NICs and the self-employed
Following the Spring Budget, the National Insurance treatment of the self-employed hit the headlines after it was announced the main rate of Class 4 contributions would be increased to 10% from April 2018 and to 11% from April 2019. The measure, billed as the `white van man tax’, was short-lived. Amid criticism that the Government had gone back on their election promise not to increase National Insurance, they performed a U-turn a week later – giving a further promise that the Class 4 rates would remain unchanged during this Parliament. Then Theresa May announced a General Election…
So where are we now with NICs and the self-employed?
The self-employed currently pay two Classes of NICs – Class 2 and Class 4.
Class 2 is a flat weekly rate payable where profits exceed the small profits threshold (set at £6,025 for 2017/18) for each week of self-employment in the tax year. For 2017/18, the Class 2 rate is £2.85 per week. It is Class 2 contributions that currently earn the self-employed rights to the state pension and certain contributory benefits.
Class 4 contributions are essentially a further tax on profits. They currently confer no benefit entitlement. For 2017/18, Class 4 contributions are payable at the main rate of 9% on profits between the lower profits limit of £8,174 and the upper profits limit of £45,000, and at the additional rate of 2% on profits above £45,000.
Both Class 2 and Class 4 contributions are collected via the self-assessment system.
New rules from April 2018
National Insurance contributions for the self-employed are to be reformed from April 2018.
Class 2 National Insurance contributions are being abolished from 6 April 2018 and Class 4 reformed to take on the role of providing benefit entitlement for the self-employed.
The new-look Class 4 structure that will apply from that date will closely resemble Class 1 contributions as applied on an annual basis (as for, say, company directors). A new small profits limit will be introduced and aligned with the lower earnings limit for Class 1 purposes (£113 per week for 2017/18). A zero rate will apply to profits which fall between the small profits limit and the lower profits limit which, like the Class 1 equivalent, will earn state pension and benefit rights for self-employed earners whose profits fall in this band. As is currently the case, contributions will be payable at the main rate between the lower and upper profits limits, and at the additional rate on profits above the upper profits limit.
As at the time of writing, the plan appears to be for the main rate to remain at 9%. However, as we enter a new Parliament, the Government may be free of the shackles imposed by previous election promises and the statutory NIC lock and decide after all to raise the main rate from April 2018. It is a case of watch this space.
Employees and the self-employed alike often need to undertake business journeys and mileage payments are often made to cover the cost of fuel and, where the car used is the individual’s own rather than a company car, the associated running costs and an element of depreciation. However, all mileage allowance payments are not the same.
It should be noted here that business travel does not include home to work travel (except in very limited circumstances).
Approved mileage allowance payments
Approved mileage allowance payments (AMAP) are relevant where an employee uses his or her own car for business travel. The system allows the employer to pay an employee a tax-free mileage rate, which does not need to be notified to HMRC on the employee’s P11D or payrolled. Approved mileage allowance payments are set for cars and vans at 45p per mile for the first 10,000 business miles with additional business miles at 25p per mile.
Tony undertakes 14,000 business miles for his employer in a tax year, using his own car for business.
The approved mileage payment is £5,000 ((10,000 @ 40p) + (4,000 @ 25p)).
If the employer pays a mileage rate in excess of the approved rate, the excess is taxable and must be notified to HMRC on the employee’s P11D. If the amount paid by the employer is less than the approved rate, the employee can claim tax relief for the shortfall.
Advisory fuel rates
HMRC also publish advisory fuel rates. These can be used by employers to reimburse fuel costs where the employee has a company car. The advisory fuel rates are lower than the approved mileage rates to reflect the fact that it is the employer, rather than the employee, who meets the running costs for the vehicle and suffers the associated depreciation.
As with approved mileage rates, payments in excess of the advisory rates are taxable.
The self-employed can also use mileage payments to work out business costs for vehicles if they opt to use the simplified expenses system. Under simplified expenses, the sole trader or partner records the number of business miles undertaken in the year and calculates the amount to deduct when working out business profits by applying a mileage rate. The mileage rates used under the simplified expenses system for cars, vans, and motorcycles are the same as the approved mileage rates set out above. So, a sole trader driving 14,000 business miles a year would be entitled to a flat rate deduction of £5,000.
Simplified expenses cover the costs of fuel, buying and running the vehicle. However, they cannot be used if capital allowances have been claimed for the vehicle.
Using loan trusts to save IHT
A loan trust can be used as a vehicle to save inheritance tax, whilst retaining the ability to access the funds lent to the trust.
