Temporary increase in SDLT residential property threshold
Stamp Duty Land Tax (SDLT) is payable where property is acquired in England and Northern Ireland. Land and Building Transaction Tax (LBTT) is payable in Scotland and Land Transaction Tax (LTT) is payable in Wales,
SDLT is payable where the chargeable consideration exceeds the relevant threshold at the rates applicable to each slice of the consideration. A supplement of 3% applies to second and subsequent residential properties where the consideration is more than £40,000. The supplement does not apply where the main residence is exchanged.
Temporary increase in residential threshold
The SDLT residential threshold was temporarily increased to £500,000 from 8 July 2020 to 31 March 2021. The thresholds applying for LBTT and LTT were also increased for a temporary period, but these are not considered here.
Property investors and those buying second homes also benefitted from the increase as the 3% supplement is applied to the rates, as reduced.
The residential threshold will remain at £500,000 beyond 31 March 2021 and will stay at this level until 30 June 2021. From 1 July 2021 until 30 September 2021 it will reduce to £250,000 returning to its normal level of £125,000 from 1 October 2021.
The first time buyer threshold will return to £300,000 for properties up to £500,000 from 1 July 2021.
Window of opportunity
The extension to the period for which the £500,000 threshold is in place provides an opportunity for investors to save money if they can complete by 30 June 2021. If this is not possible, there are still savings on offer where completion takes place by 30 September 2021.
Avoiding the VAT block on business entertainment costs
Usually, you're blocked from reclaiming VAT you incur on business entertainment costs but there are circumstances where this rule doesn't apply. What are they and when might you be able to use them to your advantage?
You're probably aware that the VAT rules block the recovery of VAT on business entertainment costs . The rules applies to costs you incur relating to customers, suppliers, etc. but not your employees. The block relates to costs such as wining and dining, tickets to sporting or theatrical events, etc.
You can reclaim VAT paid on the cost of entertaining employees unless the entertainment occurs only because the employee is acting as a host for a customer etc. For example, you can reclaim VAT relating to the cost of a staff lunch, but if the lunch was to schmooze a prospective customer and an employee attended no VAT can be reclaimed, even if their attendance was to give the sales pitch.
If the entertainment is a supply of goods or services in its own right, the VAT block doesn't apply. An obvious example of this is a hotel hosting an event, say a local business awards evening, for which it charges the event organisers.
The block doesn't apply if the entertainment is a supply (or part of it) which the customer is paying for. This rule can be stretched to cover other situations to permit a reclaim of VAT in less obvious situations.
Example. You're putting on a summer party for your employees. You allow your employees to bring a guest. If the event is free to all-comers you can reclaim the VAT on the proportion of the cost of the event related to employees but not that for their guests. However, if staff are asked to pay a small amount if they bring a guest the entertainment is a supply to the guests in its own right and you can reclaim all the VAT. Say you're paying £60 plus VAT (£12) per head to the hotel for hire of the room and catering for your party but you ask your staff to pay £10 plus VAT (£2) if they bring a guest. You would be entitled to reclaim the £12 VAT per guest but have to account for VAT of £2 for the amount charged. You save £10 VAT per staff guest.
This approach also works for more overt business entertainment costs . For example, you're having a sales drive and invite prospective customers to a presentation of your products where you'll provide a meal with drinks. If you ask attendees to pay a modest amount if they want to attend, you'll be able to reclaim the VAT paid on the cost of the event. HMRC has challenged such arrangements as unfair tax avoidance but the courts have sided with the taxpayers.
For the arrangement to be effective the charge you make for attending the event etc. must be compulsory.
The VAT-saving arrangement works as long as there is consideration given in return for the entertainment. Consideration doesn't have to be in money. For example, a court ruled that VAT on the cost of providing a meal to participants in a TV debate show could be reclaimed because the attendees provided a service in return for the food and drink.
You can reclaim VAT on employee entertainment costs. You can also reclaim it where the entertainment provided is a supply of goods or services in its own right. For example, if you invite prospective customers to a sales pitch at which they'll be given a meal, and you charge for attendance, even if the charge is only a fraction of your costs
Further grants for the self-employed
The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021.
Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.
The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.
To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.
To qualify for the grant, the trader must either:
be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.
The trader must also declare that:
they intend to continue trading; and
they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.
Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.
The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.
Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.
When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions.
Grants are taxable
Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.
How long does HMRC have to start an enquiry?
In May 2021 you received a letter from HMRC querying one of the figures on your 2018/19 tax return. You understood the deadline for such enquiries was 31 January 2021. Do you have to answer the questions?
Soon after self-assessment was introduced the rules for tax enquiries were overhauled. They allow HMRC sufficient time to raise questions about a tax return while preventing it from having an open-ended right. On the face of it the rules seem clear but below the surface they get decidedly trickier.
In the early days of self-assessment the deadline for HMRC starting a tax enquiry if you submitted your tax return at any time up to and including the normal filing date of 31 January, was 30 January the following year. Many people are unaware that this changed in 2008. The basic deadline for HMRC to start an enquiry is now twelve months from the date you submitted your tax return. For example if you submitted your 2018/19 return on 20 January 2020, if HMRC wants to start an enquiry it must have notified you by no later than 19 January 2021.
If the letter informing you of an enquiry arrives after the deadline, even if it is dated earlier, HMRC has missed the enquiry boat. You should immediately contact the HMRC office that issued it, initially by phone and then in writing to confirm the deadline was missed. HMRC has an internal procedure for checking the timing of enquiry notices which should identify if a tax inspector has left it too near the deadline to ensure timely delivery, or there were other reasons that corroborate your story.
Late tax returns and amendments
The enquiry deadline is different where you submitted your tax return or amended it after the normal filing deadline.
Late returns. If you submit your self-assessment return after the normal filing date, the enquiry window is longer than twelve months. It is twelve months from the end of the quarter in which you submitted your tax return. The quarter days are 31 January, 30 April and so on. For example, if you submitted your 2018/19 tax return on 1 May 2020, HMRC has until 31 July 2021 in which to start an enquiry.
Amended returns. The tax enquiry deadline is also extended to give HMRC a fair chance to enquire into amended figures. Without the extension you could amend your tax return after the normal enquiry deadline had passed which would give HMRC no way to challenge it unless it could use the "discovery " rules to issue an assessment. The enquiry deadline for amendments is therefore twelve months from the end of the quarter in which you submitted your tax return.
HMRC can only enquire into the amendment, not any other aspect of your tax return, once the normal enquiry deadline has passed.
Example. Gerry submitted his 2018/19 tax return on 1 July 2019. The normal enquiry deadline ended on 30 June 2020. But Gerry amended one entry on his tax return on 1 January 2021. HMRC can start an enquiry into the amendment up to 31 January 2022, but cannot enquire into any other figures on the tax return unless they directly relate to the amended figure.
HMRC's enquiry deadline is one year from when you submitted your tax return unless that was after the filing deadline. In that case the enquiry deadline is one year from the end of the tax quarter, e.g. if you submitted your 2018/19 tax return on 1 May 2020, it's 31 July 2021.
Doing up properties – Are you trading?
There can be money to be made buying a property in a dilapidated state, renovating it, and selling it for a profit. However, when it comes to tax, it is important to know whether the ‘profit’ element is a capital gain or a trading profit. This will determine how it is taxed and at what rate.
Trading or investment
The tax consequences will depend on whether the property is an investment or whether there is a trade. The question is whether you are a property developer or a property investor.
Much of it comes down to your intention when you bought the property. If the aim was to buy the property, do it up and then let it out, the property will count as an investment property. However, if the intention is to buy, renovate and sell at a profit, HMRC may regard you as trading. However, an intention to sell at a profit at some point in the future does not automatically mean you are trading. Also plans change, and a property purchased as a long-term investment might be sold after a relatively short period of time as a result of a change in personal circumstances.
