Flat rate VAT if you sell used equipment
If you use the VAT flat rate scheme (FRS) the normal rules don’t apply to some types of transaction, for example, if you sell an item of equipment which you’ve used in your business. How should you record the transaction and account for any VAT?
Flat rate scheme purchases
As you’re probably aware, the VAT flat rate scheme (FRS) can be used by businesses until their annual turnover exceeds £230,000. The scheme doesn’t affect whether and how much VAT you charge but allows you to keep some of it (by accounting for a lower percentage) rather than pay it to HMRC with your VAT return. In exchange, you aren’t allowed to reclaim VAT on your purchases, except for VAT paid on capital assets which cost you more than £2,000 (including VAT).
You can recover VAT for a group of capital assets purchased from the same supplier at the same time if overall they exceed the £2,000 limit. For example, four new desks for your firm’s office costing £520 each.
VAT when you sell capital assets
Usually, a registered business that sells a capital asset must charge the purchaser VAT and account for it to HMRC. There are exceptions, essentially where you weren’t entitled to, and didn’t reclaim, the VAT you paid on the purchase. For example, VAT on the cost of a car used for some private travel. These rules apply to all registered businesses including those which use the FRS.
Accounting for VAT
Where you’re required to charge VAT, you’ll need to account for it on your quarterly return in one of two ways as shown by the following examples.
Example 1. Gary is a builder who uses the FRS. He bought a van for £3,000 plus VAT of £600. He recovered the VAT through his quarterly returns. He sells the van for £1,000 plus VAT of £200. This is a sale outside of the FRS and so he must account for £200 in Box 1 of his next return and include the net sales figure of £1,000 in Box 6. The same rule for working out and reporting the VAT would apply if Gary had bought the van (regardless of the price he paid) before joining the FRS and reclaimed the VAT under the normal rules.
Example 2. While using the FRS Verity bought a packaging machine for her business for £1,500 plus VAT of £300. She was not entitled to reclaim the VAT because the purchase price was less than £2,000. She sells the machine for £500 plus VAT of £100. This counts as part of her normal FRS sales. Assuming her FRS percentage is 12%, Verity must include VAT of £72 ((£500 + £100) x 12%) in Box 1 of her return and include £572 in Box 6.
The VAT treatment of a car can be problematic if you sell it while you’re using the FRS and have not reclaimed VAT on the purchase, which is rarely allowed. Even though you do not charge the buyer VAT you must account for it at the FRS rate in the same way as in Example 2.
If the amount you’re asking for the car is a significant proportion of your turnover, you might be better off leaving the FRS to avoid the VAT. You can rejoin it after twelve months.
To prevent overpaying VAT, make sure your bookkeeper has all the information they need about a capital asset to decide how to report it on your VAT return if you sell it.
Furnished holiday lettings
Furnished holiday lettings offer a number of tax advantages over longer lets. One of the key benefits is the availability of capital gains tax reliefs available to traders, including rollover relief and business asset disposal relief.
Business asset rollover relief
Business asset rollover relief is a significant benefit of having a furnished holiday let rather than a standard buy-to-let. It enables the landlord to sell one property and invest in another without crystallising an immediate charge to capital gains tax; instead the gain is ‘rolled over’ and the charge is deferred.
Business asset rollover relief is available on the disposal of a qualifying business where some or all of the proceeds are used to buy new assets.
To qualify for business asset rollover relief certain conditions must be met:
The new asset must be bought in the period running from one year before the sale or disposal of the old asset to three years after.
The business must be trading when the old asset is disposed of and the new asset is acquired.
The old asset and the new asset must be used in the business.
The effect of the relief is that capital gains tax is not payable when the old asset is disposed; instead it is paid on the gain on both the old asset and the new asset on the disposal of the new asset.
Lottie runs a furnished holiday lettings business and owns a holiday cottage in St Ives. She purchased it in 2010 for £150,000 and sells it in June 2021 for £400,000 (net of costs), realising a gain of £250,000. Three months later, she buys a new holiday let in Padstow for £450,000. She claims business asset rollover relief, deferring the capital gains tax on the sale of the St Ives property.
The base cost of the Padstow property is £200,000, being the cost of £450,000, less the rolled over gain of £250,000.
Louise has a buy to let property. She also purchased it in 2010 for £150,000 and sold it in June 2021 for £400,000 (net of costs) realising a gain of £250,000. She plans to buy a buy-to-let in a different location. However, unlike Lottie, she is unable to claim business asset rollover relief and must pay the associated capital gains within 30 days of the sale completion. If she is a higher rate taxpayer, and assuming her capital gains tax annual exempt amount of £12,300 is available, she will have a capital gains tax bill of £66,556 (28% (£250,000 - £12,300) to pay, reducing the proceeds that she has available for reinvestment to £333,444. By contrast, Lottie has the full proceeds of £400,000 available to reinvest.
Partial relief is available if only part of the proceeds from the sale of the old property is reinvested in the new property.
Luke has a furnished holiday lettings business. He sells a holiday let for £300,000 realising a gain of £100,000. He buys a new holiday let for £270,000. £30,000 of the gain of £100,000 is immediately chargeable to capital gains tax. The remaining £70,000 of the gain is rolled over. The base cost of the new holiday let is £200,000, being the cost of £270,000, less the rolled over gain of £70,000.
Relief must be claimed within four years from the end of the tax year in which the new asset was acquired or, if later, the old asset was sold. A claim form is available on HMRC helpsheet HS290.
Loans to participators
Where a close company (or LLP) makes a loan (otherwise than in the ordinary course of a business) to an individual who is a participator or an associate of a participator, a tax charge of 32.5% is payable by the company should that loan remain outstanding nine months after the end of the accounting period. The charge applies to loans to directors who are also participators, to participators who are not directors, but it does not apply to directors who are not also participators.
A 'participator' may be a shareholder of the company whose interest in the company is more than 5% of the share capital but the definition also includes any person having a share or interest in the capital or income of the company. An ordinary trade creditor is not a 'participator'.
A 'close company' is a UK resident company under the control of:
(a) 5 or fewer participators, or
(b) of any number of participators who are also directors.
The rate of tax payable is the same as the higher 'dividend tax' rate at 32.5%. Should the charge be paid and then the loan subsequently be repaid, repayment can be claimed but will not be so until nine months and one day after the end of the company's accounting period in which the loan was repaid or reduced.
Where the loan has been made before the individual becomes a participator e.g. the loan is made to an individual who subsequently becomes a shareholder, then no charge is levied provided there is no link between the loan and the individual becoming a shareholder.
Material interest - As long as the participator is not also a director or employee in the company, there is no immediate tax charge for the participator. The scenario is different where the participator does not have material interest but works full time for company as there will be a charge under the benefit in kind rules should the loan exceed £15,000. There is also the possibility of a double income tax charge if the loan is subsequently waived or written off. In such circumstances not only will there be a benefit in kind on the granting of the loan but HMRC could deem the waiver to be a distribution to a participator or as earnings to a director or employee. However, there is provision in the legislation that prioritises the distribution treatment in this situation. There is no similar provision in the national insurance legislation and so this means that the income would be taxable as a distribution (dividend income) and Class 1 national insurance (both employer’s and employee’s contributions) be payable. In most small companies the director will be a shareholder entitled to vote at board level and so will also be a participator. Therefore, the distribution treatment will apply to any loans made and written off to the director or his family.
A participator who does not have material interest but works full time for company could receive small loans over several accounting periods such that eventually the aggregate exceeds the £15,000 exemption limit. HMRC's gives the example of a director receiving:
£5,000 in accounting period 1
£2,000 in accounting period 2
10,000 in accounting period 3
Individually these loans would qualify for the exemption but in total an amount of £17,000 has been received. HMRC state that the two earlier amounts in period 1 and 2 meet the requirements for the exemption and therefore the company is not charged on those amounts. However, the full amount of £10,000 in period 3 is chargeable as not meeting the condition under s456 CTA 2010 which states that:
the amount of the loan in question plus the outstanding amounts of loans made to the borrower does not exceed £15,000 (Condition A)
Details of the loan are required to be declared on the company tax return; the usual interest being charged on payments made late to HMRC.
Expenses and benefit returns for 2020/21
Expenses and benefits returns P11D and P11D(b) for 2020/21 need to be filed by 6 July 2021. Meeting this deadline is important as penalties may be charged for returns that are filed late.
A form P11D must be filed for every employee who has been provided with taxable benefits and/or expenses in the 2020/21 tax year which have not been payrolled or included in a PAYE settlement agreement. Benefits covered by an exemption can be ignored.
The information that is needed in respect of each benefit depends on the nature of the benefit. In many cases, all that is needed is the cost to the employer of providing the benefit, any amount made good by the employee and the resulting taxable amount. However, for some benefits, such as company car and fuel and employment-related loans, more information is required.
The taxable amount will normally be the cash equivalent value. However, where the benefit is made available under a salary sacrifice or other optional remuneration arrangement, the taxable amount should be worked out using the alternative valuation rules, unless the benefit is one of the few to which these rules do not apply.