How does it work?
There are two elements to setting up a loan trust – the loan and the trust.
A trust is set up, which can be an absolute trust or a discretionary trust, and trustees are appointed. The settlor can also be a trustee.
Where an absolute trust is used, the beneficiaries and their share of the fund must be specified when the trust is created. A discretionary trust provides the flexibility to change the beneficiaries and their share – although there may be tax to pay.
The settlor makes a loan to the trust. The loan is invested in an investment bond with the potential for growth. The original loan is repayable, usually in regular instalments. In this way, the settlor is able to get back their loan capital. Equally, the settlor could choose for the loan not be repaid or repaid in full or in part at any time.
The settlor does not have access to the income that builds up in the trust. This is passed to the beneficiaries.
Any part of the original loan that remains in the trust at the time of the settlor’s death forms part of the settlor’s estate. This is because the settlor has retained access to the money.
However, income from the investment does not form part of the estate – although if the trust is a discretionary trust tax may be paid by the trust on the 10-year anniversary and when money leaves the trust.
Oscar created a discretionary loan trust and appoints his twin daughters as beneficiaries. He lends £100,000 to the trust.
The loan is repaid to Oscar at the rate of £5,000 a year.
Oscar dies five years and seven months later. At the date of his death, he had received loan repayments of £25,000.
The value of the trust at the date of his death was £124,000.
At the date of death, £75,000 of the original loan remained in his estate. The remaining £49,000 represents income growth and does not form part of his estate and can be passed to the beneficiaries free from inheritance tax.
As the settlor retains access to the funds lent to the trust, they remain in his or her estate. To take the funds out of the estate, the settlor would have to give them away absolutely. If in the above example, Oscar had not needed to retain access to the funds, he could have passed them on to his daughter when he was alive and benefited from taper relief having survived for five years.
The loan trust is something of a half-way house – the settlor has the comfort of being able to access the loan capital, but any growth is taken out of the estate.
Landlords: dealing with capital expenditure under the cash basis
From 2017/18 onwards, the cash basis is the default basis for landlords with rental profits of less than £150,000 who meet the qualifying conditions. The extension of the cash basis to landlords is one of the simplification measures ahead of the introduction of digital recording and reporting under Making Tax Digital. The rules for the treatment of capital expenditure under the cash basis are also being simplified from 2017/18 onwards and the new rules will apply both to landlords brought within the cash basis from that date and to traders operating the cash basis.
Accrual basis treatment v cash basis treatment
Under the accruals basis, capital expenditure is not deducted when computing profits – only revenue expenditure is eligible for deduction. Relief for capital expenditure is given by capital allowances.
Under the cash basis, capital allowances cannot be claimed, with the exception of cars where the simplified expenses rules are not adopted. Instead, under the new rules, as long as the capital expenditure does not fall within the list of disallowed items, it is deducted in computing taxable profits. This approach provides immediate relief for capital expenditure against profits.
Items that do not qualify for deduction in the computation of profits are capital expenditure that is incurred on or in connection with the acquisition or disposal of a business or part of a business.
Further, a deduction is not permitted for expenditure on an item of a capital nature which is incurred on or in connection with the provision, alteration or disposal of:
A depreciating asset is one which within 20 years is either no longer of use as a business asset or has a value of ten per cent or less of its value at the time that the expenditure on it was originally incurred.
Bill lets out two properties in 2017/18. His taxable profits are computed in accordance with the cash basis. During the year, he buys a car for £15,000 for use in the business, a computer costing £1,200, and a printer costing £50. He is able to deduct the cost of the computer and printer in computing his profits, but not the car. However, if he does not use simplified expenses, he can claim capital allowances in respect of the car.
Partner note: www.gov.uk/government/publications/cash-basis-treatment-of-capital/reforming-the-cash-basis-expenditure-rules
How to complain about HMRC
There may be a number of reasons why a taxpayer is unhappy about the service that they have received from HMRC. For example, they may feel that HMRC made mistakes or treated them unfairly, or they were subject to unreasonable delays on the part of HMRC in getting matters resolved. In rare cases, HMRC staff may be guilty of serious misconduct.
A taxpayer who wants to complain about the service that they have received from HMRC (as opposed to disputing the amount of tax that is due) can make a complaint online by logging in via the Government Gateway. There are different forms for complaints by individual taxpayers and by businesses. Complaints can also be made by phone or by post. A complaint can also be made on the taxpayer’s behalf by a professional adviser, a friend or relative, or a voluntary organisation, such as the Citizen’s Advice Bureau, Tax Aid or Tax Help for Older People.
