can be reclaimed.
You can use postponed VAT accounting from 1 January 2021 if your business is registered for VAT in the UK and you import goods into Great Britain from anywhere outside the UK or into Northern Ireland from outside the UK and the EU.
There are no changes to the VAT treatment of goods moved between Northern Ireland and the EU, or in the way in which the VAT is accounted for.
Accounting for import VAT on your VAT return
You can account for import VAT on your VAT return if:
• you import goods for use in your business;
• you include your EORI number, which starts with ‘GB’ on your customs declaration; and
• you include your VAT number on your customer’s custom declaration if required.
If you use customs special procedures, you can account for the import VAT on your VAT return when you submit the declaration to release those goods into free circulation.
Completing your VAT return
The introduction of postponed VAT accounting means that there are some changes to the way in which you will complete your VAT return from 1 January 2021.
You will need to download a monthly statement which shows the total import VAT postponed for the previous month which you will need to include on your VAT return. There are also changes to what you need to enter in Boxes 1, 4 and 7.
• In Box 1, include the VAT due in the period on imports accounted for through postponed accounting.
• In Box 4, include VAT reclaimed in this period on imports accounted for through postponed accounting.
• In Box 7, include the total of all imports of goods shown on your online monthly statement, excluding any VAT.
Consignments not exceeding £135
Where the value of the consignment is less than £135, VAT will be collected at the point of sale rather than at the point of importation.
Tax day announcements hint at system overhaul
On 23 March 2021, dubbed “tax day”, the government published a number of policies that seem to suggest the UK tax system will be subject to major reform in the coming years.
What were the key announcements?
Tax day was the day the government published a document containing 30 announcements relating to tax policy. Much of this is high level, for example the announcement relating to promoters of tax avoidance. However, some of the content suggests that the UK tax framework will be revised over the coming years. Of particular interest is the intention to move the payment dates for income tax and corporation tax for small companies closer to the point that the underlying income is received, i.e. more akin to real-time payment. This will undoubtedly go hand in hand with the Making Tax Digital initiative.
Another welcome point is the commitment to reducing red tape associated with inheritance tax reporting. From 1 January 2022, the publication says that “over 90% of non-taxpaying estates each year will no longer have to complete inheritance tax forms for deaths when probate or confirmation is required. In addition, the current temporary provision for those dealing with a trust or estate to provide an inheritance tax return without requiring physical signatures from all those involved will be made permanent.” There is no detail on exactly how this will be achieved, but it appears the government will implement some changes recommended by the Office of Tax Simplification in 2018.
Legal v illegal dividends
Changed business conditions in light of the Coronavirus pandemic have caused many companies to review their dividend policies not least because the company's financial position may have deteriorated significantly from that shown in its last annual accounts.
The Companies Act 2006 requires that a dividend be paid only if there are sufficient distributable profits. Even if the bank account is in credit the company will need to have sufficient retained profits to cover the dividend at the date of payment. ‘Profit’ in this instance is defined as being ‘accumulated realised profits’.
If a dividend is paid that proves to be more than this amount, is made out of capital or even made when there are losses that exceed the accumulated profits then this is termed ‘ultra vires’ and is, in effect, ‘illegal.’
For private companies there is no need for full accounts to be prepared to prove sufficient profits in the calculation for an interim dividend but they will be needed for the declaration of a final dividend. HMRC’s Corporation Tax Manual states that the accounts need to be detailed enough to enable ‘a reasonable judgement to be made as to the amount of the distributable profits’ as at the payment date.
Therefore, the financial status of the company needs to be considered each time a dividend payment is made which can prove difficult with the payment of interim dividends unless the company is VAT registered and the accountant does the VAT return calculations. The test must be satisfied "immediately before the dividend is declared" and this is generally interpreted to mean that the 'net assets' test must be satisfied immediately before the company's directors decide to pay the dividend. If the directors correctly prepare basic interim accounts and a dividend is paid based on those accounts then that will be deemed lawful, even if, when the final annual accounts, prepared at a later date, show that there was an insufficient amount for distributable profits.