The P11D(b) is the employer’s declaration that all required P11Ds have been filed, and also the employer’s statutory Class 1A National Insurance return.
When computing the Class 1A liability, it is necessary to take into account taxable benefits within the Class 1A charge returned on the P11D and also any payrolled benefits. If all taxable benefits provided in the 2020/21 tax year have been payrolled (or included in a PSA), there will not be any P11Ds to file; however, a P11D(b) is still required.
Items included within a PSA are not included in the Class 1A National Insurance calculation on the P11D(b) – Class 1B National Insurance contributions are payable instead.
If an employer has not provided any taxable benefits in 2020/21, but did in previous years, and receives either a paper P11D(b) or a P11D(b) reminder letter, they will need to complete a nil declaration online on the Gov.uk website to avoid being charged a penalty.
There are various options for filing P11Ds and P11D(b)s:
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.
Keep-fit tax incentive for company owners
Because of the pandemic you let your gym membership lapse but you’re about to renew it. You’ve heard that there’s a tax break relating to sporting facilities if your company provides them. Is it something you might take advantage of?
If your business meets the cost of your gym membership it can claim a tax deduction for the expense, but only where it counts as a benefit in kind for you. Usually, this means you’ll pay tax and your company NI on the value of the benefit. However, there’s a special exemption for “recreational benefits”. The bad news is that membership of a public gym fails one of the main conditions for the exemption.
Any corporation tax (CT) saving achieved by your company will be significantly reduced by the Class 1A NI liability it has on the taxable benefit in kind . For example, CT relief on an annual membership of £1,000 would be £190, while the Class 1A would be £138. Plus, there’s your tax on £1,000 to take into account. Conversely, if the conditions for exemption are met there would be no tax or NI liabilities, while your company would still be entitled to the CT deduction.
The exemption applies where your company provides or makes available to you or your family, recreational facilities and the following conditions are met:
Condition A. The facilities are available generally to all your employees.
Condition B. The facilities are not available to members of the public generally.
Condition C. The facilities are used wholly or mainly by persons whose right to use them is employment-related. The effect of this condition is to limit the exemption to employees, former employees and the families of either.
Note. Condition B isn’t broken if the facilities are available to visiting workers from another business.
Even where the conditions are met some benefits are excluded, e.g. those involving overnight accommodation.
DIY and rented gyms
The good news is there are a number of ways you can make use of the exemption for gym facilities. You could:
create a gym on your business premises, say in a spare room, for use by you, your employees, and your families
create a gym at a separate premises away from your business, e.g. in rented accommodation, as long as it’s not a residential property
rent a public gym for a short periods during which only you and your employees etc. could use it.
The suggestions above might be prohibitive because of cost but there is a way around this.
Sharing the cost and use of a gym or other recreational facility does not break the conditions of the exemption (specifically, condition B) but can make the arrangement more affordable. So, if you want tax-efficient gym facilities, ask other businesses in the area whether they would split the cost of creating and maintaining one. They might have space to accommodate it and with any luck showers too.
If your company pays for your membership of a public gym it can claim a tax deduction for the cost but it would count as a taxable benefit for you. This would wipe out the tax advantage. If instead your company, alone or with others, creates or hires a gym for use by employees and their families, the cost is tax deductible but is not a taxable benefit.
Limited liability partnerships
A limited liability partnership (LLP) is not a partnership but a body corporate with a difference - there are no shareholders or guarantors (as there would be for a company limited by guarantee) but partners (designated 'members') carrying on a trade or business with a view to profit. It is a structure commonly used by professionals such as doctors, attorneys, and accountants who go into practice together.
As a 'body corporate' it must be registered with Companies House however, the entity does not pay Corporation tax, instead the individual members are subject to the normal partnership rules (i.e. taxed individually as being self employed on their respective share of the profit) regardless of the amount they withdraw from the business.
Members receive an income/profit share proportionate to their capital account balance. However, certain members can be allocated a disproportionate amount of profit by allowing a ‘salary’ in recognition of the work they do, which could be disproportionate to their income/profit share e.g. a new member may contribute little or no equity but take on a significant share of the management of the business. There are anti avoidance rules in place that treat a member as employed should they receive a fixed rather than varied amount of partnership profit.
Number of members
Each LLP must have at least two 'designated' members responsible for various administrative tasks; however there is no upper limit to the number of members. Members can be either individuals or limited companies with each member being able to sign binding contracts on behalf of the LLP (thus avoiding a problem sometimes encountered by ordinary partnerships where every partner has to sign certain documents).
Advantages of an LLP
The main advantage of setting up an LLP is to give some protection to a member going bankrupt where claims are made against the LLP only and members' personal liability is limited to their capital contribution. However, all members can be held responsible for another member's negligence if that negligent member is operating within the scope of their authority in the business. In comparison a partner's personal assets can be seized to settle the partnership's debts in an ordinary partnership.
A further potential advantage is that under an LLP structure different proportions of income and capital entitlements can be allocated each year to the different members; this makes LLPs a flexible method of withdrawing profits particularly where different members have different percentage interests in the business e.g. one member may undertake the majority of the administration but have a lower percentage interest in the partnership. In this instance that member can be allocated a higher (variable) share of the profit rather than being paid a fixed salary for the work involved. This ability to change the profit split year on year is also a benefit for those partnerships with different members with different marginal tax rates.
If an LLP goes into liquidation it is treated as a company rather than a partnership for Capital gains tax purposes.
Women’s state pension error - the tax position
You may have been following the story over the last year about the government error in calculating some married women’s state pensions. It’s estimated that between 70,000 and 100,000 women have been underpaid their pension for the last 20 years. This has raised questions about how HMRC will tax the arrears when they are paid. There was a call for them to be tax free and that HMRC was considering this. As yet there’s been no statement on the matter.
There are special rules for taxing lump sum state pension payments which result from someone choosing to defer their pension, but not for lump sums resulting from a miscalculation of pension entitlement. It seems that the general tax rules will apply. These say that the state pension is taxable for the year it was due to be paid. That means any arrears relating to the period prior to 6 April 2017 are beyond HMRC’s reach. Arrears for later periods should be reported to HMRC which may result in a tax bill. But as any tax will only be a small fraction of the arrears of pension received, this shouldn’t pose too much of a problem for those involved.
The government will be paying arrears of pension to many thousands of married women. HMRC cannot demand tax on the arrears relating to periods prior to 6 April 2017.
Relief for losses in the early years of a trade
It is not uncommon to realise a loss in the early years of a trade. However, traders who commenced their self-employment in 2019 or 2020 may also have suffered as a result of the pandemic. Although the Self-Employment Income Support Scheme (SEISS) provided help for traders who also suffered from the impact of the pandemic, those who started trading in 2019/20 were unable to benefit from the first three grants (qualifying only for grants 4 and 5 if they had filed their 2019/20 tax return by 2 March 2021 and met the other eligibility criteria). Traders who started a business in 2020/21 are not able to benefit from the SEISS.
However, they may be able to claim loss relief under the early trade losses relief rules, and generate a tax repayment in the process.
Nature of the relief
The relief for losses in the early years of the trade allows a trader who makes a trading loss in any of the first four years of a new trade to carry that loss back against taxable income of the previous three years. The loss is set against the income of the earliest year first.
Accruals basis not cash basis
Relief for the loss under these rules is only available where the accounts are prepared on the accruals basis. Thus, if losses in the early years are likely, it is worth considering preparing accounts using the accruals basis to open up a claim to relief. This relief is not available where accounts are prepared under the cash basis – where this is the case, the loss can be carried back against any previous trading profits of the same trade, should they exist, or carried forward and set against future profits of the same trade.
Polly was employed as a beautician earning £25,000 a year prior to setting up her own beauty business on 1 June 2020. Her business was badly affected by the pandemic, and in the 10 months to 5 April 2021, she makes a loss of £10,000. This is a loss for the 2020/21 tax year.
She can carry the loss in her first year back against her income of 2017/18, 2018/19 and 2019/20, setting the loss against her income for 2017/18 first.
She carries the loss back to 2017/18, setting it against her employment income for that year of £25,000, reducing her taxable income to £15,000 in the process. Carrying the loss back generates a tax repayment of £2,000 (£10,000 @ 20%).
Personal allowances may be lost
It should be noted that the loss carried back cannot be tailored to preserve personal allowances, which may be lost as a result.
A tax-saving tip for incorporating your business
Incorporating your business
Despite anti-avoidance measures sole traders and partnerships can save tax and NI by transferring their businesses to a company. An unincorporated business that’s transferred to a company is treated as if it permanently ceased. This means that special tax rules for calculating taxable profits apply. One of these says that the equipment owned by the business is treated as if it were sold at market value and acquired by the company at the same price. This usually results in adjustments to the tax deductions, i.e. capital allowances (CAs) previously claimed by the old business. The hassle of valuing equipment and making adjustments to CAs can be avoided if the sole trader/partnership and the company jointly elect to treat the equipment as sold and acquired at the tax value instead of the market value.