HMRC undertake that when someone makes a complaint they will:
If the person who is contacted in the first instance cannot resolve the complaint, it will be passed to a customer service adviser. Alternatively, the complaint can be made direct to a customer service adviser from the outset.
When making a complaint, the taxpayer should provide sufficient information to allow the complaint to be investigated and the matter put right – what happened and when, who dealt with it, the effect of HMRC’s actions, and what action the taxpayer would like to be taken to resolve matters. The taxpayer’s full name and address and any relevant reference numbers should also be provided.
If HMRC do not resolve things to the customer’s satisfaction, the taxpayer can take matters further. A different customer service adviser can investigate the complaint for a second and final time. If matters are still unresolved once HMRC have provided a final response, the taxpayer can ask the adjudicator to look into the complaint. Thereafter, the matter can be referred to the Parliamentary and Health Service Ombudsman.
IHT – the transferable nil rate bands
For inheritance tax (IHT) purposes, there are now two nil rate bands – the basic nil rate band and the residence nil rate band (RNRB).
Nil rate band
The basic nil rate band is currently £325,000 and is frozen at that level until the end of 2020/21. This is the amount of an estate which can be left free of inheritance tax. To the extent that the estate exceeds the available nil rate band on death (excluding anything covered by the RNRB), inheritance tax is payable at a rate of 40%.
Each spouse and civil partner have their own nil rate band.
Residence nil rate band (RNRB)
The residence nil rate band is available for deaths occurring on or after 6 April 2017. For 2017/18 it is set at £100,000, but is set to increase by £25,000 a year in 2018/19, 2019/20 and 2020/21; so that in 2020/21 it will be £175,000. It applies where a residence is left to direct descendants, such as children or grandchildren.
As with the basic nil rate band, each spouse or civil partner has their own RNRB.
Transferring the unused portion
The inter-spouse exemption allows spouses and civil partners to leave property to each other on death without any inheritance tax being payable. So, if the first partner to die leaves all his or her estate to their spouse or civil partner, no inheritance tax would be due as the transfer would fall within the inter-spouse exemption. Consequently, in this scenario, the nil rate band and RNRB would not be used on the first death.
To ensure that overall a married couple or civil partners get the benefit of two nil rate bands and two RNRBs to set against the combined estate, any proportion of the nil rate bands unused on the first death can be claimed on the second death.
It should be noted that it is the unused percentage rather than the absolute amount that can be claimed on the second death – in this way, benefit is given for any increase in the nil rate band between the first and second deaths. On the death of the surviving spouse or civil partner, the unused portion of their spouse’s/civil partner’s RNRB can still be claimed, even where the first death was before 6 April 2017, as long as the second death is on or after that date.
Maurice died in 2015, leaving £50,000 to his son, Mark, and the remainder of his estate (which included his share of the family home) to his wife Maud.
On his death, he had used £50,000 (15.4%) of his nil rate band, leaving £275,000 (84.6%) of his nil rate band unused.
Maud dies in August 2017. She leaves the family home worth £500,000 to her son Mark, together with the balance of her estate, valued at £267,000. Her total estate is valued at £767,000.
She has her own nil rate band of £325,000, plus she can claim the 84% of the current value of the nil rate not used on her husband’s death – a total of £600,000.
As she has left a residence to a direct descendant, she can claim the RNRB of £100,000, plus 100% of that attributable to Maurice. It does not matter that he died before 6 April 2017 as she died after that date. She, therefore, has a RNRB of £200,000 to set against the family home of £500,000. The remainder of the family home (£300,000) and the balance of her estate (£267,000), totalling £500,00 is covered by the available nil rate band of £600,000. Thus no inheritance tax is payable on her death.
The transferable nil rate band must be claimed.
Effective salary sacrifice arrangements
A salary sacrifice arrangement is one where an employee gives up some of his or her cash salary in return for a non-cash benefit. Salary sacrifice arrangements used to be a popular way to take advantage of tax and National Insurance exemptions for benefits in kind. However, new valuation rules were introduced from 6 April 2018, removing most of the benefits for all but a handful of benefits in kind.
So, where a salary sacrifice arrangement remains tax-effective, what steps should be taken to ensure the arrangement is acceptable to HMRC?