Badges of trade
The concept of the ‘badges of trade’ has been developed from case law and provides something of a checklist which can be used to determine whether an activity is a trade or an investment. The six badges of trade are as follows:
1. The subject matter of the transaction.
2. The length of the period of ownership.
3. The frequency or number of similar transactions.
4. Reasons for the sale.
5. Motive when acquiring the asset.
Where there is a trade, the property will only be held for as long as it takes to do up and sell. A property developer is likely to develop more than one property, either simultaneously or in succession. Where there is a trade, the property will be sold to realise a profit; for an investment property, the sale may be triggered by other factors.
Case study 1
Paul inherits some money and invests in a property, which he plans to do up and rent out. He completes the renovations and rents out the property for six years before selling it to enable him to buy a larger family home.
The property was purchased as an investment and would be regarded as an investment property. The gain on sale would be liable to capital gains tax.
Case study 2
Mark sees a run-down property on the market and spots the opportunity to make a profit. He buys the property, spends six months renovating it, selling once complete, making a profit of £40,000. He invests the proceeds in another property to renovate and sell.
Mark would be treated as trading. His aim is to sell the properties at a profit. Consequently, he would be liable to income tax rather than capital gains tax on the profit.
Stamp Duty Land Tax
Was multiple dwellings relief due?
The First-tier Tribunal was asked to decide if the purchase of a property qualified for multiple dwellings relief (MDR). It was a close call but the judgment went HMRC’s way. What can be learned from this case that might help you make a successful claim?
A quick look at MDR
Multiple dwellings relief (MDR) can reduce stamp duty land tax (SDLT) and its equivalent in Scotland and Wales. It applies if you purchase two or more dwellings in one or a series of related transactions. Usually, it’s claimed on the SDLT etc. return completed by the solicitor or conveyancing agent, but in this case it was not. The purchasers, A and T Doe (Ds) amended their return to include a claim for MDR. HMRC opened an enquiry into the amended return and refused the claim. The Ds appealed to the First-tier tribunal (FTT).
The Ds bought a house which included a separate first floor annexe made up of a bedroom, bathroom and kitchen. It had its own boiler, electricity and doorbell. Seemingly it was separate from the main part of the property but shared a front door, hallway and stairs. Access to the annexe was from the communal hallway through a lockable door.
Questions for the FTT
The Ds’ appeal involved two elements: whether HMRC raised the enquiry within the time allowed, and the entitlement to MDR . The FTT had no trouble in deciding that HMRC was in time with its enquiry. It started within the nine months from when it received the amended SDLT return. The main appeal was whether the annexe constituted a dwelling in its own right which would have justified the Ds’ claim for MDR .
State of the property
Entitlement to MDR depends on the “physical attributes of the property at the relevant time”. The relevant time being when contracts for the sale/purchase were completed. MDR cannot take account of changes to a property made after completion of the purchase even if they were always intended.
Self-contained or not
There was no doubt that the annexe was self-contained accommodation. However, there was an issue regarding access to the main accommodation which could be reached from the common hallway. The Ds argued the access was similar to that in a mansion block where separate apartments are separate dwellings for MDR purposes. However, the FTT noted an important difference. In the Ds’ property occupants of the main house need to lock the rooms on the ground floor to prevent access to the occupants of the annexe via the common hallway. While this could be easily remedied by the addition of an intermediate locking door this didn’t exist when the sale was completed. The FTT decided that the main house and annexe were therefore suitable for use as a single dwelling, not as two. Therefore, MDR did not apply.
Tip. Notwithstanding the outcome, an important point to take from this case is that entitlement to MDR is easily missed by solicitors etc. when preparing the SDLT return. They may not have a full understanding of what a property consists of unless they’ve studied the plans or visited it. When purchasing a property where MDR might be relevant but not obvious, make your solicitor etc. aware.
For MDR to apply to separate accommodation in the same building they must both be self-contained with their own entrances within the property. Entitlement to MDR can easily be missed by the conveyancer unless you make them fully aware of the layout of the properties you’re buying.
HMRC warns of disrupted VAT payments
HMRC is closing its old computer system for VAT and transferring the functions to its Making Tax Digital (MTD) platform. How might this affect your business?
Two systems. Currently, HMRC has two systems handling VAT returns and payments, one for VAT-registered businesses using Making Tax Digital (MTD) and the other for all other registered businesses. HMRC has been planning the move for a while but recently there's been a change which will affect businesses that are not signed up to MTD and a small number of those that are.
Disruption to VAT payments. The transfer began in April 2021 and HMRC hopes to wrap up the process within six months. For the most part this will not have any obvious impact on businesses. However, following discussions between HMRC and banks it's now apparent that some businesses could have their VAT direct debit arrangements disrupted.
What's the problem? The banking regulations require HMRC to inform (in advance) businesses that pay their VAT by direct debit of the amount and date the debit will be taken. There often isn't enough time to do this by post because payment is due just days after the VAT return has been submitted. HMRC must therefore send the notification electronically and so needs a valid email address for each business. Generally, if you file your VAT returns using MTD you don't have to worry as HMRC should have your current email address, but check if you're in doubt.
If HMRC doesn't have a valid email address for you, it will cancel your direct debit. You'll not only have to pay by alternative means but you'll risk missing the payment deadline.
HMRC can't say exactly when your business will be transferred to the new system, therefore if you're VAT registered you should check it has a valid email address for you as soon as possible and definitely before July 2021. It must be your email address and not your accountant's, even if your accountant completes your VAT returns for you. You can provide the email address by logging in to your HMRC Business Tax Account (if you have one) and entering it in the general information about your business.
If HMRC doesn't have a valid email address for your business, you need to supply one by July. If you don't HMRC will cancel your VAT direct debit arrangement. If you're using MTD you're probably OK but check if unsure.
The “super-deduction” is a new tax incentive for businesses to purchase equipment. The qualifying conditions have now been relaxed to allow the tax break for some previously excluded items.
In Budget 2021 the Chancellor announced a temporary tax break to encourage businesses to buy new equipment. The incentive is a capital allowance (CA) deduction equal 130% of the equipment’s cost. Assets which normally only qualify for the lower CA of 6% per annum aren’t entitled to the 130% deduction but can claim an initial deduction equal to 50% of the cost; this is called the special rate first year allowance (SR). Only companies can claim the super-deduction or SR.
Some types of asset were initially excluded from the super-deduction, including leased assets. According to tax and accountancy bodies, in some circumstances this unfairly prevented many businesses from being able to claim the tax break. The good news is that the government has conceded the point and amended the draft legislation to allow the super-deduction for certain types of leased asset.
Who will benefit?
The amendment allows companies to claim the super- deduction for so-called background plant and machinery (equipment) included in buildings. According to the Institute of Chartered Accountants in England and Wales, the new rule ensures “that the allowances are available where a company purchases or constructs a building and fits it out with fixtures and other assets that contribute to the functionality of the building” , as long as the building is for commercial use.
The types of leased asset that now qualify for the super-deduction or SR as a result of the amendment include, but are not limited to, water, heating and lighting systems, lifts, safety and fire equipment. Essentially, the cost of any background equipment included in a building now qualifies.
The exclusion which prevented companies from claiming the super-deduction or special rate allowance for leased assets included in buildings, e.g. heating and lighting systems, has been removed.
What's the best way to repay a director's loan?
At the end of your company's last financial year you owed it money. This can trigger a hefty tax bill for your company but it can be avoided if the debt is cleared. There are different ways to do this but which is the most tax efficient?
As a director shareholder if you've borrowed money from your company which you still owe when its financial year ends, it will have to pay a tax charge equal to 32.5% of whatever remains owing nine months later. The good news is that HMRC will refund the tax after the end of the financial year in which the debt is repaid. Better still, the tax charge can be avoided altogether if the debt is cleared within the nine-month period.
You could repay the loan from your own resources, but this probably isn't an option given that you needed to borrow the money in the first place. Alternatively, your company could declare a dividend and instead of paying it to you, it's used to clear what you owe. However, there can be obstacles to this.
Your company can only pay a dividend up to the amount of its profits. Plus, the profits must be sufficient to pay a dividend to all other shareholders with the same type of shares as you.