Example. Josh and Ali are the partners of a delivery business. It prepares its annual accounts to 30 April. In February 2021 the partnership bought three new vans costing £90,000 in total. On 1 May 2021 they transferred the business to Acom Ltd, wholly owned by Josh and Ali. Usually, it could claim CAs for the whole £90,000 (using its annual investment allowance), but the rules don’t allow businesses to use the AIA in their final accounting period. The CAs are limited to the difference between £90,000 and the market value of the vans on the date the business is transferred, zero if the election mentioned earlier is made.
Another special rule applies when a business is incorporated. It says that a business is not entitled to the AIA on assets transferred to it. This means Acom can’t claim CAs for the whole £90,000 expenditure on the vans all at once. Instead, it gets a CAs “writing down allowance”. This spreads the tax deduction over many years.
Spreading capital allowances
In our example Acom is only entitled to CAs at the rate of 18% pa of the reducing balance of the cost/value transferred from the partnership. In summary, because the purchase of the vans occurred in the final trading period of the unincorporated business, Josh and Ali miss out on CAs of up to £90,000 which instead is received by Acom but spread over more than 20 years.
Josh and Ali can prevent the loss/delay of CAs by changing their accounting period so that the end date falls between when they bought the vans (February 2021) and the date they transferred the business (1 May 2021).
Example. The partnership changes its accounting period so that its penultimate accounts run from 1 May 2020 to 31 March 2021. The final accounts cover 1 April to 30 April 2021. The purchase of the vans therefore falls in the partnership’s penultimate accounting period meaning that it gets CAs on the full £90,000. Josh, Ali and Acom also elect to use the tax value which is zero (£90,000 expenditure less £90,000 CAs received by the unincorporated business), for the transfer of the vans to Acom. For relatively little effort the CAs trap, which substantially delays tax relief for the vans, has been avoided.
As far as possible avoid buying equipment in the final accounting period before the business is incorporated. If that’s not possible change the accounting date so that the expenditure falls into the penultimate accounting period rather than the final one.
HMRC challenges taxpayer’s employment claim
In a 2021 First-tier Tribunal (FTT) case, the taxpayer disputed HMRC’s assertion that he was self-employed rather than an employee. What key point can businesses take from the FTT’s ruling?
Bucking the employment trend
At a time when HMRC frequently challenges claims by individuals that work they do for their clients is on a self-employed basis, the case of Phillips v HMRC 2021 (P v HMRC) bucks this trend. HMRC had formally determined P’s employment status as a freelancer for work he did for City & General Direct (C&G) between 2010 and 2013 and not as an employee. P disagreed and appealed to the First-tier Tribunal (FTT).
P had been involved in the development of a medical negligence insurance product which C&G marketed. The company needed P’s expertise in the insurance sector and engaged his services following negotiations through a series of communications, mainly by email. There was considerable discussion between P and C&G about the terms of his working arrangement, and some draft contracts were drawn up. These might have helped P’s case but the contracts were never signed.
Eventually it was agreed that P would be paid on a commission-only basis with no salary entitlement. The lack of a regular salary does not alone prove that P was not an employee. The FTT also considered where P’s normal place of work was; this was at his home, in the Lloyd’s building in London or at the offices of various insurance companies he was negotiating with. He had no desk at C&G. However, it did provide him with a computer, other IT equipment and business cards describing him as “sales director”. He also had use of a company credit card. It’s worth noting that HMRC usually cites these factors as good indicators of employment but in practice they don’t carry much weight when compared with matters of control and supervision.
No control or supervision
C&G did not control when or how P worked. Neither did it set protocols to review his work or obtain progress reports, although the latter were provided by P at irregular intervals. The lack of control and supervision over P’s work combined with other less significant factors, e.g. C&G did not enrol P in the pension scheme or give him holiday pay, were enough for the FTT to confirm HMRC’s decision of P’s self-employed status .
Lessons for would-be employers
While ultimately this case was about the worker’s tax and NI position, had the decision gone the other way it might, in theory, have led HMRC to issue demands for unpaid PAYE tax and NI to C&G. In practice, this would have been unlikely because the time limit for issuing such demands had passed. However, it’s a warning for businesses that use freelance workers to nail down their employment status from the start.
If there’s the slightest doubt about a worker’s employment status , use HMRC’s check employment status for tax (CEST) tool. Keep a record of the result and all the paperwork to back up the data you input.
Despite some factors pointing towards employment, the lack of control and supervision over the taxpayer’s work trumped these. The FTT therefore ruled that the taxpayer’s status was self-employed. Use HMRC’s status tool if there’s any doubt over the status of someone who works for you. Keep a copy of the results and supporting documents.
Double check your P11Ds while there’s time
Many employers made unusual or special payments to employees because of homeworking or other coronavirus-related reasons during 2020/21. The question is, should they be reported on Form P11D?
Deadlines and form - The deadline for submitting benefits and expenses returns for 2020/21, Form P11D , is 6 July 2021. Whether you still have this arduous task to complete or have submitted your forms it’s worth sparing a few minutes to make sure that any out-of-the-normal expenses payments related to the pandemic have been dealt with correctly.
Tip. If you’ve already submitted your P11Ds and need to correct one or more of them, it’s best to do this before the deadline but can be done later if necessary. You must include all the benefits and expenses, not just the ones you want to change.
Reportable or not - Coronavirus-related expenses paid to your employees or benefits you provided them with in 2020/21 might be exempt from income tax and NI and therefore not reportable on Form P11D . For example, you provided a normally office-based employee with a mobile phone so they could make business calls when they worked from home. Other expenses and benefits are reportable but the employees might be entitled to claim a tax deduction; that’s entirely up to them.
Non-reportable benefits and expenses - The following benefits and expenses do not need to be reported:
Reportable benefits and expenses - The following do need to be reported:
More information. The lists above aren’t exhaustive. If you provided a benefit or paid expenses to an employee because of the pandemic and aren’t sure if you should be reporting them on Form P11D HMRC has a couple of guides that might help.
Not all benefits provided and expenses paid by employers because of the pandemic are tax exempt, e.g. home broadband costs where an employee already had a broadband service. These must be reported on Form P11D. Most benefits and expenses linked to homeworking, e.g. the provision of equipment, don’t need to be reported.
Recovering VAT on speculative expenditure
You’re thinking of branching out into a new trade to complement the existing one. You’ve incurred costs on research and feasibility but if you decide not to go ahead are you entitled to recover the VAT paid on these?
As a registered business you’re entitled to reclaim (recover) VAT paid on purchases subject, of course, to a raft of HMRC rules and regulations. One of the fundamentals is that you can only recover VAT paid where the goods or services purchased have a “direct and immediate” link to VATable supplies that you make. HMRC makes this point several times in its various VAT guides.
Direct and immediate links
In places HMRC’s guidance can be misleading, especially if read in isolation. The “direct and immediate” condition for VAT recovery mainly relates to distinguishing between VAT incurred on purchases made for business purposes and those for non-business purposes. For example, VAT can’t be recovered where a business purchases goods which are used in making VAT-exempt sales (because they aren’t VATable). That said, the “direct and immediate” rule seems to preclude the recovery of VAT for speculative purchases that may or may not lead to making VATable supplies at an unspecified future time. HMRC’s interpretation of what counts as a “direct and immediate” link has been challenged. In several important rulings the courts have decided in favour of the taxpayers and criticised HMRC’s interpretation as being too strict.
What is input tax?
The good news is that the main VAT legislation comes to the rescue of businesses who incur speculative costs for an existing or new business. It says that input tax (which can be reclaimed subject to the usual conditions) includes VAT paid or payable on any goods or services “used or to be used for the purpose of any business carried on or to be carried on by him” . In plain English this means:
an existing business can recover VAT paid on expenses it plans to use for its current trade; and
VAT paid on expenses for a trade it has not yet commenced.
The legislation also means that if you haven’t started your business but are incurring costs, you can register as an “intending trader” and reclaim VAT on your paid purchases (as always, subject to the usual rules). This can allow you to recover VAT on costs which you would not be entitled to under the pre-registration rules for VAT input tax.
Usual rules apply
Before recovering VAT for speculative business expenditure you must make sure the other usual conditions are met:
the supply that may result from the expenditure must be VATable. If it’s exempt then you can’t recover the VAT. If it will be a mix of exempt and VATable supplies, or supplies for non-business purposes, you must make a reasonable estimate of the value of VATable supplies and claim a corresponding proportion of the VAT
you must have evidence to show that your business has paid the VAT, e.g. invoices.
You’re entitled to recover the VAT paid by your business on speculative expenditure as long as the supplies you intend to make as a result are VATable, i.e. not exempt or for private purposes. This rule applies even if the project the expenditure relates to doesn’t come to fruition.
Special reductions and late filing penalties
The First-tier Tribunal (FTT) has considered whether a taxpayer had a reasonable excuse for filing his tax returns late. While the issue was not unusual, the FTT’s ruling was. How might its decision help you reduce a late filing penalty?