Post 5 April 2017, where provision is made via a salary sacrifice arrangement, the tax and National Insurance exemptions associated with the following remain available:
For all other benefits, with the exception of low-emission cars, the benefit is now valued at the higher of the salary foregone or cash alternative offered and the normal cash equivalent value (which will be zero where the benefit would otherwise be exempt). Transitional rules delay the start date of the new valuation rules for arrangements in place at 5 April 2017.
Entering into a salary sacrifice for benefits not on the above list can still generate savings as the NIC liability will move from Class 1 to Class 1A, saving employee’s NIC. However, these may not be sufficient to justify the administration costs involved.
Keeping it effective
For HMRC to accept that a salary sacrifice arrangement is effective, the employee’s contract must be varied to show the lower salary and the benefit in kind taken in exchange. The employee must not simply be able to revert back to the higher salary at will – if this is the case, HMRC will disregard the salary sacrifice arrangement and tax employee by reference to the higher salary, losing the benefit of any exemption attaching to the benefit in kind. If the employee wants to opt out of the salary sacrifice, again, the terms of his or her contract should be changed to reflect the revised arrangement.
Further, the actual arrangements must mirror the contractual position so that the employee actually receives the lower salary and the benefit in kind.
Timing is important. The contract must be varied to reflect the salary sacrifice before the changes come into effect – if the contract is not varied until after the changes have been implemented, the employee will be taxable on the higher salary (even though he has not received it), as he remains contractually entitled to do so.
Although the benefits of salary sacrifice arrangements are much reduced, they still have a role to play – but where used it is important that they are effective in HMRC’s eyes.
Relief for early year losses
Many businesses make losses in the early years as they struggle to become established. The tax system provides various ways for relieving losses generally, with additional help available where the loss is incurred in the early years.
Option 1: relief for losses in early years of a trade - Unincorporated businesses with losses in the first four years of trade are able to carry the loss back against total income of the three years preceding the loss. The loss is set against income of the earliest year first – the individual does not get to choose the year against which the loss is relieved.
This can be useful if, say, an individual has been employed and then starts a business making an initial loss, as carrying the loss back may generate a tax refund. However, if income in the preceding years is low, carrying the loss back may not be the best option if this leads to personal allowances being wasted. The special relief for losses made in the early years of a trade is not available where a business prepares accounts under the cash basis.
Option 2: sideways relief - A trading loss can be relieved against general income of the year of the loss and/or against general income of the year preceding the loss. The taxpayer can choose whether to relieve the loss against the general income of the current or the preceding year, and which is to take priority where a claim is to be made for both years. However, it is an all or nothing claim and it is not possible to tailor the claim to use only part of the loss so as to preserve personal allowances, for example.
Where the individual does not have sufficient income to offset the loss in full, the relief may extend to capital gains.
Where a loss is made in the early years of the trade, relief can be claimed under these provisions rather than under the special provisions outlined above for applying to losses in the early years. As with early years relief, sideways relief is not available where the accounts are prepared under the cash basis.
Option 3: carry forward - Carrying the loss forward for relief against future profits from the same trade is essentially the default option and can be used if it is neither possible nor desirable to carry the loss back or sideways.
Best option - In ascertaining the best use for a loss, the aim is generally to get relief at the best possible rate as early as possible. However, what is the best strategy will depend on an individual’s circumstances and the extent that other income is available to mop up a loss. For example, it may not be desirable to carry a loss back or sideways if that results in personal allowances being wasted – in which case carrying the loss forward will be preferable. However, going back or sideways when this triggers a tax refund will generally be advantageous. It is also necessary to be aware of the cap of reliefs, set at the higher of £50,000 and 25% of adjusted net income.
Recent press reports suggested that up to two million couples may be missing out on a valuable tax break – the marriage allowance.
The marriage allowance was introduced from 6 April 2015 and allows certain couples to transfer 10% of their personal allowance (£1,150 for 2017/18) to their spouse or civil partner where this would otherwise be wasted. However, there are eligibility conditions to be met.
Couples can benefit from the marriage allowance if the following apply:
How to apply
An application for the marriage allowance can be made online (see www.gov.uk/apply-marriage-allowance).
If the claim is successful, it will be backdated to the start of the 2017/18 tax year. It is also possible to claim for 2015/16 if the couple qualified but did not make a claim for that year.
Giving effect to the claim
The effect of the marriage allowance is that 10% of the personal allowance is transferred from one spouse or civil partner to the other. For 2017/18, the transferred personal allowance is £1,150 (10% of £11,500).