Alternative repayment options
While a dividend is the most tax-efficient method of clearing what you owe, it can be cleared by your company paying you extra salary. The trouble is this triggers immediate PAYE tax and NI liabilities which must be deducted from the salary and only the net amount is available to clear the loan. This makes it a costly option.
Example. To clear a debt of £25,000, assuming you're a basic rate taxpayer, would need a salary payment of £36,765. Your company would also have to pay employers' NI of £5,074 (£36,765 x 13.8%). This means it would have to find £16,838 in PAYE tax and NI just to avoid the 32.5% tax charge of £8,125 (£25,000), and within the same time scale. Corporation tax (CT) relief for the salary and NI of £7,950 will reduce this cost but it will be another year before this is received which means the £16,838 still has to be found. Accepting the 32.5% tax is the better option until the debt can be cleared with a dividend.
By comparison to the cost of salary, £33,890 after CT relief, a dividend that was sufficient to clear your debt would cost your company £27,027 without any PAYE tax to NI find.
Writing off the debt can be as tax and NI efficient as a dividend. In fact, a write-off is taxed in exactly the same way, but unlike a dividend it can be done even if your company has no profits.
Writing off a debt can trigger NI liabilities as if the amount written off were salary. But they can be avoided where the loan is made to you in your role as a shareholder rather than as a director/employee of your company. Even where NI contributions are payable on a write-off, they would amount to less than the NI payable if using the salary option to clear the debt and the 32.5% tax. From a tax and NI perspective writing off a loan makes good sense.
The most tax-efficient way is for your company to declare a dividend and instead of paying it to you, it's used to clear your loan. However, your company must have accumulated enough profits to pay a dividend. As an alternative, your company could simply write off the debt. This is usually equally tax efficient.
The legislation for the cycle-to-work tax break is unusually straightforward. It allows employers to provide a bicycle, with or without safety equipment, as a tax and NI-free benefit in kind. Three simple conditions must be met: the employee can’t own the bike etc., it is used mainly for qualifying journeys and you offer the benefit to all your employees. Note. The tax break applies even if some employees choose not to take up your offer.
The trouble is the scheme is widely marketed through employee benefits specialist companies adding layers of complication to the simple tax break. The government also upped the stakes by making it one of the benefits which still saves tax when used as part of a salary sacrifice arrangement. This gives employers a lot to pick through.
No cycle-to-work scheme required
At its simplest all you need to do is offer your employees use of a bike and procure as many as you need. The bikes don’t all have to be the same value; you can give the employees a budget (perhaps linked to their seniority in the business) and let them choose. There’s no limit on the value of bikes that you’re allowed to provide.
After a while the bikes can be offered for sale to the employees at a modest price. HMRC suggests acceptable values: 18% to 25% of cost after a one year, and just between £1 and 2% of cost after five years. That seems like a pretty cheap way to buy a bike tax efficiently.
Providing the bikes is an extra cost to the business notwithstanding that it can claim tax relief for their cost.
If you offer the bikes with a salary sacrifice, i.e. an employee gives up some of their salary in exchange for use of a bike, it can be made to be cost neutral to you (by using the tax and NI savings) and yet still leave the employee with a good deal.
Providing a bike in exchange for payment, i.e. the salary the employee gives up, constitutes a hire agreement. A corollary of this is that if the bike costs you more than £1,000 you’ll need to obtain a credit licence from the Financial Conduct Authority, unless you have one already for other reasons.
Where you use a salary sacrifice arrangement and want to avoid the extra admin involved with obtaining a consumer credit licence, you have two options:
if you want to procure and provide the bikes direct to employees make sure they cost no more than £1,000; or
use an employee benefits provider which has a consumer credit licence (most do these days). They’ll organise procurement of the bikes and handle the paperwork. A quick online search will give you plenty of choices. The drawback is that you’ll be charged fees for their services.
Dividends are paid at the same rate for each category of share according to the number of shares held. However, such inflexibility could mean the distribution of profits not being made in the most tax efficient manner or produce difficulties for a shareholder who does not want or need the payment -- a dividend waiver may offer the solution.
Examples of tax inefficiency can arise where one of the shareholders is a higher rate taxpayer and the others are either basic rate taxpayers or non-taxpayers or if by taking the dividend the shareholder is affected by the higher income charge on Child Benefit. A shareholder may also prefer not to take a dividend if Child Tax Credit is being claimed as inclusion in the calculation may take his or her total income over the CTC limit. Shareholders of smaller companies in particular may choose to waive their rights to dividends in order to retain money in the business.
In a dividend waiver the shareholder voluntarily waives (gives up) entitlement to their share of the dividend which then allows the distributable profits to be divided between the remaining shareholders in the proportion to their holdings. The other shareholders still receive their proportion of distributable profits in the proportion of each of their respective holdings but the shareholder who has waived his dividend receives nothing -- his or her share of the profit remaining in the company’s bank account.
The waiver can refer to a single dividend or a series of dividends declared during a specified period of time. An interim dividend must be waived before being paid, and a final dividend waived before being approved as a waiver afterwards could be construed as being a ‘settlement’. The settlements rules are anti-avoidance provisions and apply where the settlor (i.e. the person gifting an asset) retains an interest in the asset given away and the settlor or the settlor’s spouse benefits from the gifted asset, an element of ‘bounty’ (i.e. no consideration) being needed for the provisions to apply. The transfer could also be deemed to be a transfer of value for inheritance tax purposes and even ‘value-shifting’ for capital gains tax purposes.
Dividend waivers that have been challenged by HMRC in the past have invariably been as the result of payments made in situations where the waivers have meant the increase in dividends for a company owner’s spouse (or children or the trustees of a children’s settlement). In practice, however, HMRC are only likely to make the ‘settlement’ point where the waiver is considered to create a tax advantage.
HMRC's interest is more likely to be aroused if the level of retained profits in the company is insufficient to allow the same rate of dividend to be paid on all issued share capital or where there is evidence which suggests that the same rate could not have been paid on all the issued shares in the absence of the waiver. To alleviate the possibility of HMRC interest it is suggested that the deed should state that the waiver has been made to allow the company to retain funds for a specific purpose, thus emphasising that there is some commercial reason for the waiver.
Use them sparingly
Dividend waivers should be used sparingly - don’t waive every year. HMRC will look more closely at arrangements which are repeated, the practical effect of which reduces the overall tax payable. In addition, waivers should not last for more than twelve months as use of a long-term waiver could reduce the value of that shareholding, and potentially increase the value of those shareholdings that are able to enjoy higher dividends as a result. If it is envisaged that waivers will be required on a more regular basis then consideration should be made to the creation of Alphabet shares. A waiver must be a formal deed and must be signed, dated, witnessed and sent to the company. The drafting of a deed is a reserved activity, which only a member of The Law Society or the Bar can conduct.
What are Super-deductions?
A new tax investment incentive for companies
Perhaps the most innovative give-away in the recent budget was “Super-deductions for investment expenditure”.
What does this mean?
Companies that invest in qualifying plant and machinery in the period from 1 April 2021 to 31 March 2023 will benefit from enhanced capital allowances. Investments in assets that qualify for the main rate of capital allowances of 18% will benefit from a 130% first-year allowance. This means that for every £100 that you spend, you can deduct £130 in computing your taxable profits. This is equivalent to a tax saving of 24.7%.
What this does not mean?
What this change does not mean is the notion that you can deduct 130% of the cost of a qualifying purchase from your tax bill. The deduction is made from your company’s taxable profits.
If your company invests say £5,000 in qualifying plant it will be able to write off £6,500 (£5,000 x 130%) against its taxable profits. If your company has taxable profits more than £6,500, it will save £1,235 (£6,500 x 19%) in corporation tax. Which means:
· Your tax saving is 24.7% (£1,235/£5,000) of your investment cost, and
· The net cost of your investment is effectively £3,765 (£5,000 - £1,235).