Tough late filing penalties
Several years ago HMRC vastly ramped up the penalties it can charge if you submit a tax return late. Oliver Hampel (H) felt the full force of this when HMRC charged penalties for two late tax returns that equated to between a fifth and one third of his annual income.
The undisputed facts
When H’s business income fell sharply he decided to ditch his accountant and complete his personal returns himself. Unfortunately, his inexperience resulted in his 2015/16 and 2016/17 returns being submitted late and so HMRC demanded penalties. He appealed against them to the First-tier Tribunal (FTT) on the grounds that he had a reasonable excuse for the lateness. If the FTT agreed the penalties would be cancelled.
A reasonable excuse?
H’s first excuse was that he had trouble logging on to HMRC’s self-assessment system. Anyone who’s used HMRC’s self-assessment filing system will sympathise with H, as did the FTT. However, this did not relieve H of his responsibility. It was his fault that he left submitting his tax return to the eleventh hour when it was too late to get help. H’s alternative argument was that he was not sure where to report his income: on his personal tax return or that for his company. This is also a lame-duck argument for the same reason as H’s other excuse. He couldn’t shirk his responsibility to file a tax return simply because he didn’t understand the tax rules. The FTT could not accept either of H’s arguments as reasonable excuses and therefore the penalties had to stand.
That might have been the end of the matter for H but the FTT wasn’t done, and this time it was HMRC that came under fire. The FTT decided that the amount of penalties compared to H’s income meant that HMRC should have considered a “special reduction”.
The tax rules specifically allow for a special reduction of penalties in various circumstances.
HMRC failed to take account of H’s low income following his appeal against the penalties. The judge said that it is “clearly possible for a penalty imposed for failure to make a return to be disproportionate when compared to the taxpayer’s income”. Therefore, while the fixed penalties are usually justifiable the variable and daily penalties introduced more recently can soon add up to a sum which is unreasonably high and disproportionate; this was the position in H’s case. As a result, the FTT ruled that the penalties should be reduced to the fixed amounts, which in this case were £100 for the 2015/16 return and £400 for 2016/17.
The FTT did not accept that the taxpayer had a reasonable excuse for submitting his returns late and so confirmed that penalties were payable. However, it chose to substantially reduce them as the amounts were unreasonably high given the taxpayer’s income. HMRC should have considered this when the taxpayer made his appeal.
SEISS Action if claiming the 4th grant
Action to take if eligible for the 4th SEISS grant Feb-Apr 2021
Look out for communication from HMRC April 2021
HMRC will be contacting you in mid-April to let you know if you are eligible to claim the 4th SEISS grant for the quarter ending 30 April 2021.
This will be sent by letter, email or within HMRC’s online service and it will advise you of the earliest date you can make your claim.
Before making your claim
To make your claim you will need to gather together the following information:
• Your self-assessment unique taxpayer reference (UTR)
• National Insurance number
• Government Gateway user ID and password
• Your UK bank details including sort code, account number, name on the account and address linked to the account.
You may also need to answer questions about your passport, driving license or other information held on your credit file.
You may need to back up your claim
You will need to keep evidence that your business has suffered reduced activity. For example, business accounts show reduced activity, records of cancelled contracts or appointments, record of any dates you suffered reduced activity due to lockdown or similar government restrictions.
Additionally, you will need to keep details of the following:
• A record of dates you had to close due to government restrictions
• NHS Test and Trace instructions if self-isolating
• NHS instruction to shield
• Test results if diagnosed with coronavirus
• Letters from school regarding closures that required you take on additional child care
Making your claim
You can only apply online, and the online service is timed to open from late April 2021. Your letter from HMRC will advise you of the earliest date you can apply.
You must make the claim personally, we cannot do this for you.
Once you have completed the claims process you should receive your grant within 6 days.
We can help
Although we cannot directly make claims for clients we can help if you are unsure if you should make a claim or you are having difficulty completing the online application process.
Tax deductions for your buy-to-let property
In between tenants you’re doing some work on your rental property. How you categorise this - repairs or improvements - determines whether or not you’re entitled to an income tax deduction. What factors should you take into account?
In the last decade landlords of residential properties have had to cope with more changes to the tax rules than any other group. The changes have affected the tax treatment of income and outgoings. In this article we will take a close look at repair and improvement costs.
Room for improvement or just repair?
As a general rule, a “revenue” tax deduction can’t be claimed for the cost of improving your property. A revenue deduction reduces the amount of rental income liable to tax. Instead, the cost is “capital” and so deductible when working out the capital gain or loss you make when you sell the property. You might therefore have to wait decades for a tax deduction.
Conversely, the cost of repairing a property is a revenue expense and so reduces the income tax bill on rent for the year of expenditure. Naturally, it’s in your interest to attribute a cost to repairs rather than improvements.
Sometimes the distinction between a repair and an improvement isn’t clear and the tax legislation doesn’t provide any help. For example, if you add a conservatory to your rental property it’s an improvement cost.
But what if you completely replace an existing conservatory that had become dilapidated?
As a rule, an addition to a property, e.g. creating a new room by converting a loft or garage, will always be an improvement.
Partial or total repair?
The replacement of an entire element of a property may be a repair or an improvement. The scale and cost of works aren’t usually a factor. For example, the roof of your property was lost in a storm and replaced with equivalent materials; that would be a repair despite improving the value of the property. At one time HMRC usually argued that a repair that significantly affected the value of a property should be treated as an improvement (and so a capital expense) for tax purposes. These days its approach has softened.
As a rule of thumb, a like-for-like repair or replacement using similar materials to the original counts as a repair regardless of the scale. HMRC’s property income manual (PIM) confirms this. There’s an exception for such expenditure where the repair work is carried out on a property soon after purchase and the cost of the repairs was reflected in the price paid for the property.
Repairing or replacing equipment which is fixed to the property and has effectively become part of the structure, e.g. a heating system including a boiler, is treated in the same way as the structure. For example, a like-for-like replacement boiler and radiators is a repair and the cost qualifies for a revenue deduction . However, if the work included the addition of an extra radiator, the corresponding proportion of the cost would be capital.
Where possible you should categorise works as repairs. As a rule of thumb, a like-for-like repair or replacement using similar materials to the original counts as a repair regardless of the scale. This applies to the structure of the building and to equipment fitted to it such as boilers and water systems.
Is it time to add fuel to your benefits package?
Company cars continue to be a popular benefit in kind. Conversely, employer-paid-for fuel has a poor reputation for resulting in disproportionately high tax bills. Is this still justified or might it be time for another look?
Car versus car fuel
The calculation of tax and Class 1A NI on company cars provided as a benefit in kind is reasonably logical. It varies according to the original list price of the car and its CO2 emissions. The second factor is also used in the calculation of the taxable benefit where the employer pays for your fuel for private journeys made in a company car. However, the other factor has no link to the value of the fuel but is a fixed amount set by the government each year. For 2021/22 it’s £24,600. This can lead to some eye-watering tax and NI bills.
Example. Dave, a higher rate taxpayer, is the sole director and shareholder of Acom Ltd. It provides him with a company car - currently a five-year-old BMW with CO2 emissions of 178g/km. Acom also pays for Dave’s fuel for private journeys. The factors for working out the car fuel benefit are 37% (based on the car’s CO2 emissions) and the fixed amount of £24,600. This means Dave’s tax bill for having his car fuel bill paid for is £3,640 (£24,600 x 37% x 40%). Assuming fuel is £1.30 per litre and Dave gets 34 miles to the gallon from his BMW, he would have to drive 20,940 miles on private journeys before he would see any financial advantage from the arrangement.
The position is actually worse than this as Acom will have to pay Class 1A NI of £1,256 (£24,600 x 37% x 13.8%) for providing the benefit. A cost to Acom is a cost to Dave because he owns the company. This means he would have to drive considerably more than 20,940 miles before the car fuel benefit was a worthwhile perk.
The good news for Dave is that he can avoid the tax and NI bills on the car fuel by reimbursing Acom for the cost of the fuel. This is known as “making good” the benefit, and Dave can do it any time up to and including 6 July following the end of the tax year. This gives him time to work out if he’s driven enough private miles to make the benefit worthwhile.
Time to change?
Dave has decided to change his company car for a hybrid with CO2 emissions of 44g/km and an electric range of 40 miles. Having experienced the horrendous tax and NI bill he’s decided that Acom will not pay for fuel for private motoring, or if it does he’ll make good the cost and so avoid the tax and NI charges. However, it might be worth him reconsidering this.
The percentage factor for car and car fuel benefits for hybrid cars is much lower than for petrol and diesel vehicles.
Example. To make a like-for-like comparison with our previous example we’re using the figures for 2021/22 and assuming the hybrid car and fuel for private mileage was provided for the whole tax year. The tax and Class 1A bill for car fuel benefit would be £688 (£24,600 x 7% x 40%) and £237 (£24,600 x 7% x 13.8%) respectively. The tax and NI looks much more reasonable. However, the use of the car in electric mode will boost the MPG considerably and so Dave’s petrol costs will be lower. He should still therefore make the calculation after the end of the tax year to determine if making good the cost of fuel is a good option. Note that there’s no fuel benefit if Acom pays Dave’s electricity bill for charging his new car. Instead, the taxable amount is the cost to the company.