As a result of the transfer, the personal allowance of the person transferring 10% of their allowance is reduced by £1,150 to £10,350 and the recipient’s personal allowance is increased by £1,150 to £12,650.
Where a couple have claimed the marriage allowance, this is reflected in their tax code. The person who has made the transfer will have the suffix letter M and the person receiving the transfer will have the suffix letter N. Where there are no other adjustments to the tax code, this will result in a code of 1035M for the transferor and 1265N for the transferee.
Where the recipient is not employed, effect to the claim is given via the self-assessment tax return.
If the spouse or civil partner is a non-taxpayer and the recipient pays tax at the basic rate, claiming the allowance will result in a tax saving of £230 for 2017/18 (£1,150 @ 20%).
The allowance cannot be claimed if the recipient pays tax at the higher or the additional rate.
Ben is a stay-at-home dad. His wife Lucy works in retail and earns £20,000 for 2017/18. Ben does not use his personal allowance, so the couple claims the marriage allowance. As a result, £1,150 of Ben’s personal allowance is transferred to Lucy and her personal allowance is increased to £12,650. As a result of making the claim, Lucy’s tax bill is reduced by £230
Company losses and what to do with them
Although it is clearly preferable to make a profit rather than a loss, this is not always possible. Where a loss arises, from a tax perspective, decisions have to be made as to how that loss can be utilised and, where there is more than one option, which is the best possible use of the loss.
A trading loss is worked out in the same way as a trading profit by making the usual adjustments to the accounting profit or loss to arrive at the tax figures.
There are various ways in which the loss can be relieved.
Same accounting period
It may be possible to relieve the loss in the same accounting period by setting it against other gains or income of that period. This may be the case if the company makes a trading loss but disposes of an asset or assets and has a gain chargeable to corporation tax, or if the company receives interest payments, which can mop up some or all of the loss.
The trading loss can also be carried back and set against the profits of the preceding 12-month period. This can be a useful option, as it will generate a repayment of corporation tax previously paid – something that may provide a welcome cashflow boost to a struggling company. With falling corporation tax rates, carrying back rather than forward may give a higher rate of relief.
ABC Ltd prepares accounts to 31 March each year. In the year to 31 March 2017, it realises a loss of £15,000. In the year to 31 March 2016, it made a profit of £12,000, on which corporation tax of £2,400 was paid.
The company elects to carry back £12,000 of the loss of £15,000 to set against the profits of the year to 31 March 2016, triggering a refund of the corporation tax paid of £2,400 (plus repayment supplement). The balance of the loss of £3,000 is available to carry forward.
The loss can also be carried forward and set against profits of future accounting periods from the same trade. This may be the only option if there has also been a loss in the previous accounting period so carry back is not possible.
If the company stops trading, a claim for terminal loss relief may be possible. This allows a loss made in the final 12 months to be carried back against total profits of the previous three years. It is not possible to tailor how the loss is used – it must be set against the profits of a later year before an earlier year.
Claims for relief will normally be made in the corporation tax return, but can also be made by letter.
Moderation in all things is the taxman’s motto when it comes to tax-free Christmas parties. The tax legislation allows employees and their guests to enjoy a Christmas party or similar annual function without suffering a benefits in kind tax charge – as long as the event is reasonably modest. In this regard, this means the cost per head is not more than £150.
To qualify for the exemption, the event must be an annual function, such as a Christmas party or summer barbecue, it must be open to all employees and the cost per head must be £150 or less. Where an employer has staff at more than one location, it is permissible to hold an event at one location only, or some locations but not all, and still benefit from the exemption as long as all the staff at each location are invited.
Cost per head not per employee
When working out the cost per head, it is simply the total cost of the function (including VAT) divided by the number of guests (not just the number of employees). So, for example, if an event costs £15,000 and is attended by 100 employees and 83 guests, the cost per head is £81.77, being £15,000 divided by 183.
More than one annual function
Where there is more than one annual function each year, several functions may be exempt as long as the cost per head figure in total is not more than £150. The £150 is an exempt amount, not an allowance, and as such only whole functions can be exempt. It is not the case that the first £150 of the total annual cost per head figure is exempt.
Example - Happy Ltd has four events each year:
Event Cost per head
Christmas party. £80
Anniversary dinner. £100
Summer barbecue. £40
The exemption is best utilised against the anniversary dinner (£100 per head) and the summer barbecue (£40) – a total cost per head of £140.
The remaining £10 is lost – it cannot be set against the Christmas party.