If regular amounts have been withdrawn then the amounts are deemed ‘illegal’ if at the date of each payment the management accounts show a trading loss or the profit cannot support the payment. HMRC will argue that ‘in the majority of such cases’ the director/shareholder of a close company will be aware (or had reasonable grounds to believe) that such a payment as dividend was ‘illegal'.
A significant consequence of paying an ‘illegal’ dividend could arise if the company goes into liquidation when the liquidator or administrator routinely reviews the director's conduct over the three years before insolvency. If it is found that a dividend has been paid ‘illegally’ then under the Companies Act 2006 rules the shareholders will be expected to repay the amount withdrawn (or the ‘unlawful part’). HMRC will actively pursue this route being as they are often the largest unsecured creditor. Furthermore, under the Insolvency Act a director can be held personally liable for any breach of his or her fiduciary duty to the company.
However, it is not only in liquidation that HMRC could open an enquiry into the treatment of a dividend. HMRC treats a dividend that it perceives to be illegal as being equivalent to a loan and, for a ‘close’ company, this means being a loan to a participator and as such it must be declared on the company tax return. If such a 'loan' is not so declared and the financial statements filed online show that the company’s reserves are in deficit at the end of the relevant period then HMRC may raise enquiries. Likewise where the opening balance next year is in deficit but dividends are still paid.
HMRC have also been known to argue that the repayable amount is an interest-free loan and for a director employee could result in a taxable benefit-in-kind should the loan be less than £10,000.
Self-employment and the £2,000 dividend allowance
All taxpayers, regardless of the rate at which they pay tax, are entitled to a tax-free allowance for dividends. For 2020/21 this is set at £2,000, so if you’re thinking of branching out to be self-employed or have made the switch last year, this is what you need to consider.
Nature of the allowance
If you’re self-employed and own your limited company, you can take money out of your company as a dividend, or you may receive a dividend payment if you own company shares.
Although termed the ‘dividend allowance’ it is in fact a zero rate band. Dividends covered by the allowance are taxed at a zero rate of tax, but count towards band earnings.
Where the personal allowance has not been otherwise utilised, dividends sheltered by the personal allowance are also received free of tax.
Dividends not covered by the allowance
Where dividends are not sheltered by either the dividend allowance or the personal allowance, they are taxable at the dividend rates of tax. Where the taxpayer has different sources of income, dividends are treated as the top slice of income. For 2020/21, dividend income is taxed at 7.5% to the extent that it falls within the basic rate band, at 32.5% to the extent that it falls within the higher rate band and at 38.1% to the extent that it falls within the additional rate band.
Using the 2020/21 allowance
The dividend allowance is lost if it is not used in the tax year. As the end of the 2020/21 tax year approaches, it is sensible to review your dividend policy and consider whether it desirable, and indeed possible, to pay further dividends before the 2020/21 tax year comes to an end on 5 April 2021.
Where an individual receives dividends both from their investments and their family or personal company, depending on their shareholdings, their dividend income may have fallen in 2020/21 as a result of the Covid-19 pandemic. This may provide the scope to pay higher dividends than normal from the family or personal company in order to utilise the allowance.
However, remember that dividends can only be paid from retained earnings.
Where profits are low for example if you have just started a business, or a loss has been made in 2020/21 as a result of the pandemic, this does not necessarily prohibit the payment of dividends – dividends can be paid as long as retained profits brought forward are sufficient to cover both any loss and any dividends paid out.
To comply with company law requirements, dividends must be paid in accordance with shareholdings. However, using an alphabet share structure (such that one shareholder has A class share, another has B class shares, and so on) overcomes this restriction and allows dividend payments to be tailored to utilise family members’ unused dividend (and indeed personal) allowances for 2020/21.
Personal and family companies – Optimal salary for 2021/22
A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise.
Preserving pension entitlement
One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years.
For the year to be a qualifying year, earnings must be at least equal to the lower earnings limit. A director has an annual earnings limit, and for 2021/22, the annual lower earnings limit is set at £6,240. Where the shareholder is not a director, earnings for each earnings period must be at least equal to the lower earnings limit. For 2021/22, the weekly and monthly thresholds are, respectively, £120 and £520.