The tax and Class 1A NI bills for hybrid cars are significantly lower than for those powered only by fossil fuels. This can make car fuel benefit a tax-efficient perk, but it can depend on the ratio of private miles driven using fossil fuels to electric only.
Can you extract cash to cover your living expenses?
If you operate through a limited company, for example as a personal or family company, you will need to extract funds from your company in order to use them to meet your personal bills. There are various ways of doing this. However, a popular and tax efficient strategy is to take a small salary which is at least equal to the lower earnings limit (set at £6,240 or 2021/22) to ensure that the year is a qualifying year for state pension and contributory benefits purposes, and to extract further profits as dividends.
However, this strategy requires the company to have sufficient retained profits from which to pay a dividend. If the company has been adversely affected by the Covid-19 pandemic, it may have used up any reserves that it had. As dividends must be paid from retained profits, if there are none, it is not possible to pay a dividend.
Are there other options for extracting funds to meet living expenses?
Pay additional salary or bonus
Unlike a dividend, a salary or bonus can be paid even if doing so creates a loss – it does not have to be paid from profits. However, this will not be tax efficient once the salary exceeds the optimal level due to the National Insurance hit and the higher income tax rates applicable to salary payments.
Take a director’s loan
If it is expected that the company will return to profitability, taking a director’s loan can be an attractive option. Depending when in the accounting period a loan is taken, a director can benefit from a loan of up to £10,000 for up to 21 months free of tax and National Insurance. If the company has returned to profitability within nine months of the year end, a dividend can be declared to clear the loan in time to prevent a section 455 tax charge from arising. If the account is overdrawn at the corporation tax due date nine months and one day after the year end, a section 455 tax charge of 32.5% of the outstanding amount must be paid by the company (although this will be repaid after the corporation tax due date for the accounting period in which the loan balance is cleared).
Put personal bills through the director’s loan account
Another option is for the company to pay the bills on the director’s behalf and to charge them to the director’s loan account. Again, if the company has sufficient profits to clear the outstanding balance within nine months of the year end, a dividend can be declared to prevent a section 455 tax charge from arising. A benefit in kind tax charge (and a Class 1A National Insurance liability on the company) will also arise if the outstanding balance is more than £10,000 at any point in the tax year.
Provide benefits in kind
Use can be made of various tax exemptions, such as those for trivial benefits and mobile phones, to provide certain benefits in kind in a tax-free fashion.
If the company is run from the director’s home, the company can pay rent to the director for the office space. This should be at a commercial rate, and the director will pay tax on the rental income. However, there is no National Insurance to worry about and the rent can be deducted in computing the company’s profits, even if this creates a loss.
As a bonus, if the extraction policy creates a loss, it may be possible to carry the loss back to generate a much-needed tax repayment.
NIC and company directors
Special rules apply to company directors when it comes to calculating their Class 1 National Insurance liabilities.
Why the rules
Directors, particularly of personal and family companies, can control how and when they are paid and, in the absence of special rules, would be able to reduce their Class 1 National Insurance liability by manipulating the earnings period rules. The rules circumvent this.
Annual earnings period
Company directors have an annual earnings period for National Insurance regardless of their actual pay frequency. This means that if they do not opt to apply the alternative arrangements, their National Insurance liability is calculated cumulatively by reference to the annual thresholds.
For 2021/22 these are as follows:
A director is paid £8,000 a month. In month 1, he pays no National Insurance as his earnings are below the annual primary threshold of £9,568.
In month 2, his earnings for the year to date are £16,000. By applying the annual thresholds, his total liability on his earnings to date of £16,000 is £771.84 (12% (£16,000 - £9,568)). As he paid no National Insurance in month, his liability for month 2 is £771.84.
For months 3 to 6 inclusive, his earnings for the year to date fall between £9,568 and £50,270. Consequently, he pays employee’s National Insurance at 12% on his earnings for the month of £8,000, equal to £960 each month.
In month 7, his earnings for the year to date are £56,000 (7 months @ £8,000 a month), on which total contribution of £4,998.84 (12% (£50,270- £9,568)) + 2% (£56,000 - £50,270)) are due. He has already paid £4,611.84 (£771.84 + (4 x £960)), leaving £387 due for the month.
As his earnings for the year have now exceeded the upper earnings limit, he will pay National Insurance at the rate of 2% of all future payments – a liability of £160 per month.
Applying the annual earnings period rules means that the contribution liability falls unevenly throughout the year. The liability for the year is £5,798.60 ((12% (£50,270 - £9,568) + ((2% (£96,000 - £50,270))).
As seen in the example above, calculating the liability by reference to the annual thresholds on a cumulative basis each time the director is paid means that their pay is uneven throughout the year. To overcome this, the director can opt for their National Insurance to be calculated throughout the year on their earnings for each earnings period using the relevant thresholds for the earnings period, as for employees who are not directors, with an annual recalculation on an annual basis at the end of the year.
If this basis is adopted, the director in the above example would pay National Insurance of £483.26 (12% (£4,189 - £797)) + (2% (£8,000 - £4,189))) each month for months 1 to 11, with a final payment of £482.74 in month 12.
Over the course of the year, the annual liability (£5,798.60) is the same which-ever method is used, but collected differently.
Directors can choose the method that suits them best.
VAT on charging electric vehicles
HMRC has published new VAT guidance on its policy for the supply and purchase of electricity for electric vehicles.
Fuel for vehicles. There are special rules for VAT on fossil fuels provided or purchased for vehicles. HMRC’s policy paper now sets out its view on electricity provided or bought for charging electric vehicles.
Providing electricity. VAT-registered businesses must charge the standard rate (20%) for electricity for charging electric vehicles except where the supply is ongoing, made at a person’s home and is less than 1,000 kilowatt hours per month, in which case the reduced rate (5%) applies. This means if you pay part of an employee’s electricity bill to cover charging their car at home, you must account for VAT at the reduced rate of VAT on the amount you pay them.
Reclaiming VAT. If you’re a sole trader you can reclaim VAT paid on electricity for charging your car etc. at home or at a public charging point to the extent the electric vehicle is used for your business. Where the cost can’t be specifically identified as relating to business or private travel, you must make a fair and reasonable estimate and reclaim only the business element. The position is slightly different for employees of sole traders and other businesses.
Employees. Your business can’t reclaim the VAT where you reimburse an employee for the cost of charging their vehicle at home, regardless of whether it’s used for business journeys. Conversely, you can reclaim the full amount of VAT for the supply of electricity used to charge the electric vehicle at your premises or a public place. This includes the electricity for private journeys. However, in that case you must make a fair and reasonable estimate (using mileage records kept by your employees) to account for standard-rate VAT on the value of electricity used for private mileage. Alternatively, you can recover VAT on only the business element.
If you pay an employee for charging an electric vehicle at home you must account for VAT at the reduced rate. You can’t reclaim VAT on home electricity costs incurred by an employee but you can for charging costs incurred elsewhere.
Tax relief on loans to close companies
Family and personal companies are often ‘close’ companies. Broadly, this is one that is controlled by five or fewer shareholders or any number of shareholders all of whom are directors.
In a close company, the directors and shareholders may borrow money from the company (in respect of which a tax charge may arise if the loans are not repaid by the time that the corporation tax for the period in which the loans were made is due nine months and one day after the end of that period).
The directors and shareholders may also lend money to the company. This may be more prevalent over the last 18 months as a result of the Covid-19 pandemic. Where the director borrows money in order to lend it to the close company, tax relief may be available. Tax relief may also be available where a shareholder borrows money to buy more shares in the company.
Availability of interest relief
Individuals are only entitled to tax relief for interest payments on certain loans. The list of eligible loans include a loan to buy an interest in a close company.
An individual can benefit from tax relief if they borrow money to buy ordinary shares in a close company in which they own at least 5% of the ordinary share capital (either alone or with associates). Where the 5% test is not met, relief is available for a loan to buy shares in a close company in which the individuals owns some shares and in which they work for the greater part of their working time in the management and conduct of the company’s business, or that of an associated company.
Tax relief is also available if the individual borrows money to lend it to a close company in which they have an interest, as long as the money is used wholly and exclusively for the purposes of the business or that of an associated company, provided that company is a close company and is not a close investment holding company. Again, to qualify for the relief, the individual must either own 5% of the ordinary share capital (either alone or with associates), or own shares in the company and spend the greater part of their working time working for the company, or an associated company.
The relief is lost if the borrowings are recovered from the close company. This would be the case if, say, a directors borrowed £50,000 to lend to the close company and the company repaid this, but the director did not clear the original loan. In this situation, the director would not be able to continue to claim tax relief on the interest paid on the original loan.