Although the Christmas party costs less than £150 per head, it is taxable as the exemption is best used against the anniversary dinner and barbecue. While it would be possible to provide the Christmas party and summer barbecue within the terms of the exemption, this does not make the best possible use of it as this would leave the anniversary dinner at £100 a head in charge rather than the Christmas party at £80 a head. The Ball cannot qualify as cost per head is more than £150.
What to report
If the party comes within the terms of the exemption, it can be ignored. If it is taxable, the total amount (employee plus any guests) needs to be reported on the P11D.
Beware, the benefit of the exemption is lost if a salary sacrifice arrangement is used.
Employees often use their own cars for work, usually claiming expenses in the form of a mileage allowance to cover the costs. While it is up to the employer to decide how much to pay by way of mileage allowances, and indeed whether to pay a mileage allowance, it is the taxman who decides what can be paid tax-free.
The approved mileage allowance payments (AMAPs) system allows employers to make tax-free mileage payments to employees up to the `approved amount’. This is found by multiplying the business mileage for the year by the rate per mile for the vehicle in question. Approved rates are set not only for cars but for vans, motorcycles, and bicycles too.
The approved rates are currently as follows:
For tax purposes, the rate for cars and vans drops from 45p per mile to 25p per mile once the employee has been paid for 10,000 business miles in the tax year. For National Insurance, the rules are different – the 45p rate can be paid NIC-free regardless of how many business miles the employee undertakes in the tax year.
Ray is an employee. He uses his own car for business and in the 2017/18 tax year undertakes 14,755 miles in his own car.
Under the AMAPs system, the tax-free `approved’ amount is £5,688.75 ((10,000 miles @ 45p) + (4,755 miles @ 25p)).
Paying mileage allowances at the taxman’s approved rates is the simplest option from a tax perspective – there are no tax consequences and the payments can be ignored by the employer and the employee.
If the mileage payments made by the employer exceed the approved amount, the excess (the `taxable mileage profit’) is taxable and must be notified to HMRC on the employee’s P11D (in section E), unless the employer has opted to payroll the mileage profit. So, if in the above example, Ray was paid 50p per mile, he would receive a mileage payment of £7,377.50 - £1,688.75 more than the approved amount. He would be taxed on the `profit’ of £1,688.75.
Where the allowances paid by the employer are below the approved amount, or if the employer does not make mileage payments, the employee can claim tax relief for the difference between the amount actually received (if any) and the approved amount. The relief can be claimed either on the employee’s tax return or on form P87.
Employees can also be paid a tax-free passenger payment of 5p per passenger per mile for each fellow employee to whom they give a lift, as long as the journey is a business journey for the driver and passengers alike.
Protect your lifetime allowance
The pensions lifetime allowance places a cap on overall tax-relieved pension savings. Pension savings in excess of the lifetime allowance are subject to a lifetime allowance charge, which effectively claws back tax relief.
The lifetime allowance was reduced from £1.25 million to £1 million with effect from 6 April 2016. People who had pension savings in excess of £1 million at that date, but not more than £1.25 million can protect their lifetime allowance from the effect of the reduction.
There are two types of protection available – individual protection 2016 and fixed protection 2016.
It was announced in the Budget on 22 November 2017 that the lifetime allowance would be increased in line with inflation to £1.030 million from 6 April 2018.
Individual protection 2016
Individual protection 2016 is available where an individual has tax-relieved pension savings on 5 April 2016 worth between £1 million and £1.25 million. The protection fixes the lifetime allowance at the lower of their pension savings on that date and £1.25 million. Thus a person with pension savings of £1.2 million on 5 April 2016 would be able to protect their lifetime allowance at £1.2 million.
Where individual protection is in place, a person can continue to add to their pension savings – but they must pay a tax charge on money taken from their pension to the extent that it exceeds the protected lifetime allowance.
The lifetime allowance has suffered previous reductions and other protections may be in place. A person can still apply for individual protection 2016 if they also have enhanced protection, fixed protection, fixed protection 2014 or fixed protection 2016. Where another protection is in place, individual protection 2016 will lie dormant until previous protections are either lost or given up. HMRC must be notified when this happens. However, an application for individual protection 2016 cannot be made by a person who has primary protection or individual protection 2014.
An application for individual protection 2016 can be made online.
Fixed protection 2016
The second type of protection available is fixed protection 2016. This fixes the lifetime allowance at £1.25 million. However, fixed protection 2016 is only available if neither the individual nor his or her employer have added to the pension since 5 April 2016 and the individual has opted out of any workplace schemes (e.g. under auto-enrolment) since 5 April 2016. Further, an individual who has enhanced protection, primary protection, fixed protection or fixed protection 2014 (which protect the allowance from earlier reductions) cannot apply for fixed protection 2016.