Beware the fine print
As you would expect, there will be circumstances – grey areas – where the legislation that maps out the do’s and don’ts to claiming this relief will deny you the 130% deduction. In their notes describing the proposed changes HMRC said:
“Certain expenditures will be excluded…, there will be exclusions for used and second-hand assets and expenditures on contracts entered into prior to 3 March 2021 even if expenditures are incurred after 1 April 2021. Plant and machinery expenditure which is incurred under a Hire Purchase or similar contract must also meet additional conditions to qualify for the super-deduction...”
And there are alternatives
Even if you cannot claim this 130% Super-deduction, your expenditure may qualify for the existing 100% Annual Investment Allowance, a 50% or 100% First Year allowance or a range of writing down allowances.
Check out if you could claim
However, this is a significant incentive to invest if your company is likely to be profitable from 1 April 2021. To ensure that any significant investment you may make will qualify for the Super-deduction or to discuss other tax options, please call.
PRR and the former marital home
Transfers between spouses - No gain no loss
From the date a marriage or partnership is registered a transfer from one spouse/partner to the other is treated as if it were a sale at a price that results in neither a capital gain nor a loss. This is called the “no gain no loss” rule. It boils down to the transfer from one spouse/civil partner to the other being treated as if it were a sale equal to the cost of the asset (for capital gains tax (CGT) purposes). The no gain no loss rule applies even if one spouse/partner pays the other for the asset.
Example. Martin and Jackie are just married. Martin makes a gift of a family heirloom, an antique diamond ring, to Jackie. It’s worth £30,000. When Martin inherited it it was valued at £20,000. The gift is treated as if Martin sold the ring for £20,000, meaning he made neither a gain nor a loss. Jackie is treated as having paid £20,000 for the ring. Depending on Martin’s CGT position it might have been more tax efficient for him to have transferred the ring just before the marriage. That way the gift would have been treated as a sale at ”market value” (the price a third-party buyer would pay for it, i.e £30,000). Martin would then be taxable on a deemed gain of £10,000, but if he hadn’t used his CGT annual exemption (£12,300 for 2021/22) it would cover the gain meaning he wouldn’t face a tax bill. Jackie would have been treated as having paid £30,000 for the ring, meaning if she sold it any potential gain would be less by £10,000 because her deemed cost was £30,000 instead of £20,000. This tax-saving plan would also apply to any other asset.
Transferring a share of your home
The no gain no loss rule applies to the transfer of a property but with the added complication of private residence relief (PRR). If prior to 6 April 2020 one spouse/partner transferred a share of their home to the other, the receiving spouse/partner would have been treated as owning the property from the same date as the transferring spouse but without their entitlement to PRR. If on a later sale of the property there’s a gain, the spouse/partner who transferred a share might be entitled to more PRR than the other; that spouse/partner might therefore end up with a tax bill.
Since 6 April 2020 where one spouse/civil partner transfers, or has transferred to the other, a share of a property, the receiving spouse/partner inherits the same entitlement to PRR.
Selling your home after a transfer
Putting together the rule for intra-spouse/partner transfers and those for PRR since 6 April 2020 means there’s no CGT to worry about when he gives his wife a share of his property. If later they sell the property they’ll both be entitled to the same PRR.
Are you getting the most from rent-a-room relief?
If you let part of your home, rent-a-room relief might automatically exempt the rent from tax. This sounds good but it might not be tax efficient. When might the relief not work to your advantage and what steps can you take to counter this?
Rent-a-room relief (RARR) was introduced in the 1990s to simplify the tax reporting requirements for individuals who let part of their home. It achieves this by exempting rental income up to a limit (£7,500 for 2021/22). Where income exceeds the limit there’s no automatic exemption but the £7,500 can instead be claimed as a deduction from the rent received instead of the actual costs of letting.
Example - part 1. Joan owns and lives in a three-bedroom property in a university town. She takes in two students as lodgers. Each has exclusive use of one bedroom and use of the kitchen and living areas of the property. Joan charges each lodger £400 per month (£9,600 per year). This exceeds the RARR limit and therefore the income is not exempt. However, rather than fuss with calculating the proportion of expenses, which Joan reckons would only amount to around £2,500, she can elect to deduct the RARR amount of £7,500 so that she only has to pay tax on £2,100.
For one year Joan only takes in one lodger so she can renovate the other room and make general repairs to the shared areas. As a result her expenses exceed rent meaning she’s made a loss. The trouble is, as the rent fell below the RARR limit it’s automatically exempt from tax and the loss is ignored for tax purposes. If the exemption did not apply Joan could use the loss to reduce tax on the rent for later years, say when she has two lodgers again.
You can disapply RARR so that a loss will not be lost because of the exemption. This requires a special election which stays in force until you revoke it.
Example - part 2. Joan made the election to prevent the RARR exemption applying for the year of the loss, which amounts to £3,000. The following year Joan takes in two lodgers, again at £400 per month. Her income is back to £9,600 and her expenses are £2,500. She therefore revokes her claim for RARR not to apply so that she can claim the £7,500 as a tax deduction. This leaves £2,100 taxable. The good news is Joan can use the loss of £3,000 to reduce the taxable amount to nil and carry forward the remaining £900 of loss to reduce the taxable amount for the next year or, if it’s not needed, later years.
Obtain relief for pre-letting expenses
When starting a new property rental period there will usually be a preparatory phase during which expenses will be incurred. To what extent is relief available for expenses incurred before the property is let?
Start of the property rental business
A property rental business usually starts when the letting first commences. Once the letting has commenced, relief is available for expenses in accordance with the usual rules to the extent that the expense is incurred wholly and exclusively for the purposes of the business and is revenue in nature. Relief for capital expenditure is given in accordance with the relevant rules depending on whether the accounts are prepared under the cash basis or the accruals basis.
The start date is important as it provides the dividing line between pre-commencement expenditure and that incurred in the running of the business.
Relief for pre-commencement expenditure
A landlord may be able to claim relief for expenses incurred for the purposes of a property rental business before the start of that business. Relief is only available if:
The expenditure is incurred within a period of seven years before the date on which the property rental business started.
The expenditure is not otherwise allowable for tax purposes.
The expenditure would have been allowed as a deduction if it had been incurred after the rental business started.
Thus, to be deductible, the expenditure must be revenue in nature and incurred wholly and exclusively for the purposes of the property rental business.
Where relief is available, the qualifying pre-commencement expenditure is treated as if it was incurred on the day on which the property rental business commenced and is deductible in computing the profits for the first accounting period.
Jaz purchases an investment property in January 2021 which he plans to let out. In preparing to let the property, he incurs administration expenses of £1,200 and undertakes repairs costing £3,000. The property is first let on 28 June 2021. Jaz claims relief for the pre-commencement expenses of £4,200, which are treated as if they had been incurred on 28 June 2021 – the date on which the property rental business commenced.
More time to pay back deferred VAT and tax
At the start of the pandemic, VAT registered businesses were given the option of deferring payment of any VAT that fell due in the period from 20 March 2020 to 30 June 2020. Self-assessment taxpayers were also given the option of delaying their second payment on account for 2019/20, which was due by 31 July 2020. In his Winter Economy Plan, the Chancellor extended the deadlines by which the deferred tax must be paid, giving further help to those struggling to pay their tax bills as a result of Coronavirus.
VAT-registered businesses which took advantage of the opportunity to delay paying VAT that fell due between 20 March 2020 and 30 June 2020 were originally required to pay the deferred VAT by 31 March 2021. However, there is now another option for those for whom this presents a challenge, and they can instead pay the deferred VAT in smaller equal instalments up to the end of March 2022. Those wishing to take advantage of the instalment option will need to opt into the scheme; failure to do this will mean that the VAT owed will need to be repaid by 31 March 2021. Where businesses are able, they can if they so wish pay the deferred VAT in full by 31 March 2021.
Depending on the business’ VAT quarter dates, deferred VAT will relate to the quarter ending 29 February 2020, the quarter ending 31 March 2020 or the quarter ending 30 April 2020. VAT due after 30 June 2020 (i.e. for the quarter to 31 May 2020 and subsequent quarters) must be paid in full and on time. Where direct debits were cancelled, these should be reinstated if this has not already been done.