Relief must be claimed
Tax relief on eligible borrowings must be claimed. This can be done via the self-assessment tax return.
The income tax relief cap applies – this is the greater of £50,000 and 25% of adjusted net income.
New lower SDLT residential threshold
Back in July 2020, the residential stamp duty land tax threshold in England and Northern Ireland was increased to £500,000 to help stimulate the property market after the first wave of the Covid-19 pandemic. The increased threshold was originally due to apply from 8 July 2020 until 31 March 2021, but as the Covid-19 pandemic continued to run, the Chancellor announced at the time of the 2021 Spring Budget, that the temporary threshold would remain at £500,000 until 30 June 2021. From 1 July 2021, the threshold falls to £250,000, remaining at this level until 30 September 2021, before reverting to the usual level of £125,000 from 1 October 2021. For first time buyers, the threshold reverted to £300,000 from 1 July 2021 for properties costing £500,000 or less.
Similar initiatives were introduced in Scotland in relation to land and buildings transaction tax (LBTT) and in Wales in relation to land transaction tax (LTT). In Scotland, the LBTT threshold was increased to £250,000 from 15 July 2020 until 31 March 2021. However, there was no extension beyond 31 March 2021, and the threshold reverted to £145,000 from 1 April 2021. In Wales, the LTT was increased to £250,000 from 27 July 2020, originally until 31 March 2021. However, this was extended until 30 June 2021. The threshold reverted to £180,000 from 1 July 2021.
Missed the 30 June deadline
If you are looking to buy property in England or Northern Ireland and missed the 30 June 2021 deadline, there is still the opportunity to benefit from a reduced temporary threshold, as long as the purchase completes by 30 September 2021.
Completing by this deadline could save up to £2,500.
For SDLT purposes in England and Wales and for LTT purposes in Scotland, investors and second-home owners were able to benefit from the increased threshold, with the second property supplement (3% for SDLT purposes and 4% for LTT purposes) being applied to the rates as reduced. However, those buying second homes in Wales were not able to benefit.
Julia is looking for a property to let out as a holiday let. She finds a property in June 2021 and her offer of £400,000 was accepted.
If she is able to complete by 30 September 2021, she will pay SDLT of £19,500 ((£250,000 @ 3%) + (£150,000 @ 8%).
However, if she misses this deadline, completing on or after 1 October 2021, she will pay SDLT of £22,000 ((£125,000 @ 3%) + (£125,000 @ 5%) + (£150,000 @ 8%)).
Completing by 30 September 2021 will save her £2,500 in SDLT.
Termination payments and Class 1A National Insurance
As the Coronavirus Job Retention Scheme comes to an end, employers with employees who are still on furlough will need to decide whether they are able to bring the employee back to work, either full time or part time, or whether they will have to terminate the employee’s employment.
When terminating an employee’s employment, the employer may need to pay Class 1A National Insurance contributions on a termination award made to the employee.
Taxation of termination payments: Recap
Where an employee’s employment is terminated, the employee may receive termination payments, such as pay in lieu of notice and ex-gratia lump sums, in additional to normal wages and salary payments.
Normal payments from the employment, such as salary and holiday pay, are taxed as earnings and are liable to employee’s and employer’s Class 1 National Insurance contributions. However, the treatment of termination payments depends on whether, and if so the extent, to which they exceed what is known as the employee’s ‘Post Employment Notice Pay’ (PENP). Detailed consideration of how this is determined is outside the scope of this article, but broadly, PENP is the amount that the employee would have earned had they worked their notice period.
PENP is taxed as earnings and is liable to employee’s and employer’s Class 1 National Insurance.
Where the employee’s termination payment exceeds their PENP, the first £30,000 of the excess is tax-free. Amounts over £30,000 are taxable but not liable to employee’s National Insurance.
Employer liability to Class 1A NIC
Where a termination payment exceeds the £30,000 threshold, since 6 April 2020, the employer must pay Class 1A National Insurance on the excess over £30,000 at 13.8%.
Unlike Class 1A National Insurance contributions on benefits-in-kind, the Class 1A payable on a termination payment is not included in the Class 1A liability reported on the P11D(b); instead it is reported to HMRC via Real Time Information (RTI) on the Full Payment Submission (FPS) for the period in which the termination payment was made to the employee.
The Class 1A National Insurance payable on the termination award must be paid over to HMRC with the tax and Class 1 National Insurance for that period, i.e. by 22nd of the month where payment is made electronically or by the 19th of the month where payment is made by cheque, rather than with the Class 1A on benefits in kind, which must be paid by 22 July after the end of the tax year where payment is made electronically (or by 19 July where payment is made by cheque).
An employee has been on furlough since March 2020. In September 2021, his employer decides that they are unable to keep the employee on. The employee’s employment is terminated with effect from 1 October 2021.
The employee receives a termination payment of £100,000, paid to him on 1 October 2021. The employee’s PENP is £15,000. The excess over the PENP is £85,000 (£100,000 - £15,000), of which the first £30,000 is tax-free. The remaining £55,000 is taxable and liable to Class 1A National Insurance.
The employer’s Class 1A National Insurance liability is £7,590 (£55,000 @ 13.8%). The payment is made to the employee in month 6 (month to 5 October 2021). The employer’s Class 1A National Insurance on the termination payment must be paid to HMRC with the PAYE tax and Class 1 National Insurance for month 6. Payment must be made by 22 October 2021 where it is made electronically, or by 19 October 2021 if payment is made by cheque.
Employers terminating employees’ employments will need to budget for the Class 1A liability, as well as the cost of the termination packages.
Claim tax relief for additional costs of working from home
During the Covid-19 pandemic, the advice was ‘work from home if you can’. As a result, millions of employees found themselves working at home, often at very short notice. Many still have not returned to the workplace, and homeworking (whether fully or flexibly) is here to stay.
Employees will generally incur additional costs as a result of working from home. They will use more electricity to run their computer and light their workspace and may use more gas as a result of having the heating on during the day.
While for many years there has been a statutory exemption that allows employers to meet or contribute towards the additional costs of working from home, in recognition of the homeworking requirements imposed by the pandemic, employees who do not receive homeworking payments from their employer are able to claim tax relief for the extra household costs that they have incurred while working from home.
Exemption for costs met by the employer
Employers can pay employees a homeworking allowance of £6 per week (£26 per month) tax-free, and without the employee having to demonstrate that they have actually incurred additional household costs of at least this amount as a result of working from home. The tax-free amount is the same, regardless of whether the employee is required to work from home full-time or one day a week. Consequently, the payments can be made to employees who work flexibly, working from home part of the time and at the employer’s workplace part of the time.
Where the employee’s actual additional household costs as a result of working from home are more than £6 per week, the employer can meet the actual costs tax-free, as long as the employee is able to provide evidence in support of the actual additional costs.
Tax relief for employees
Employees who have been required to work from home can claim tax relief for the additional costs of doing so where these are not met by the employer. HMRC will accept claims of £6 per week/£26 per month without needing evidence of the actual additional costs. Where these are higher, the higher amount can be claimed, as long as this can be substantiated.
HMRC are now accepting claims for 2021/22. Claims can be made online at www.tax.service.gov.uk/claim-tax-relief-expenses/only-claiming-working-from-home-tax-relief?_ga=2.193253997.1398232652.1624373729-980780301.1612354164.
Relief is given for the full tax year, even if the employee returns to the workplace before 5 April 2022. Employees who were entitled to the relief for 2020/21 can also claim for that year if they have not yet done so.
Where an employee is required to complete a self-assessment tax return, the claim can be made on the return.
A claim of £6 per week (£312 for the year) will save a basic rate taxpayer £62.40 in tax and a higher rate taxpayer £124.80 in tax.
SDLT Multiple Dwellings relief
Multiple dwellings relief’ (MDR) allows a rate to be charged at the percentage payable on the ‘average value’ price (referred to as the ‘Average Value SDLT’ (AVSDLT)) should more than one property be purchased at one time, rather than on the total consideration. MDR is only available for residential transactions.
The purpose of this relief is to simplify the calculation of SDLT when a single transaction includes the purchase of more than one dwelling. As such, rather than separately calculating the SDLT on each property acquired, SDLT is computed as follows:
Calculate the ‘AVSDLT’ i.e. total dwellings consideration/ total number of dwellings.
Multiply the resultant figure by the total number of dwellings.
The answer is the total SDLT liability.
NOTE 1: The SDLT must be at least equal to 1% x total dwellings consideration.
NOTE 2: the dwellings are not the main residence of the purchaser and as such the additional rate of 3% applies.
A single transaction (post 1 October 2021) comprises the purchase of 4 'dwellings' for £950,000.
£950,000/4 = £237,500 per dwelling
Tax per dwelling =
3% x £125,000 = £3,750
5% x £112,500 = £5,625
£9,375 x 4 dwellings = £37,500
The minimum tax is 1% of the purchase price = £9,500
Tax payable without claiming MDR would be £67,250.