Where fixed protection 2016 has been granted, it is not able to add to the pension (except in very limited circumstances). If further contributions are made, fixed protection will be lost and tax will be payable on any pension in excess of the standard lifetime allowance at the time the pension is taken.
As with individual protection 2016, applications for fixed protection 2016 can be made online.
Disincorporation relief – claim it while you can
Changes to the taxation of dividends have reduced the tax advantages associated with operating as a company. Add into the mix the additional burdens imposed on companies – such as the need to file accounts and an annual confirmation statement at Companies House – and it is easy to see why the question of whether it would now be better to operate as an unincorporated business may arise. However, while it is relatively easy to incorporate a business and reliefs are available to smooth the way, going from a company to an unincorporated business is less straightforward, and may trigger unwanted tax charges.
Enter disincorporation relief
Disincorporation relief allows a company to transfer certain types of assets to its shareholders who continue to operate the business in an unincorporated form, without the company incurring a corporation tax charge on the disposal of the assets.
Without the benefit of the relief, transferring assets to shareholders may trigger a corporation tax charge. A transfer between a company and its shareholders is one between connected persons, and as such, the transfer is deemed to be at market value, regardless of the actual money, if any, which changes hands. If the market value is more than the original cost or tax written down value, this will trigger a corporation tax charge.
Disincorporation relief essentially delays the charge and passes it to the shareholders, who agree to use the transfer value as the cost in working out any gain on a subsequent disposal of the asset.
Disincorporation relief is only available where:
The business must be transferred to individuals or to individuals who are in partnership (but not to a limited liability partnership), and they must continue to run the business afterwards. The relief must be claimed jointly by the company and its shareholders.
The relief is only available for a qualifying transfer. This is a transfer where all the following conditions are met:
Qualifying assets are an interest in land (other than land held as trading stock) and goodwill (though an adjustment may apply if the goodwill relates to a business started on or after 1 April 2002 or acquired from an unrelated third party on or after that date).
At its introduction, disincorporation relief only applied to transfers occurring within a five-year window – 1 April 2013 to 31 March 2018. It was announced at the time of the Autumn 2017 Budget that the end-date will not be extended, and as such disincorporation relief will not be available for transfers after 31 March 2013. The transfer date is normally the date that the business is transferred but may be a different date for a disposal under contract.
Where the intention is to disincorporate, the clock is running on the availability of disincorporation relief.
Corporate gains – end of indexation allowance
To date, companies have been able to benefit from relief for inflationary gains in the form of indexation allowance when they dispose of an asset. The indexation relief is deducted in computing the chargeable gain or allowable loss.
However, it was announced at the time of the Autumn 2017 Budget that the relief is to be frozen – the effect being that no relief will be available for inflationary gains arising on or after 1 January 2018. Where an asset is disposed of on or after 1 January 2018, the indexation allowance will only be calculated up to December 2017. Where an asset is acquired after December 2017, no indexation allowance will be available to mitigate any gain on disposal.
The freezing of indexation allowance will bring the position of companies more closely into line with that of individuals. Individuals have not received relief for inflationary gains since the ending of taper relief in April 2008.
Nature of indexation allowance
Indexation allowance is deducted when working out the gain chargeable to corporation tax. The indexation allowance is based on movements in the retail prices index (RPI) between the month in which the asset was acquired and the month in which the asset was disposed of. HMRC publish indexation allowance tables each month.
Indexation allowance – date of disposal is before 1 January 2018
Where the disposal takes place before 1 January 2018, the indexation allowance is computed by reference to the actual month in which the disposal took place.
Snowdrop Ltd sold a capital asset for £100,000 in November 2017. The asset was acquired in February 2015 for £80,000.
Using HMRC’s indexation allowance table for November 2017 (see www.gov.uk/government/publications/corporation-tax-on-chargeable-gains-indexation-allowance-2017/indexation-allowance-november-2017), the indexation factor for February 2015 is 0.074.
The indexation allowance is found by multiplying the indexation factor by the cost of the asset.
The indexation allowance is, therefore, £80,000 x 0.074 = £5,920.
The gain chargeable to corporation tax is, therefore, £100,000 – (£80,000 + £5,920) = £14,080.