Regardless of whether the instalment option is chosen or not, the deferred VAT will need to be paid in addition to the usual VAT payments, and it is prudent to budget for this.
Under the original proposals, self-assessment taxpayers could delay paying their second payment on account for 2019/20 due by 31 July 2020 and instead pay it by 31 January 2021, along with any balancing payment due for 2019/20 and the first payment on account due for 2020/21. For some taxpayers who have been affected financially by the pandemic, this will be something of a stretch. In recognition of this, self-assessment taxpayers who are finding it difficult to pay what they owe can set up an automatic time to pay arrangement online, as long as they do not owe more than £30,000 in tax.
Should you be correcting your SEISS claim?
You've received payments under the Self-Employment Income Support Scheme (SEISS), including the fourth grant. However, HMRC expects you to review your claims and repay any overpayments. What should you be checking?
Who checks what? - Apart from two exceptions, explained below, calculating the amount of the Self-Employment Income Support Scheme (SEISS) isn't your responsibility. HMRC assesses your eligibility and the amount of the grant using the figures you supplied in your tax returns. As long as your tax returns were accurate, you only have to make sure that your business was adversely affected by coronavirus. The trouble is "adversely affected " has different meanings for different the SEISS grants.
Amount of claim - checking exceptions - Although HMRC is responsible for working out the amount of grant, you're required to check that what it said you would get when you made your claim isn't materially different from what you received. If it was, you're obliged to tell HMRC. Also, you should review your claim amount if you amend your tax return on or after 3 March 2021. Specifically, if you amend your 2019/20 return you must check if it affects your fourth grant. If the amendment means you're eligible for a smaller SEISS payment, you pay must repay the difference to HMRC, but only if it exceeds £100. If an amendment affects your SEISS claim, tell HMRC within 90 days. It will soon publish guidance about what to do if you're unsure whether an amendment would reduce your grant.
Qualifying criteria - the SEISS 1 and 2 - Apart from checking the amounts, you must also check that you met the "adversely affected " condition for the SEISS 1 and 2 claims. The adverse effect on your profits must have occurred between March to 13 July 2020 for the SEISS 1 and after 13 July for the SEISS 2. It will show itself as lower income or higher costs directly due to coronavirus. If you believe there was no adverse effect, you must notify HMRC and repay the grant. There's no minimum by which your business income or costs needed to have been affected. As long there was an adverse effect you were entitled to claim the grant, even if your business recovered after your claim.
The SEISS 3 and 4 - Some effects which counted as adverse and allowed you to claim the SEISS 1 and 2 aren't relevant for the SEISS 3 and 4. Specifically, higher costs resulting from coronavirus don't count as an adverse effect here. Where the SEISS 1 and 2 grants could be claimed if you lost a contract this doesn't count as an adverse effect for the SEISS 3 and 4 if you were able to replace it. For the SEISS 3 and 4 "adversely affected " means your business must have suffered reduced demand as a direct result of coronavirus and at the time of your claim you had a reasonable belief this would result in a "significant " reduction in profits. What counts as "significant " isn't quantified in the rules. But it must be identifiable as resulting from the pandemic. Plus, the adverse effect must show up as lower profits in your accounts. HMRC expects you to review all your SEISS claims in light of the conditions and criteria mentioned above. There are stiff penalties if you don't notify HMRC of any overpayment.
For the SEISS 1 and 2 you must be sure that at the time of your claims you could reasonably have expected increased costs or lower income as a direct result of the pandemic. For the SEISS 3 and 4 you must be certain that the adverse effects of the pandemic on your business will result in lower profits.
Isolation support payments - new tax guidance
Individuals who are asked to self-isolate can apply for the £500 coronavirus "Test and Trace Support Payment " or equivalent in Scotland or Wales. The bad news is that these payments are taxable. Depending on your circumstances the payments must be declared to HMRC in different ways. It has recently issued new guidance on how you should do this.
If you're an employee (or director) you must include the support payment in the "Other benefits (including interest-free and low interest loans) " box of your self-assessment tax return employment pages (Form SA102). This also applies if you have income from self-employment (or a business partnership) as well as from employment.
Self-employed and business partners.
If you fall into this group you must include the support payment as income in your business accounts for the accounting period in which it was received. The support payment is exempt from NI. If you're self-employed or a business partner you should therefore exclude it when working out Class 4 NI contribution. This requires special adjustment on your tax return ( Form SA103F , SA104F or SA104S ).
If you receive a coronavirus self-isolation support payment you must declare it to HMRC as taxable income. If you're an employee include it as a benefit from employment. If you're self-employed include it as business income in your accounts.
Buy-to-let or furnished holiday letting?
When looking for an investment property, there are various decisions that need to be made. If the intention is to let the property, one consideration is whether to go down the buy-to-let route or whether to look at a holiday let.
From a tax perspective, holiday lets that qualify as furnished holiday lettings have their own tax rules, which can be more beneficial than those for unincorporated property businesses. However, to qualify there are stringent tests that must be met.
Tax rules – Buy-to-let
Rental income from a traditional buy-to-let investment is taxed under the property income rules, and unless the landlord opts to operate through a limited company, the relevant rules are those for unincorporated property businesses. Under these rules, all rental properties owned by the same person or persons form part of the same property rental business, and profits and losses are computed for the property rental business as a whole.
The landlord’s rental profit (or his or her share of the rental profit) forms part of their income chargeable to income tax. It is taxed at the appropriate marginal rate to the extent that the individual’s total taxable income exceeds their personal allowance.
Key features of the tax regime for unincorporated property business are as set out below.
The cash basis is the default basis where rental income is £150,000 or less – a landlord who is eligible for the cash basis must opt for it not to apply if they wish to compute profits using the accruals basis.
Relief for interest and finance costs are given as a basic rate tax reduction, rather than deduction in calculating taxable profit.
Losses can only be carried forward and set against future profits of the same property rental business.
Profits do not count as earnings for pension purposes.
Furnished holiday lettings
The tax regime for furnished holiday letting (FHL) is more akin to that for a trade and offers some advantages not available to those running an unincorporated property rental business .
Interest is deductible in full in calculating the profits of the property rental business, meaning relief is obtained at the landlord’s marginal rate of tax.
The landlord can claim capital gains tax reliefs for traders, such as business assets disposal relief, business asset rollover relief, gift relief and relief for loans to traders.
The landlord is entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures.
Profits from the FHLs count as earnings for pension purposes.
Where a landlord has FHLs and other lets, such as a buy-to-let, the profits from the FHL business must be worked out separately.
The tax regime for FHLs is only available to holiday lets that qualify as a FHL. To do this, the property must be in the UK or EU, it must be let furnished and it must three occupancy tests (for which see HMRC Helpsheet HS253).
Making a choice
In deciding whether to go down the buy-to-let route or furnished holiday lettings route, it is necessary to consider all relevant factors, not just the tax considerations. However, the differing tax regimes should be borne in mind when determining which route provides the best return on investment.
Take advantage of the enhanced carry back of losses
Many businesses have suffered losses as a result of the Covid-19 pandemic, and where a business has made a loss, various options are available to obtain relief for that loss. The challenge is to make the best use of the loss.
To help loss-making businesses, legislation is to be introduced to increase temporarily the period for which a business can carry back a loss from one year to three years. The extended carry back is available to both unincorporated business and companies, and can be used to generate a useful tax repayment at a time when cash flow is tight.
Unincorporated businesses - Under the existing rules, a person who incurs a trading loss in a tax year can make a claim to offset the loss of their net income of the current year, the previous year or both years. This option is now available to traders using the cash basis.
For a limited period, the carry-back period will be extended, and losses can be carried back and set against trading profits of the previous three years. from one. Losses carried back must be set against the income of a later year before an earlier year. The extended carry back will apply to losses in 2020/21 and 2021/22. It will enable a loss for 2021/22 to be carried back where a loss was also made in 2020/21 and the individual had no other income for that year.
Example - Lottie is a beautician. She prepares accounts to 31 March each year. For the year to 31 March 2021, she made a loss of £12,000. It is assumed that she made a loss of £7,000 for the year to 31 March 2022.