Definition 1: 'Dwelling'
Legislation does not define 'dwelling' but is widely accepted as being a building or part of a building that accommodates all of a person's basic domestic living needs. The definition has seen granny annexes, converted garages, pool houses, converted party barns and garden offices all qualify for the MDR relief.
The nearest the legislation gets to providing a definition is FA 2003 sch 6B para which states that a dwelling is:
‘A building or part of a building counts as a dwelling if-
It is used or suitable for use as a single dwelling, or
It is in the process of being used constructed or adapted for such use.’
One area where there have been several tax cases that have considered this definition centre round 'granny flats'. HMRC has confirmed that provided the granny flat is a self-contained dwelling and the main house comprises more than two thirds of the total, then MDR can be claimed. One of the main issues is where a property has an additional dwelling that cannot be accessed independently. For example, in a recent tax case relief was refused as there was no door separating the house from its annexe; it also did not have a separate postal address, council tax or utility supply.
The relief does not apply to the transfer of a freehold reversion or head lease where a dwelling has a long lease of 21 years or more.
Definition 2 - 'Single transaction'
MDR can be claimed where the transaction involves an interest in at least two dwellings or at least two dwellings and some other property.
Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease then the SDLT rules treat those dwellings (for that transaction alone) as being non-residential property. This rule applies automatically. Therefore, depending on the figures, it might be better not to make an MDR claim. If one is made it is made on a land transaction return (due within 30 days of completion) or in an amendment to a return, the time limit for which is 12 months from the filing date
Tax consequences of 'illegal' dividends
Dividends can only be declared out of a company’s available undistributed profits, and if the payments are to be legal then the correct administrative procedures need to be followed. If a director sanctions illegal dividend payments, there can be significant tax for both the individual concerned and the company even if the director was unaware of the non validity of the dividend at the time.
Just because the company's bank account is in credit does not necessarily mean that sufficient profit has been made to cover the dividend payment and it is the amount of 'retained profit' that needs to be calculated whenever declaring a dividend.
‘Retained profit’ is defined in the Companies Act 2006 as being ‘accumulated realised profits less ....accumulated, realised losses'. Therefore, a dividend can be paid in a loss-making period provided that there are sufficient 'distributable'/retained profits brought forward making an overall profit. Conversely a dividend cannot be paid if a profit had been made in an accounting period but retained losses brought forward mean that the overall result is a loss.
Tax implications - Shareholder
If a dividend is declared and there was insufficient retained profit at the time such that the dividend was 'illegal', then the dividend is treated as void and the shareholder is treated as not having received a distribution. Where the recipient shareholder knows or should have known that a dividend (or part thereof) is illegal, that shareholder is liable to repay the dividend (or the proportion that exceeds available reserves) to the company if it has already been distributed. It would be difficult for an active director/shareholder to state that he or she did not know that a dividend should not have been paid (this might not necessarily be the case if the director/shareholder was not that involved with the company). Indeed, HMRC's Corporation Taxes Manual at 5205 states that ‘when dealing with private companies controlled by directors who are shareholders, such a member [shareholder] ought to know the status of the dividend’.
If the dividend is not repaid and the shareholder is also a director or employee of the company, the company will be deemed to have made a loan to the shareholder. As it is unlikely that interest would have been paid, this deemed loan will trigger a benefit-in-kind under the rules for taxable loans to employees; a notional interest rate being charged (currently 2.5% per annum), on which the employee will be taxable should the loan be more than £10,000 at any time in the tax year. P11D forms will need to be completed to account for the ‘beneficial interest’ on loans of more than £10,000. As with all P11D benefits, Class 1A National Insurance will need to be paid by the company on the benefit.
Tax implications - Company
HMRC would probably argue that the dividend represents a 'loan to a participator', on which the company is liable to a tax charge under CTA 2010 s 455. Such a charge arises when a company lends money to its directors or employees and the loan is not repaid within nine months and one day of the accounting year end.
The rate of tax payable is the same as the higher 'dividend tax' rate of 32.5% on the gross amount paid. This amount is payable even if the company is making a loss and there is no corporation tax due but only if the loan is outstanding at the due date of corporation tax.
To cancel this charge the loan needs to be repaid or written off by the due date of nine months and one day after the year-end. Once the loan is repaid or written off, the s455 tax will also be repaid nine months after the accounting end date in which the repayment is made; partial repayments attracting a pro rata refund.
Showing illegal dividends in the company accounts can make the company look insolvent with negative balances on the balance sheet; this can affect the company’s ability to gain credit from a lender or suppliers and may breach current agreements - it may also provide HMRC with an excuse to start an enquiry.
How to persuade HMRC a mistake wasn’t deliberate
HMRC claimed that a taxpayer had deliberately made errors on his tax return. The taxpayer disputed this and took his argument to the First-tier Tribunal (FTT). Why did he think this was worth the effort and what did the FTT decide?
HMRC categorises mistakes in tax returns and other documents as innocent, careless or deliberate. If in the deliberate category and they result in too little tax being paid, the rules allow HMRC to hike the penalties. The level of extra penalties and the chance to reduce them persuaded Mr Issa (I) to challenge HMRC’s view at a First-tier Tribunal (FTT).
I made errors on his tax return. This resulted in him underpaying tax by more than £60,000. He hadn’t included pay from his employer when made redundant, and he didn’t mention that a loan from his employer had been written off. His argument was that he’d followed HMRC guidance because he had used figures from his P45 and P60 on his tax return. Plus, he didn’t know the loan write off counted as taxable income. When he completed his tax return he hadn’t realised that his employer had failed to send him a P60 or P11D covering all the earnings and the benefit in kind (the written-off loan). HMRC decided these errors were deliberate errors so in addition to the tax it demanded a penalty of nearly £25,000. You’re not expected to be a tax expert but you should realise if a matter is complex or unusual, such as redundancy or property sales. You must take “reasonable care” in deciding what figures to put on your tax return. If you’re not sure, take extra steps to get it right, e.g. consult HMRC’s guidance or a tax advisor.
HMRC said it had challenged one of I’s tax returns before when he had not declared a benefit in kind and charged a penalty for a careless rather than a deliberate error . Because of this HMRC argued that this time I should have known the additional amounts needed to go on his tax return or at least investigated the matter further.
There’s a lot at stake if HMRC alleges deliberate behaviour; remember the burden of proof is on it to show it and not you to disprove it. A deliberate error is when someone knowingly provides a document containing an error, intending HMRC to rely on it as accurate, or they consciously choose not to find out the proper tax treatment. Trap. HMRC can go back up to 20 years to collect tax (plus interest and penalties) if an error was deliberate. If the error is careless, it can only go back six years. Plus, for deliberate errors, penalties start at 35% of the underpaid tax and can be up to 70%. Where the error is concealed from HMRC, the minimum penalty is 50% and the maximum is 100%.
The FTT decided in favour of I. It wasn’t satisfied that HMRC had shown he intended to mislead or that it was reasonable that he should have taken additional advice. His past errors did not prejudice the more recent ones.
It’s always a good idea to consider how your behaviour might look to HMRC. Check that the information you use to complete your tax return is reliable, and it’s the sort HMRC would expect you to use. Make sure you can show a genuine attempt to follow HMRC guidance. As a minimum, read basic HMRC guidance on filling in tax returns. If you follow these steps HMRC will find it hard to argue any mistake you make is deliberate.
The FTT ruled for the taxpayer so HMRC must reduce the penalties. If HMRC argues you’ve made a deliberate mistake, set out the steps you have taken to get things right. Show how any errors are accidental and that there was no intention to hide anything.
Limited cost trader - managing purchases tax efficiently
You’re considering whether to join the VAT flat rate scheme (FRS). Your bookkeeper has warned that you might be classed as a “limited cost trader” which will nullify the VAT savings that the scheme offers. Is there a way around this?
Joining the FRS
A VAT-registered business can join the flat rate scheme (FRS) if it expects its net of VAT turnover to be £150,000 or less in the following twelve months. You can continue to use it until your turnover exceeds £230,000 including VAT. You only need to check this threshold once a year, on the anniversary date of when you first joined.
Once in the scheme you continue to charge your customers VAT as usual but instead of passing all of it to HMRC, minus VAT you’ve paid on purchases, you only pay a proportion of it without deducting any purchase VAT (so-called input tax).
Flat rate percentage
The proportion of VAT you pay to HMRC depends on the type of business you operate. For example, the percentage rate for photographic services is 11%. This means that a photographer who made sales of, say, £30,000, including VAT of £5,000, in a quarter would account to HMRC for just £3,300. But generally they wouldn’t be entitled to reclaim any input tax paid on purchases.
Depending on how much this is the business will make a VAT profit from the FRS of between zero and £1,700 (£5,000 - £3,300).
In 2017 anti-avoidance rules were introduced to prevent businesses making significant profits from the FRS . This was achieved by creating a special FRS rate of 16.5% for so-called limited cost traders (LCTs).
Limited cost trader
The LCT percentage applies for a VAT return where your purchases of “relevant goods” don’t exceed £250 including VAT and 2% of your gross sales (see The next step ). For example, if your sales in a VAT quarter were £30,000 and your purchases £500, you would have to use the LCT percentage because they were less than £600, i.e. 2% of your sales.