Contributions are payable by the employee at a notional zero rate on earnings between the lower earnings limit and the primary thresholds. The employee starts paying contributions once earnings exceed the primary threshold.
Optimal salary – Employment allowance is not available
The employment allowance is not available to companies where the sole employee is also a director. This means that personal companies will generally be unable to claim the allowance.
For 2021/22, the primary threshold is set at £9,558 (£184 per week/£797 per month) and the secondary threshold is set at £8,840 (£170 per week, £737 per month).
Although the maximum salary that can be paid without paying any National Insurance is one equal to the secondary threshold of £8,840 for 2021/22, it is beneficial to pay a higher salary equal to the primary threshold of £9,568. Employer’s National Insurance will be payable on the salary to the extent that it exceeds £8,840 at a cost of £100.46 (13.8% (£9,568 - £8,840)), however, this is outweighed by the corporation tax deduction at 19% on the additional salary and the employer’s NIC.
Once the primary threshold is reached, employee contributions are payable at 12%. At this point, the combined National Insurance cost of 25.8% (13.8% + 12%) is more than the corporation tax saving and paying a salary in excess of the primary threshold is not worthwhile.
Thus, where the employment allowance is not available, the optimal salary is equal to the primary threshold for 2021/22 of £9,568 (£184 per week, £797 per month).
Optimal salary - Employment allowance is available
In a family company scenario, the employment allowance will be available if there is more than one employee on the payroll. As long as the employment allowance is available to shelter the employer’s National Insurance that would otherwise arise, the optimal salary is one equal to the personal allowance, set at £12,570 for 2021/22. No National Insurance is payable until the primary threshold is reached. Above this level, employee National Insurance is payable at the rate of 12%. However, the additional salary saves corporation tax at 19%. However, once the personal allowance has been used, tax at 20% is payable as well as employee’s National Insurance of 12%, which exceed the corporation tax deduction of 19%.
Thus, where the employment allowance is available, the optimal salary for 2021/22 is one equal to the personal allowance of £12,570 (£242 per week, £1,048 per month).
ATED return and charge for 2021
The annual tax on enveloped dwellings (ATED) is payable where high value residential property is held within an ‘envelope’, such as a limited company. The charge applies if a dwelling in the UK that is valued at more than £500,000 is owned, or partly owned, by:
a partnership where at least one of the partners is a company; or
a collective investment scheme, such as a unit trust or an open-ended investment vehicle.
Qualifying property rental business
Relief is available in various situations, including where there is a qualifying rental business.
the business must be a property rental business; and
it must be carried out on a commercial basis with a view to profit.
The property must be let to a third party, and not occupied by an owner.
If it is not currently generating receipts, all is not lost – relief remains available if steps are being taken to use the property to generate an income without delay, such as advertising for a tenant.
Relief, however, is not available if the property is held in a company which is not a qualifying property rental business (for example, a trading company), even if it is let commercially.
Amount of the charge
Where relief or an exemption is not available, an annual charge applies based on the value of the property at the relevant valuation date. For 2021/22 the charges are as follows:
More than £500,000 up to £1 million £3,700
More than £1 million up to £2 million £7,500
More than £2 million up to £5 million £23,500
More than £5 million up to £10 million £59,100
More than £10 million up to £20 million £118,600
More than £20 million £237,400
The charge period runs from 1 April 2021 to 31 March 2022. Where a property within the charge to ATED is held on 1 April 2021, the tax must be paid by 30 April 2021. Where a property is acquired after that date, the tax is payable within 30 days of the date on which the property came within the charge to ATED.
An ATED return for 2021/22 must be filed online by 30 April 2021 using the ATED Online Service where the property is held on 1 April. Where the property is acquired in the year, the deadline is 30 days from the date on which the property comes into charge.
If relief is available, for example, for a qualifying rental business, a Relief Declaration Return should be submitted instead. Again, this can be done using the ATED Online Service.
Bounce-Back loans - Pay as You Grow options
You may have received, or are about to receive, a letter from your bank if you took out a government-backed Bounce-Back Loan (BBL) last year. You may remember that in the first year of the BBL no repayments were required, and the government picked up the tab for any setup costs and interest charges.