She had trading profits of £27,000 in 2019/20, £20,000 in 2018/19 and £16,000 is 2017/18.
She carries the loss of £12,000 back to 2019/20 reducing her profits to £15,000 for that year and generating a tax repayment of £2,400 (£12,000 @ 20%).
In the absence of the extended carry back, if she had no other income (or gains) for 2021/22 and no income for 2020/21, Lottie would have to carry the loss from 2021/22 forward to set against other profits from the same trade. However, the extended carry-back allows her to carry the loss back to set against trading profits of 2019/20. Although, this will reduce her profits to £10,000, which is below the personal allowance for that year of £12,500, it will generate a tax repayment of £500 (£2,500 @ 20%), which may be useful.
As the loss cannot be tailored to preserve the personal allowance, if she does not want to waste any of her personal allowance for 2019/20, she can instead carry the 2021/22 loss forward.
Companies - The extended back also applies for corporation tax purposes for losses incurred in accounting periods ending between 1 April 2020 and 31 March 2021 and losses incurred in accounting periods ending between 1 April 2021 and 31 March 2022.
For corporation tax purposes, losses can be carried back to the preceding accounting period. Where the extended carry-back applies, a loss can be carried back and set against profits of the same trade for the preceding year and two previous years, with losses being set against a later year before an earlier year.
Example - ABC Ltd makes a loss of £40,000 for the year to 31 January 2021 and a loss of £25,000 for the year to 31 January 2022. The company made a profit of £30,000 for the year to 31 January 2020, a profit of £50,000 for the year to 31 January 2019 and a profit of £42,000 for the year to 31 January 2018.
The loss for the year to 31 January 2021 is carried back and set against the profit of £30,000 for the year to 31 January 2020, with the remaining £10,000 set against the profit of £50,000 for the year to 31 January 2019, reducing it to £40,000. This generates a corporation tax repayment of £7,600 (£40,000 @ 19%).
The loss of £25,000 for the year to 31 January 2022 is carried back and set against the remaining profits for the year to 31 January 2019, reducing them to £15,000. This generates a tax repayment of £5,000 (£25,000 @20%).
Without the extended carry back, it would only have been possible to carry-back £30,000 of the loss for the year to 31 January 2021, reducing the repayment to £5,700. Using the extended carry back increases the total repayment by £6,900.
Minimising tax on a shared company car
As a couple working for the same company you might share a company car. But if one of you pays tax at a higher rate than the other, HMRC might try to tax you alone. What can be done to prevent this and so minimise the tax bill?
The family car
The rules for taxing a company car which is made available to more than one employee for private use are uncontentious. However, where those involved are family members, say a husband and wife, things can get a little tricky, at least in HMRC’s eyes. The reason for this is the opportunity for couples to reduce the tax bill on a shared vehicle.
Example. Lewis and Nicole are employed by Acom Ltd. Lewis’s remuneration package is worth £95,000 per year and he’s a higher rate taxpayer. Nicole works part time for a salary of £16,000 and dividends totalling £15,000 per year and is therefore a basic rate taxpayer. If Acom provides Lewis with a company car for which the benefit in kind amount is £12,000, he’ll pay tax of £4,800 (£12,000 x 40%). If instead Acom provides the car to Nicole she’ll pay tax of £2,400 (£12,000 x 20%). It doesn’t matter much to the company who it provides the car to as the Class 1A NI and other costs will be the same either way.
In circumstances similar to those in the example above HMRC might well attack the arrangement by arguing that the car is really being made available to the higher paid spouse.
The legislation doesn’t include rules to prevent tax avoidance by allocating a company car to a lower paid director or employee rather than their higher paid spouse. HMRC instead twists the legislation that exists to ensure only one of them is taxed to attribute the car to the higher paid spouse. It will look at who the company insures to drive it, who actually drives it, plus employment contracts and other records. However, you can rebuff HMRC’s attack and ensure the benefit is taxed on the right spouse.
Make sure that the insurance policy for the car fits the usage, e.g. if the car is only to be used by one spouse make them the only named driver. Ensure that the company records specify who the car is made available to.
More than one driver
This won’t be practical if the husband and wife drive the car as both will need to be insured. Therefore, while not as tax efficient as making the car available only to the lower taxpaying spouse, making it available to both will reduce the tax to some degree and avoid unwanted attention from HMRC.
Sharing a car saves tax
Where a company car is shared, the taxable amount is apportioned on a “just and reasonable” basis between both spouses.
For a couple who each have the right to use the car, even if one actually uses it more than the other, HMRC can’t argue with a 50/50 split. In our example this would save Lewis and Nicole tax of £1,200 compared with Lewis alone being taxed on the car. However, if Nicole has use of the car more than Lewis, evidenced by mileage records, the split could be skewed in her favour which would reduce the tax further.
Keep evidence that shows who the company actually provides the car to. For example, who’s insured to drive it. They alone are taxable on the car benefit. If their partner pays tax at a lower rate the tax bill can be reduced by making the car available to both of them. The taxable amount is then shared 50/50 and HMRC won’t challenge this.
Are you missing out on pension contribution relief?
If you make pension contributions personally or through your firm's workplace scheme you're entitled to tax relief. However, thousands of people fail to claim this relief to the tune of an estimated £830m each year. Might you be one of those missing out?
Tax relief for pension contributions is going begging. Estimates of the amount unclaimed vary widely but even HMRC has suggested a figure that runs into hundreds of millions each year. The vast majority of this lost tax relief belongs to those who pay tax at higher rates.
Personally paid contributions
If you pay contributions from your bank etc., basic rate tax relief (20%) for most types of pension scheme is given at source. For example, if a pension plan is for contributions of £100 per month, you pay £80 and HMRC pays £20. If you're a basic rate taxpayer that's the end of the matter, but not if you're liable to tax at a higher rate. You're entitled to tax relief at the highest rate of tax you pay, but you must ask HMRC for it. This is where so many people miss out, especially those who don't complete a self-assessment tax return.
To obtain higher/additional rate tax relief for your contributions you must claim it each year on your tax return or by writing to HMRC giving amounts and details of your contributions.
The amount of contributions on which you can claim tax relief is limited. The limit, known as the annual allowance, is usually £40,000 per tax year but can be a reduced to as little as £4,000. Always check your limit, especially if you're a higher earner.
If you have a pension plan which began before April 1988, known as a retirement annuity contract (or "section 226 " or "section 226A " contract), tax relief at source doesn't apply. Whether you pay tax at the basic or higher rates, to obtain tax relief for your contributions you must claim it each year on your tax return. If you don't complete a tax return, write to HMRC giving details of the contributions you are claiming relief for.
Workplace pension contributions
If your firm deducts pension contributions from your salary under its auto-enrolment or other workplace pension scheme, your entitlement to tax relief is the same as that for personally paid contributions. However, the method of obtaining relief can be different. There are two alternatives: net pay or relief at source. It might not be clear which your firm uses as different payroll software has different ways of showing it. Ask your employer or pension provider which method your workplace pension uses.
Net pay. If your firm uses the net pay method, you're receiving all the tax relief you're entitled to whatever rate of tax you pay on your total income. It even gives the correct tax relief if you pay no tax on your salary. You therefore don't need to claim any further tax relief or mention the contributions on your tax return. But the annual allowance trap mentioned earlier does apply and you should check you're not getting too much tax relief.
Relief at source. If your firm uses the relief at source method, the position is exactly the same as for personally paid contributions. If you pay higher rates of tax on your total income you'll need to claim the extra relief you're entitled to.
If you pay income tax at higher rates and pay pension contributions from your own funds, you are entitled to extra tax relief on the contributions. To get the extra relief you must submit a claim to HMRC. The position is the same as if you pay contributions through your firm's workplace pension scheme, unless your firm uses the net pay method.
New financial year - are you at risk by taking dividends?
The accounts for your company’s recently ended financial year are being finalised by your accountant. You expect them to show a loss. Does this mean you should stop taking dividends to avoid trouble with HMRC?
Yes or no to dividends?