Checking your purchases
The test of whether the LCT percentage applies must be carried out every time you submit your VAT return. This means your business could be a LCT one VAT quarter but not the next.
It’s possible to avoid the LCT rules by planning your purchases of relevant goods so that they are condensed into fewer VAT return periods.
Example. Acom Ltd, which provides photographic services, uses the FRS . Typically its sales are £45,000 including VAT per quarter and its purchases, £750. This means the LCT percentage applies for each VAT return and Acom must account to HMRC for VAT of £7,425 (£45,000 x 16.5%). To avoid the LCT it must purchase relevant goods in the quarter with a total exceeding £900, i.e. 2% of gross sales. If Acom was able to condense its purchases into three quarters, i.e. £1,000 each rather than £750, it would only be an LCT in one quarter out of four. Where the LCT percentage didn’t apply it would have to account for VAT of £4,950. This would save it VAT of £2,425 for each quarter it was not an LCT.
If you use the FRS and there’s a risk of the limited cost trader percentage applying, review your purchasing plans to see if it can be avoided for at least some VAT returns. This can be achieved by condensing your purchases into a shorter period. The VAT savings can amount to thousands of pounds each quarter.
Take dividends while you can
For personal and family companies, a tax efficient strategy for extracting profits is to take a small salary and to extract any further funds needed outside the company in the form of dividends. However, while there are no restrictions on taking a salary if the company is making a loss, the same is not true of dividends.
Need for retained profits
Dividends can only be paid out of retained profits (i.e. profits left in the business after corporation tax has been paid).
However, if a company make a loss for a particular year, this does not necessarily preclude the payment of a dividend, as long as the company had retained profits at the start of the year, and the loss has not completely eliminated those profits.
Andrew runs a personal company A Ltd. He prepares accounts to 31 July each year. At 1 August 2020, he had retained profits of £20,000. He expects to make a loss for the year to 31 July 2021 of £5,000. He will have retained profits available after taking account of the predicted loss of £15,000 from which to pay dividends.
If a company needs funds outside the business and is unsure regards to future profitability, it may be worthwhile taking dividends while there are retained profits available.
Using the figures in the above example, assuming that Andrew has cash available, he may wish to extract all his retained profits as a dividend while he can to benefit from the more favourable tax treatment of dividends. If he makes further losses, his remaining profits may be eliminated, removing the option of taking a dividend.
The dividend will be tax-free to the extent to which it is covered by the dividend allowance (set at £2,000 for 2021/22) and any unused personal allowance. Thereafter, dividends (treated as the top slice of income) are taxed at 7.5% to the extent to which they fall in the basic rate band, at 32.5% to the extent to which they fall in the higher rate band and at 38.1% if they fall in the additional rate band. There is no National Insurance on dividends.
It is prudent to prepare management accounts to show that the company had retained profits at the time at which the dividend was paid, in case of a challenge by HMRC.
No retained profits
In the absence of retained profits, it is not possible to pay a dividend; any payment made that is classed as a dividend, will be made illegally and may be challenged by HMRC and reclassified as a salary or bonus payment, and taxed accordingly.
However, if the company is loss making, but funds are need to meet personal liabilities, it is possible to pay a higher salary or a bonus, even where this increases the amount of the loss. The salary or bonus payment, and any associated employer’s National Insurance, can be deducted in working out the taxable loss, which may be carried back to generate a repayment of corporation tax.
Why file your tax return early?
You’ve seen HMRC’s recent publicity about the advantages of filing your self-assessment tax return early. It says it can reduce your 31 July tax bill. How does this work and what other advantages might there be to filing your tax return early?
As you know, the usual deadlines for filing your self-assessment returns are 31 October for paper returns and 31 January online. Because of the pandemic HMRC extended the deadlines for 2019/20 tax returns but it has said that it doesn’t plan to repeat this for 2020/21.
Get your tax bill down
A good reason for getting your return done sooner rather than later is to reduce your self-assessment payments on account for 2020/21 (if you’re required to pay them). The second of these must be paid by 31 July 2021. It’s usually equal to half the previous year’s tax bill but if your tax liability for 2020/21 is less than for 2019/20, you can reduce the payment accordingly. While you can estimate and reduce your payment without filing your return, this won’t give you the same level of certainty. If you underestimate your tax payment you will have to pay interest on any shortfall.
If you file before the end of July HMRC will revise the 2021 payments on account to reflect your actual tax liability instead of the provisional figure.
Report coronavirus support payments
Don’t forget that coronavirus support payments like the Self-Employment Income Support Scheme (SEISS) are taxable. The first three SEISS grants are taxable for 2020/21.
Tax returns that don’t show SEISS grants in the right boxes are cause problems for HMRC and may delay it processing them. There are boxes for the SEISS, the Coronavirus Job Retention Scheme, Eat Out to Help Out Scheme, and any other HMRC coronavirus support scheme. This also applies for grants etc. from local authorities which vary depending on which UK country you’re in.
Filing the return means saying you’ve reviewed amounts you’ve claimed under these schemes and that you think they’re correct. Make time to do this properly before you file the tax return.
The second good reason for filing your self-assessment early, even if it doesn’t reduce the tax bill, is that you’ll have certainty about your tax payments for 31 January and 31 July 2022. This means that if you’re concerned that you may not be able to meet the payments, you can start negotiations with HMRC on time to pay sooner.
If your profits have fallen but you don’t file your return by 31 July 2021, do it as soon as you can after this date. HMRC will refund any tax you have overpaid on account soon after it receives your return.
Access to loss relief and refunds
The third reason is an earlier opportunity to claim tax relief for losses under the new rules on carry back loss relief. But check this with your accountant first; they might also need your figures for 2021/22 before you decide what’s best.
If profits or other income have taken a hit for 2020/21, filing your return by 31 July 2021 may reduce the self-assessment payments on account for that year. Don’t forget to factor in tax on coronavirus support.
Collection of tax debts post Covid-19
During the Covid-19 pandemic, HMRC paused much of their tax collection work, both to allow resources to be diverted to other activities, such as administering the various coronavirus support initiatives, such as the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme, and to provide those whose finances were adversely affected by the pandemic with a bit of breathing space.
However, as the country starts to emerge from the pandemic HMRC have once again turned their focus to the collection of tax debts, publishing a policy paper setting out their approach.
Contact from HMRC - HMRC will generally contact taxpayers who have unpaid tax bills and who have not come to an agreement with HMRC regarding the payment of those bills. The contact may be by post, by phone or by text. Anyone who receives contact that purports to be from HMRC should check that the contact is genuine – HMRC has published guidance on the Gov.uk website containing tips to spot approaches that may be fraudulent.
Any contact from HMRC should not be ignored – HMRC will deal with taxpayers who work with them more favourably than those who resist attempts to get in touch. Those that do resist may be visited by an HMRC officer.
Ideally, taxpayers who are struggling to pay should contact HMRC to broker an agreement rather than waiting for HMRC to contact them.
Pay if you can - The briefing makes it clear that HMRC expect those taxpayers who are behind with their tax bills to pay the tax that they owe if they can.
Being able to pay may involve taking advantage of the financial support packages available and taking out a loan, such as one under the Recovery Loan Scheme, to provide the necessary funds to clear the tax debt.
If a taxpayer needs time to arrange a loan, HMRC may agree to defer the debt for a short period of time until the finance is agreed.
Set up a time-to-pay arrangement - If the taxpayer is unable to pay the outstanding tax in full, they may be able to agree a time-to-pay arrangement with HMRC allowing payment to be made in instalments.
If the client has already been approached by HMRC, they should contact the tax office that sent the communication to discuss setting up a time-to-pay arrangement. Otherwise, they can contact HMRC’s Payment Support Service (0300 200 3825). When making the call, the taxpayer should have their unique taxpayer reference and bank details to hand.
HMRC will want to know the amount of the bill that they are struggling to pay and why they are having problems paying it. They will also want to know what the client has done to try and get the money together. They will also take into account how much the client can pay immediately, and how long they may need to pay the outstanding balance.
Once a time-to-pay arrangement has been agreed, it is important that payments are made on time in accordance with the arrangement. Failure to do so may trigger enforcement action.
Enforcement action - If the taxpayer fails to communicate with HMRC or stick to the terms of an arrangement, from September 2021, HMRC may also take enforcement action to recover the debt. They have a range of powers available, including taking control of goods, summary warrants and court action (including insolvency proceedings).
While HMRC will endeavour to support viable businesses, if they judge that a business has little chance of recovery, they will act to seek to recover any tax that may be due.
Partner note: HMRC Policy Paper Collection of tax debts as we emerge from coronavirus (Covid-19) (see www.gov.uk/government/publications/hmrc-issue-briefing-collecting-tax-debts-as-we-emerge-from-coronavirus-covid-19/collecting-tax-debts-as-we-emerge-from-coronavirus-covid-19).