Banks are therefore writing to remind account holders that BBL repayments are about to commence if the first year has expired. They are also including details of certain relaxations that are available following the Chancellor’s Pay as you Grow announcements last month.
Repayment options. Pay as you Grow (PAYG)
If you need to reduce your monthly repayments, you can advise your bank that you want to take advantage of one the following PAYG concessions:
• Reduce monthly payment for six months by paying interest only. This option is available up to three times during the course of your BBL.
• You could take a payment holiday for six months. This option is available once during the term of your BBL.
• You could request an extension of your BBL loan term from six to ten years. This would reduce your monthly repayments. For example, on a £5,000 loan, monthly repayments would drop from £88.74 per month to £51.75 per month.
You can use certain combinations of these options together, but as the banks will point out, all of these options will increase the overall interest costs of your loan.
How might this affect your credit score?
If you ultimately fail to meet your obligations to repay your BBL the government has fully guaranteed your loan. However, your bank will point out that failure to repay may affect your credit score.
Rather cryptically, correspondence from High Street banks we have seen regarding the take-up of PAYG options, also includes the following remark:
Using these options [PAYG] won’t affect your credit score, though it may influence how we assess your creditworthiness in the future…
You would be forgiven if you were confused by the two contradictory remarks in this sentence.
Should you take advantage of the PAYG options?
If you have concerns that you need all the help you can get in the coming months and yes, you would like to make the most of the PAYG options, please call so we can discuss your options including any likely consequences for your credit worthiness.
Running a car on the company - Benefit in kind
Despite successive Governments changing the rules to increase the tax take, the provision of company cars remains one of the more popular benefits an employer can give to an employee.
Benefit in kind
A director or employee who earns more than £8,500 is charged an amount as a benefit in kind (BIK) if the car is used by an employee but owned by the employer. The calculation is a percentage of the car's list price appropriate to the level of the car’s CO2 emissions, i.e. the higher the CO2, the higher the tax. An additional rate is charged in respect of car fuel provided for private use. With fully electric vehicles increasingly becoming the 'norm' 2020/21 saw the BIK charge reduce to 0% before rising to 1% in 2021/22 and then 2% through to April 2025. This massive reduction in percentage makes arguments for a company car alternative seem outdated. However, there is still a place for alternatives.
A company car allowance is a cash allowance added to the employees' salary allowing them to purchase or lease a vehicle privately. It offers the employee the perks of having a new vehicle without the employer having the hassle of running a car fleet. As the payment paid is part of the salary it is charged to tax at the usual income tax and NIC rates under PAYE.
There are no set rules as to the amount that the employer can pay as a company car allowance but it is generally assumed that the cash offered will be approximately the same amount as the employer would have paid to lease the company car.
Employees paid an allowance
Where an employee is paid an allowance for using a personally owned car on business, this is tax-free up to a certain point. Currently, if the payment made is 55p for example, for each business mile 45p of this can be claimed and paid tax-free; the balance of 10p being taxable. How the payment is made will determine whether an exemption is allowed for NI purposes. To avoid the NIC charge car allowances need to be paid in proportion to the amount of business travel and then the 45p per mile exemption can be claimed.
If directors or employees are paid a fixed allowance towards their car’s running costs, then the amount needs to be on a sliding scale linked to the expected business mileage (e.g. those who expect to travel up to 4,000 miles per year receive one set rate, up to 8,000 miles a different amount and above that another etc.) This way, initially NIC will be payable on the allowance and then, the NI-free element of the allowance can be calculated when the exact business mileage is known; any amount overpaid can be refunded.
Using your own car
Many employees use their own car for business purposes and pay for the fuel used via a company fuel card. For a car fuel tax charge to arise, the employee must first be chargeable to tax in respect of the car, which means it must be a company car and used by either a director or an employee. There will be a BIK charge on the cost of the private fuel obtained by using the company card unless the employee reimburses for the private fuel used.
To ensure that the rules are adhered to, the company should have a written policy in place as confirmation. In addition, procedures should be put in place to keep accurate mileage records and a monthly amount for private mileage can then be deducted from net salary.