You probably already know that in most circumstances dividends are the most tax-efficient form of income you can take from your company. You probably also know that companies can only pay dividends if they have profits at least equal to the dividend they want to pay. For companies that have had their business decimated by the pandemic, this might pose a problem.
Example part 1. Acom Ltd has traded for several years. Its financial year ends on 31 March. The director shareholders take most of their monthly income as dividends which won’t exceed its profits. In 2020 trading was hit by the pandemic and the director shareholders stopped taking dividends. The good news is that in the last couple of months business has returned to profitability. However, the director shareholders can’t resume paying dividends until they are sure the company has sufficient profits.
Profits, losses and distributions, e.g. dividends, from previous years must be taken account of to establish whether a company has sufficient “retained profits” to pay further dividends.
Example part 2. As at 1 April 2020 Acom had retained profits of £30,000. By July that year the director shareholders had been paid dividends of £24,000 and anticipated that current losses would wipe out the remaining £6,000 of retained profits. They stopped any further dividends.
When can dividends resume?
Profits from which dividends can be paid are those shown by the latest “relevant accounts”. This means the company’s “last annual accounts” or interim accounts. Where does this leave Acom’s directors given that the last relevant accounts, to 31 March 2020, showed retained profit of £30,000. In May 2021 can Acom pay dividends based on this figure despite knowing that £24,000 of that profit has been paid as dividends and that in the next financial year the company made a loss?
Yes or no to dividends - again?
Acom could legitimately pay dividends in May 2021 based on its 2020 accounts. However, if when the 2021 accounts are finalised they show a loss which together with the £24,000 dividends paid in that year wipes out all retained profits, dividends could not be paid until Acom could show it had sufficient retained profits. But that’s not the full picture.
What about “overpaid” dividends?
If Acom’s losses for the year to 31 March 2021 exceed £6,000, let’s say they are £20,000, it would not in hindsight have even had enough profit to pay the £24,000 of dividends it did: retained profits of £30,000 less losses of £20,000 leaves just £10,000 profits for dividends so it overpaid £14,000. The bottom line is that although the director shareholders were acting in good faith at the time, £14,000 cannot be dividends and must be recategorised.
HMRC might try to argue that the £14,000 is earnings liable to PAYE tax and NI but as the dividend was paid in good faith the excess should be treated as a loan to the shareholders. As far as the current year is concerned, to prevent a potential dispute with HMRC, the directors could take further loans and repay them from dividends when they are sure there’s enough profit.
Unless you’re sure your company has enough retained profits it should not pay dividends. The shareholders can take a loan from the company instead. This will prevent HMRC from arguing that overpaid dividends are taxable as earnings.
Road Fuel - Recovery of VAT
Since 1 February 2014 VAT paid on fuel for road vehicles is treated like that paid on any other type of expense. Previously, where fuel was used for both business and private journeys special rules applied and while these still exist, they are optional. You're now allowed to work out reclaimable VAT using any method that results in a "fair and reasonable " result. Alternatively, you can use the optional flat rate charges. HMRC calls them fuel scale charges (FSCs).
The FSC can be used where your business pays for fuel used for private journeys made by you or your employees. It works by you reclaiming the VAT on all fuel, whether it's used for business or private journeys. You then pay VAT on the FSC, which varies according to the car's CO2 emissions. If the VAT you reclaim exceeds the FSC you're saving VAT, but if the reverse is true using it will cost you.
If you don't use the scale charge, then any "fair and reasonable " result must limit your claim to VAT paid on fuel used for business and the only practical way to measure this is to keep a mileage log. How you work out the amount to claim depends on how the business pays for the fuel.
Where you pay a mileage allowance to employees for business journeys their expenses claims will show the miles they travelled and so will the mileage log. You can reclaim VAT on the allowance either using your estimate of the fuel element of the mileage allowance or by using HMRC's advisory rates
Bill is a rep for Acom Ltd. He drives his own car for work. For the quarter ended 31 May 2021 his expenses claim shows business mileage of 8,000. Acom pays Bill a flat rate of 35p per mile and it estimates 18p of this is needed by Bill to cover costs. The VAT included in this is 3p (18p/6). Acom can reclaim VAT of £240 (8,000 x 3p). Bill must provide you with original fuel receipts which show at least this amount of VAT.
If your business pays for the fuel direct, e.g. via a credit card, the employee must provide details of their business mileage so that you can keep a log. You can work out the VAT reclaimable using the mileage allowance method or HMRC's preferred method which uses apportionment.
John is a director of Acom. In the quarter ended 31 May 2021 he travelled 4,200 miles in a company pick-up. 3,000 miles were for business. He charged £690 of fuel to his company credit card of which £115 was VAT (£690/6). Acom can reclaim 3,000/4,200 of the VAT, i.e. £82.15.
Reporting expenses and benefits for 2020/21
Employers who provided taxable expenses and benefits to employees during the 2020/21 tax year will need to report these to HMRC, on form P11D by 6 July 2021, unless the benefit or expense has been payrolled or is included within a PAYE Settlement Agreement. Benefits covered by an exemption do not need to be included.
Where taxable benefits have been provided, the employer must also file a P11D(b) by 6 July 2021. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A amount.
The tax legislation contains a number of exemptions which remove a charge to tax. These may be specific to a particular benefit, such as those for mobile phones and workplace parking, or may be more general, such as the exemption for paid and reimbursed expenses, which applies if the employee would have been entitled to a tax deduction had they met the expense directly.
There are also a number of temporary Covid-19 specific exemptions that apply for the 2020/21 tax year. These include the provision or reimbursement of Covid-19 antigen tests and reimbursed homeworking equipment (such as a computer) to enable the employee to work at home during the pandemic if the equipment would be exempt if made available by the employer.
Remember, exemptions are only available if the associated conditions are met. However, care must be taken here where provision is made under a salary sacrifice arrangement and the alternative valuation rules apply as this may negate the exemption.
The amount on which the employee is taxed is usually the cash equivalent value. This is calculated in accordance with the benefit-specific rules where these exists, as is the case for company cars, vans, living accommodation and employment-related loans. Where there is not a benefit-specific rule, the cash equivalent is determined in accordance with the general rule. This is the cost to the employer, less any amount made good by the employee. Amounts made good are only deducted where the employee makes good by 6 July 2021.
If the benefit is provided under an optional remuneration arrangement (OpRA), such as a salary sacrifice arrangement, the alternative valuation rules are used to calculate the taxable amount, unless the benefit is one which is specifically excluded from the ambit of those rules (such as childcare vouchers, pension provision and advice, employer-provided cycles and low-emission cars (l75g/km or less) or within the transitional rules for 2020/21. Under the alternative rules, the taxable amount is the salary foregone or cash alternative offered where this is more than the cash equivalent value.
HMRC produce worksheets which can be used to calculate the taxable amount for some benefits. These can be found on the Gov.uk website.
There are various options for filing P11Ds and P11D(b):
using a payroll software package;
using HMRC’s Online End of Year Expenses and Benefits Service;
using HMRC’s PAYE Online Service; or
filing paper forms.
Whichever method is used, the forms must be filed by 6 July 2021. Employees must be given a copy of their P11D or details of their taxable benefits by the same date.
Any associated employer-only Class 1A National Insurance must be paid by 22 July 2021 if paid electronically, or by 19 July 2021 if paid by cheque.
‘Chosen’ for an HMRC enquiry?
What happens if your business is ‘chosen’ for an HMRC enquiry?
HMRC has the power to enquire into any return and request any information to establish whether that return is correct. No reasons need be given and invariably will not be disclosed.
An enquiry may be:
Full - checking a return as a whole including the accounts.
Random - standard procedures as part of the overall crackdown on tax avoidance possibly targeting specific businesses deemed as high-risk. Previous enquiries have targeted the construction industry, private health care professionals and more recently, those involved with cryptocurrencies and obviously 'cash' businesses.
Aspect (or 'compliance check').