Electric cars from April 2021
For 2020/21, it was possible to enjoy an electric company car as a tax-free benefit. While this will no longer be the case for 2021/22, electric and low emission cars remain a tax-efficient benefit.
How are electric cars taxed? - Under the company car tax rules, a taxable benefit arises in respect of the private use of that car. The taxable amount (the cash equivalent value) is the ‘appropriate percentage’ of the list price of the car and optional accessories, after deducting any capital contribution made by the employee up to a maximum of £5,000. The amount is proportionately reduced where the car is not available throughout the tax year, and is further reduced to reflect any contributions required for private use.
The appropriate percentage - The appropriate percentage depends on the level of the car’s CO2 emissions. For zero emission cars, regardless of whether the car was first registered on or after 6 April 2020 or before that date, the appropriate percentage for electric cars is 1% for 2021/22. For 2020/21 it was set at 0%.
This means that the tax cost of an electric company car remains low in 2021/22.
Example - J has an electric car with a list price of £30,000. The car was first registered on 1 April 2020.
For 2020/21, the appropriate percentage for an electric car was 0%, meaning that J was able to enjoy the benefit of the private use of the car tax-free.
For 2021/22, the appropriate percentage is 1%. Consequently, the taxable amount is £300 (1% of £30,000).
If Jaz is a higher rate taxpayer, he will only pay tax of £120 on the benefit of his company car. If he is a basic rate taxpayer, he will pay £60 in tax. This is a very good deal.
His employer will also pay Class 1A National Insurance of £41.40 (£300 @ 13.8%).
For 2022/23 the appropriate percentage will increase to 2%.
Low emission cars - If an electric car is not for you, it is still possible to have a tax efficient company car by choosing a low emission model.
The way in which CO2 emissions are measured changed from 6 April 2020. For 2020/21 and 2021/22, the appropriate percentage also depends on the date on which the car was first registered as well as its CO2 emissions. For low emission cars within the 1—50g/km band, there is a further factor to take into account – the car’s electric range (or zero emission mileage). This is the distance that the car can travel on a single charge.
The following table shows the appropriate percentages applying for low emission cars for 2021/22.
Appropriate percentage for 2021/22 for cars with CO2 emissions of 1—50g/km
Electric range Cars first registered Cars first registered
before 6.4.2020 on or after 6.42020
More than 130 miles 2% 1%
70—129 miles 5% 4%
40—69 miles 8% 7%
30 – 39 miles 12% 11%
Less than 30 miles 14% 13%
As seen from the table, choosing a car with a good electric range can dramatically reduce the tax charge. Assuming a list price of £30,000, the taxable amount for a car first registered on or after 6 April 2020 with an electric range of at least 130 miles is £300 (£30,000 @ 1%); by contrast, the taxable amount for a car with the same list price first registered before 6 April 2020 with an electric range of less than 30 miles is £4,200 (£30,000 @ 14%).
The moral is to choose a new greener model & you will be rewarded with a lower tax bill.
Selling a property post death – Is there a CGT charge?
For capital gains tax purposes, there is a tax-free uplift to the market value at the date of death, irrespective of whether any inheritance tax is payable at the estate. This effectively resets the base value for capital gains tax purposes going forward.
Many estates include a property, whether a main home, or investment properties as well. Where these are sold post death, the issue of whether a capital gains tax liability arises will need to be considered.
Who is selling? - Where a property that forms part of the deceased’s estate is to be sold, the outcome is different depending on whether the executors or administrators are selling the property, for example, to realise cash to distribute to the beneficiaries, or whether legal title has been transferred to the beneficiary/beneficiaries, who have decided to sell.
Sale by executor or personal representative - Where a property is sold by the executor or personal representative following the deceased death, the estate will be liable for any capital gains tax.
Executors collectively are entitled to a single annual exempt amount for disposals in the tax year in which death occurred and the two following tax years. After this, there is no annual exempt amount to mitigate any capital gain. Any chargeable gain on a residential property (after deducting any available annual exempt amount) is charged at the higher residential rate of 28%.
Chargeable gains on residential property must be notified to HMRC within 30 days of completion. The associated capital gains tax should be paid in the same time frame.
What about the main residence exemption?
In certain situations, a post-death disposal by the personal representatives may benefit from the main residence exemption. This is the case where:
immediately before and immediately after the death of the deceased, one or more individuals occupied the property as their only or main residence;
the individual or individuals is/are entitled to at least 75% of the net sale proceeds or to an interest in possession of 75% or more of the net sale proceeds; and
the personal representatives makes a claim for private residence relief.
A claim may be possible where, say, a property is owned by a married couple as tenants in common, each with a 50% share. The husband dies, leaving 70% of his share to his wife and 30% of his share to his daughter. On sale by the executors following his death, the deceased’s spouse is entitled to 85% of the net sale proceeds and the deceased’s daughter to 15%. As the property has been the wife’s main residence before and after the deceased death, the personal representatives can claim the main residence exemption.
Sale by the beneficiary - If legal title to the property is transferred to the beneficiary or beneficiaries following the deceased’s death, their base cost for capital gains tax purposes is the market value at the date of death. If they subsequently sell the property and it is not their main residence, a chargeable gain will arise. They will benefit from their own annual exempts amount to the extent not used elsewhere, and any available capital losses. The gain will be charged at the appropriate residential rate – 18% or 28%. The gain must be reported to HMRC within 30 days and the tax paid within this window.
If the property is occupied after the deceased’s death as the beneficiary’s main residence, they will benefit from the main residence exemption when the property is sold.
Planning a sale - Where a property is included within the estate, and the plan is to sell that property, consideration should be given to whether it should be sold by the personal representatives or the beneficiaries, and if a capital gain is likely to be realised, what will achieve the best outcome.
Super-deduction for capital expenditure
To encourage companies to invest, enhanced capital allowances are available for expenditure incurred within a limited two-year window. As an alternative to the annual investment allowance (AIA), companies will be able to benefit from either a super-deduction or a new first-year allowance, depending on whether the expenditure is on assets that would qualify for main rate capital allowance or for special rate capital allowances.
The super-deduction will allow companies to claim capital allowances of 130% for expenditure on new assets that would otherwise qualify for main rate (18%) plant and machinery capital allowances where the expenditure is incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction does not apply where the contract for the asset was entered into prior to 3 March 2021 (Budget Day), even if the expenditure is incurred in the qualifying two-year period. Plant and machinery which is purchased under Hire Purchase or similar contracts must meet additional conditions in order to qualify for the super-deduction.
Where an accounting period straddles 1 April 2023, the rate of deduction is apportioned based on the number of days in the accounting period falling before 1 April 2023 and the number of days in the accounting period falling on or after this date.
The effect of the super-deduction is that for every £100 of expenditure on qualifying assets in the qualifying period, the company can claim capital allowances of £130 when computing taxable profits. This gives an effective rate of relief of 24.7% (130% x 19%).
Where an asset which has benefited from the super-deduction has been sold, disposal receipts are treated as balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating the balancing charge.
Companies wishing to benefit from the super-deduction should plan the timing of investments in qualifying assets so that the expenditure is incurred in the qualifying two-year period. Where significant investment is planned after 1 April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.
A company does not have to claim the super-deduction. Where the company is loss-making or profits are low, it may wish to claim writing down allowances instead or tailor the claim to reduce the profit to nil. Likewise, if the plan is to sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing charge on the disposal.
New first-year allowance
A new first-year allowance of 50% is available for expenditure on most new plant and machinery that would otherwise qualify for special rate writing down allowances of 6% where the expenditure is incurred in the period 1 April 2021 to 31 March 2023. As with the super-deduction, it is only available to companies.
This is an alternative to the annual investment allowance, which gives a deduction of 100%. However, the first-year allowance may be beneficial where the AIA limit has already been reached.
Statutory payments from April 2021
By law, there are various statutory payments that an employer must make to an employee while the employee is absent from work due to the birth, adoption or death of a child. The employer must pay employees who meet the qualifying conditions at least the statutory amount for the relevant pay period. The statutory payment rates are increased from April 2021 and apply for the 2021/22 tax year.