A full enquiry is both costly and time-consuming, for both sides, therefore should a business find itself the subject of one then it will be for a good reason – at least in the HMRC’seyes. As such, an enquiry letter will more likely be for an aspect enquiry where HMRC look at specific areas or claims relating to a return e.g. HMRC may have received information that a property is let but the owner has not completed the letting pages of the return or the taxpayer may declare a small amount of tax when turnover is high. Some compliance checks begin as ‘aspect’ checks before being upgraded to full enquiries if HMRC believes serious issues are evident.
Which businesses can be chosen?
HMRC identifies cases using various means, having invested in technology that collects data, analyses information, highlighting potential cases. Their 'Connect' computer system obtains information from a range of sources - newspaper advertisements showing a trade but no accounts submitted, lists of market stall holders, DVLA records, data of racehorses and their owners, estate agents details of rental properties or house sales, local authority lists, planning applications, Land Registry, credit card information from issuers, data from companies such as eBay, PayPal and Airbnb.
However, a sizeable number of investigations are made due to calls to HMRC's fraud hotline or submission of an online form headed: "HMRC Fraud Hotline - Information report form". Currently HMRC is concentrating on 'compliance checks' specifically relating to suspected CJRS fraud. HMRC believes that between 5% and 10% of CJRS grants contain mistakes or have been illegally claimed and has apparently received over 21,000 reports from the public of suspected CJRS fraud; 26,000 cases are being looked into, some of which include criminal investigations. The process is part of the government’s pledge to invest in a Taxpayer Protection Taskforce created to focus on fraud committed on any coronavirus support package.
The first indication of a full enquiry is the receipt of a letter accompanied by a Code of Practice leaflet, confirming the type of enquiry, the information expected to be provided and the deadline for providing this information. A Statement of Assets may be included enabling the Inspector to ascertain whether any assets have been acquired of which HMRC was unaware, payment of which might have been via the use of undisclosed earnings.
A Disclosure Report will be issued at the end of an enquiry to include a Certificate of Full Disclosure signed by the taxpayer to the effect that a full disclosure has been made ‘to their best knowledge and belief’. Should any additional tax be due then a tax penalty will be levied, the amount being determined by consideration of the reasons why the underpayment arose and the amount.
CJRS grant compliance check letters confirm that HMRC are looking into whether the taxpayer has 'received a CJRS grant payment and may need to repay some or all of the grant you have received. This is because you may have:
- claimed for a CJRS grant which is more than you are entitled to based on the information we hold about your employees
- not met the conditions to receive a CJRS grant - for example by including employees in your CJRS claim who are not eligible.'
A response is required within a set timescale (sometimes just two weeks from the date of the letter) otherwise a full compliance check will be opened.
HMRC has an official time limit of five years and ten months after the tax year end for compliance investigation which can be extended to 20 years where fraud or negligence is suspected.
Can you claim the Employment Allowance for 2021/22?
The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.
To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.
The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.
There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.
Amount of the allowance
The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.
A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:
Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 - £1,500) is carried forward.
Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 - £1,500) is carried forward.
Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.
Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.
Claiming the allowance
The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.
Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.
Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.
Making a negligible value claim
Where assets that have become worthless, it may be possible to make a negligible value claim, allowing a loss to be realised which can be set against chargeable gains to reduce the capital gains tax liability. A negligible value claim can be made either on the self-assessment tax return or in writing to HMRC.
Shares of negligible value
Where the claim is for company shares and securities and the company is in liquidation, the following information must be given to HMRC:
a statement of affairs for the company and any subsidiaries;
a letter from the liquidator or receiver showing whether any return will be made to the shareholders;
details of how this decision was reached (for example, a balance sheet where liabilities are significantly greater than assets); and
evidence that no recovery or rescue is likely (for example, a statement that the company has ceased trading).
If a negligible value claim is being made for a company that is not in liquidation or receivership, comprehensive evidence to support the claim that the shares are of negligible value should be provided.
Where the shares are unquoted, HMRC will generally accept that the shares are of negligible value where all the following conditions are met at the date of the claim:
the company is registered in the UK;
the company is not registered as a PLC;
there is capital loss arising from the deemed disposal of shares following the negligible value claim;
the company was in liquidation and insolvent or had ceased trading and had no assets.
HMRC publish a list of quoted shares and securities that they accept as being of negligible value.
Anna purchased 1,000 shares in an unquoted company for £10 each. On 1 May 2021 the company goes into liquidation. Anna successfully makes a negligible value claim, realising a loss of £10,000 which she can set against capital gains in the same or later tax years.
Reclaiming VAT on staff homeworking allowances
You’re downsizing your office and have asked a few staff to permanently change to homeworking. You’ll pay them a one-off allowance towards the cost of setting up their home workspace. Can you reclaim the VAT they incur?
Is it a business expense?
Bar-room accountants like to suggest that “putting it through the business” will get you a tax deduction for a wide variety of expenses. In practice, this has no bearing on your right to tax relief or to reclaim VAT. The basic rule for VAT is that it can only be reclaimed if the expense had a business purpose. Furthermore, the expense must be linked to VATable supplies your business makes.
VAT paid which results in exempt supplies, or is linked to non-business or private use, can’t be reclaimed even if it benefits your business.
Example. Hugh is a solicitor and keen golfer. He puts his club membership fees through his business as he says golf helps generate contacts and get more clients for his legal practice. Whether or not this is true is irrelevant. The purpose of the expenditure is a private one and so the VAT paid on the membership fee can’t be reclaimed.
Evidence of VAT paid
An allowance paid by your business to one of its employees may or may not meet the basic rule for VAT claims. Working for now on the assumption that it does, before you can reclaim it you’ll still need evidence, usually a valid invoice or receipt which shows that VAT has been paid.
Receipts and invoices in an employee’s name are, contrary to common belief, acceptable to HMRC as evidence as long as they are passed on to you by the employee. It’s advisable to get your employee to formalise this by attaching the invoices etc. to a corresponding expenses claim.
Who received the supply?
If an allowance you pay an employee is used by them to buy goods for their new home office, e.g. a desk, chair, shelves, etc. it’s important that ownership of these items belongs to your business. You should therefore make this position clear to the employee.
If ownership is with your employee it’s they and not your business who has received the supply and so the basic rule mentioned isn’t met and you won’t be entitled to reclaim the VAT.
HMRC’s view is that if you pay an employee an allowance which they use to decorate or improve their home, you can’t reclaim the corresponding VAT. It’s a private expense because the decoration is attached to the property which belongs to the employee and so they own it.
If the cost of home decoration, or any other purchase, counts as a taxable benefit in kind for income tax purposes, it makes the expense a business rather than a private one because it counts as part of your employee’s remuneration, which is a business expense. In that case, you can reclaim the VAT but you’ll need to account for VAT on the value of private use, unless it is incidental to the business use.
You can reclaim VAT on expenses incurred by your employees for creating a home workspace. You must have the original receipts and invoices to show that VAT has been paid. Ask your employees to attach them to an expenses claim. If there’s any private use of the home office, you might need to account for VAT on this.
Off-payroll workers miss out on statutory pay
Off-payroll and statutory pay.
Since 6 April 2021 the responsibility for deciding if IR35 applies and accounting for the resulting tax and NI, shifted from the workers to the businesses etc. (except for SMEs) they work for. This is bringing more workers within the PAYE tax and NI net and potentially entitlement to statutory payments such as maternity pay. The new responsibility on businesses etc. paying off-payroll workers does not make them liable for statutory pay, but workers may be entitled to them through their own companies etc.
Example. Jane owns a company through which she provides services to several clients. Some work is subject to the off-payroll rules and her company is paid for it net of PAYE tax and NI, which it passes to Jane. The off-payroll NI (and tax) won’t show in Jane’s company’s payroll records. However, it does mean that if she doesn’t work because of illness she might qualify for statutory sick pay.
HMRC has issued new guidance on how Jane and her company should tackle such situations and work out if and how much statutory pay she is entitled to.
If you work through your own company or other intermediary and your clients deduct tax and NI under the off-payroll rules, it might entitle you to statutory payments such as sick pay. Refer to HMRC’s new guidance on how to calculate this.