An employee is only entitled to statutory payments if their average earnings for the qualifying period are at least equal to the lower earnings limit for National Insurance purposes.
Statutory maternity pay
Statutory maternity pay (SMP) is payable to an employee who is on maternity leave. Although an employee can take up to 52 weeks’ statutory maternity leave, statutory maternity pay is only payable for 39 weeks. The payment ceases if the employee returns to work before the end of the maternity pay period (MPP).
For the first six weeks of the MPP, SMP is payable at the rate of 90% of the employee’s average earnings. For the remainder of the MPP, SMP is paid at the lower of 90% of the employee’s average earnings and the standard amount. For 2021/22, this is set at £151.97 (up from £151.20 for 2020/21).
Statutory adoption pay
Statutory adoption pay (SAP) is payable to one parent on the adoption of a child. The other parent may be entitled to claim statutory paternity pay. The provisions for adoption pay and leave largely mirror those for maternity pay and leave – the employee is entitled to take up 52 weeks’ leave, while the adoption pay period (APP) runs for 39 weeks, unless the employee returns to work before the end of this period.
As with SMP, SAP is payable at the rate of 90% of the employee’s average earnings for the first six weeks and at the standard amount, or 90% of the employee’s average earnings if lower, for the remainder of the adoption pay period. The standard amount is £151.97 per week for 2020/21.
Statutory paternity pay
Statutory paternity pay may be payable on the birth or the adoption of a child. The child’s father, mother’s partner or the adoptive parent who is not in receipt of SAP and leave may be entitled to statutory paternity leave and paternity pay. Eligible employees are entitled to two weeks’ statutory paternity leave which may be taken in a single block or in two one-week blocks.
Statutory paternity pay is payable while the employee is on statutory paternity leave (as long as the eligible conditions are met) at the standard rate (£151.97 for 2021/22) or, if lower, at the rate of 90% of the employee’s average earnings.
Shared parental pay
The shared parental pay (ShPP) and leave provisions allow parents to share leave and pay following the birth or adoption of a child. Where an employee returns to work before the end of the MPP or APP, the employee can share the remaining leave and pay with their partner. Shared parental pay is payable at the standard amount, set at £151.97 for 2021/22, or where lower, at 90% of the employee’s average earnings.
Statutory parental bereavement pay
Parents are entitled to statutory parental bereavement leave following the death of a child under the age of 18 or a still birth after 24 weeks where this occurs on or after 6 April 2020. Bereaved parents are able to take two weeks’ parental bereavement leave, either in a single block or as two separate weeks. Eligible employees are also entitled to statutory parental bereavement pay (SPBP) at the standard amount (£151.97 for 2021/22) or, if less, at 90% of their average earnings.
Interest costs – Unincorporated business v limited company
Most landlords will need some sort of finance in order to invest in property to let out. However, while tax relief for mortgage and finance costs are available regardless of whether the property business is operated as an unincorporated property business or whether it is run through a limited company, the mechanism and extent of the relief differ.
Unincorporated property business
The way in which relief is given for interest and finance costs incurred by an unincorporated property business has changed in recent years, moving gradually from a system of relief by deduction to relief as a basic rate tax reduction. The transition is now complete.
The effect of this is that rather than deducting interest and finance costs, such as mortgage interest, when calculating the profits of the property rental business, these costs are ignored initially. Relief is given at a later stage as a reduction when working out the amount of tax that the landlord has to pay. The reduction is equal to 20% of the allowable interest and finance costs or, if lower, the amount that reduces the landlord’s tax bill to nil.
Where the tax liability is insufficient for relief to be given for the full amount of the interest, unrelieved interest costs can be carried forward and relieved (as a basic rate tax reduction) in a future year.
The rules restricting relief for interest do not apply to limited companies. Instead, interest is deductible in accordance with the loan relationship rule. As a result, interest and finance costs are deducted in full in calculating the taxable rental profits of the company. This means relief is given in full at the prevailing rate of corporation tax. Further, interest costs can be deducted in full, even where this creates a loss.
Not the end of the story
The fact that the interest restriction does not apply to companies, together with a corporation tax rate that is less than the basic rate of income tax, may suggest at first sight that it will always be better to operate as a limited company. However, that is not the end of the story – profits from a company will need to be extracted if the landlord wishes to use them personally, and this may incur additional tax and National Insurance liabilities.
CIS compliance for property developers
The Construction Industry Scheme (CIS) is a scheme whereby contractors of building firms are required to deduct tax at source from payments made to sub-contractors working for them. Some sub-contractors are entitled to be paid without any tax deduction, others at 30% as per HMRC's instructions but the majority have 20% tax withheld before payment. The scheme requires registration as a contractor and administration in the form of monthly submissions; the penalties for non and/or late submission can be severe.
The definition of 'contractor' is widely drawn - HMRC's Construction Industry Scheme guide CIS 340 defines a (mainstream) contractor as 'a business or other concern that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be ... many other businesses.'
The definition of ‘construction work’ is again widely drawn to include the construction, alteration, repair, extension, demolition or dismantling of buildings and/or work - although there are exceptions. A business set up to undertake such construction work is obviously required to operate the scheme as would a property developer undertaking a trading business in construction of properties being developed for sale (even if just on one property). Private householders paying for work on their own homes will never fall within the CIS regime's scope.
Buying property as an investment
In comparison, someone who buys and rents out property typically does so as an investment; this would appear to be confirmed as under section 12080 of The Construction Industry Scheme Reform Manual it states that:
"A 'property investment business' is not the same thing as a 'property developer'. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental.“
However, a problem arises when an investor landlord buys a property, doing it up intending to keep it as a rental property - is that person now a developer and therefore caught under the CIS rules? HMRC confirm that this is the case as further on in the CIS manual it states that:
"Where a business that is ordinarily a property investor, undertakes activities attributed to those of ‘property development’, they will be considered a mainstream contractor [caught for CIS] during the period of that development".
Therefore, the investor now becomes a developer liable to register as a contractor under the CIS regime even if just one property is renovated.
Wider scope for the CIS scheme
The system goes further because even where the landlord is predominantly a property investor and therefore not a construction business (e.g. a restaurant chain), they are deemed to be a contractor and subject to the CIS regime if they spend more than £1 million a year, on average, for three years on ‘construction operations’ (e.g. repairs, construction of extensions etc), on their premises or investment properties. There is a slight 'let out' in that such businesses can ignore expenditure on property such as offices or warehouses used by the business itself.
Some businesses commission construction firms to undertake work for them but if the work is for the business's own premises, used for that business, then the business itself is not obliged to register or act as a CIS contractor.
‘De minimus’ limit
There is a 'de minimus' limit in that on application, HMRC can authorise deemed contractors not to apply the scheme to small contracts for construction operations amounting to less than £1,000, excluding the cost of materials however this arrangement does not apply to mainstream contractors.
Reduced rate of VAT
To help the hospitality and leisure industry recover from the impact of the first national lockdown, a reduced rate of VAT of 5% was introduced for a limited period from 15 July 2020. The reduced rate of VAT was originally to apply until 12 January 2021. However, in September last year, the Chancellor announced that it would remain at 5% until 30 March 2021.
By the time of the Spring 2021 Budget on 3 March 2021, the hospitality and leisure sectors were suffering the effects of further lockdowns. To provide more help to this sector, the period for which the reduced the temporary 5% rate of VAT will apply has been further extended until 30 September 2021. From 1 October 2021, a new reduced rate of VAT of 12.5% will apply until 31 March 2022. The rate will revert to the standard rate of 20% from 1 April 2022.
The following supplies will benefit from the reduced rate of 5% until 30 September 2021 and the new reduced rate of 12.5% from 1 October 2021 to 31 March 2022.
Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
Hot takeaway food and hot takeaway non-alcoholic beverages.
Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
Admission to cultural attractions that do not already benefit from the cultural VAT exemption, such as theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and other similar cultural events and facilities.
Where an admission to an attraction is within the existing cultural VAT exemption, this takes precedence over the reduced rate.