Indexation allowance – date of disposal on or after 1 January 2018
Where an asset is disposed of after 2018, the indexation allowance is calculated by reference to the indexation factor for December 2017, regardless of the actual date of disposal. This means that the indexation allowance for an asset acquired before 1 January 2018 will be the same, regardless of whether it is disposed of in January 2018 or December 2018. No relief is given for inflation beyond 31 December 2017.
`Relevant goods’ and the VAT flat rate scheme?
The VAT flat rate scheme is a simplified VAT scheme, which allows small traders to account for the VAT that they pay to HMRC by reference to a percentage of their VAT-inclusive turnover.
Prior to 1 April 2017, the percentage depended only on the business sector in which the business operated. However, from 1 April 2017 it is also necessary to determine whether the business counts as a `limited cost business’. Where a business meets the definition of a limited cost business, the VAT payable to HMRC is calculated as 16.5% of VAT-inclusive turnover for the period rather than by reference to the (lower) flat rate percentage for the business sector. The calculation needs to be performed separately for each VAT period.
A limited cost business is one where the spend on `relevant goods’ is either:
Relevant goods are goods that are used exclusively for the business. Crucially, they must be `goods’ not `services’. VAT Notice 733 gives the following examples of goods that count as relevant goods:
The above list is not exhaustive and other goods may count as relevant goods depending on the nature of the business.
A person receives `goods’ where ownership is passed to the business from another person or where title passes at a later date, such as goods purchased on hire purchase. The supply of water, power, heat, refrigeration, and ventilation is also a supply of goods (although hiring equipment to provide these is a supply of services).
In the main, items that are services rather than goods do not count as relevant goods. VAT Notice 733 contains the following list of examples of supplies that aren’t relevant goods:
The list is not exhaustive. Further guidance can be found in VAT Notice 733.
Corporation tax and trading losses
Relief may be available where you operate your business through a company and you make a loss. The loss may be set against total profits of the current or previous accounting periods or may be carried forward and set against future trading income from the same trade.
Computing the trading loss - A trading loss is computed in the same way as a trading profit and normal rules apply. However, it should be noted that trading income does not include any chargeable gains, so chargeable gains are not taken into account in computing the loss.
The loss may be augmented by capital allowances and reduced by any balancing charges.
Entitlement to relief - A company can only obtain relief for a loss while the company carrying on the trade is within the charge to corporation tax in respect of that trade. This is the case where the company is either resident in the UK or resident abroad and carrying on a trade in the UK through a branch or agency.
Relief against total profits of same period - The first way in which relief for a trading loss may be given is against total profits of the accounting period for which the loss was incurred. Chargeable gains are not included in the computation of the trading loss, so if the company has chargeable gains in the period in which the loss was incurred, these can be sheltered by the loss.
Relief against total profits of a previous period - Once a claim has been made to set a trading loss against total profits of the period in which the loss was incurred, the balance of the loss can be carried back and set against the total profits of previous accounting periods to the extent that they fall within the period of 12 months immediately preceding the start of the loss-making accounting period. It is only possible to carry a loss back once it has been set against total profits of the period of the loss. However, any loss remaining after set-off against current year profits does not have to be carried back – it can go forward.
Carry forward against future trading profits - The loss may also be carried forward against future trading profits from the same trade. Note that any losses carried forward can be set only against trading profits and not against future chargeable gains.
A loss can be carried forward without the need first to make a claim against total profits of the current period. Where losses remain after carrying back to a previous period, these too can be carried forwards against future trading profits from the same trade.
Group relief - Where the company is a member of a group, losses may be able to be surrendered to other companies in the group.
Terminal loss - A loss in the last 12 months of trading (a terminal loss) can be carried back against total profits of the preceding three years.
Anti-avoidance – There are a number of anti-avoidance provisions that apply to prevent abuse of the loss relief rules, including restrictions where there is a change in the nature of the trade and where losses are uncommercial.
Planning - In general, the aim is to obtain relief sooner rather than later, but at the highest possible rate. Speak to your adviser as to what is best for you.
Starting a business – what profits are taxed?
Starting a business – what profits are taxed?
An unincorporated business pays tax on what is known as the `current year basis’. This means that, as a general rule, the profits for a tax year are taxed by reference to the profits for the 12 months to the accounting date that ends in that tax year. So, for example, if Joe has been in business as a sole trader for many years and prepares accounts to 30 June each year, for the 2017/18 tax year he would be taxed on the profit for the year to 30 June 2017.
Early years - Special rules apply in the first few years of trade. The first year is taxed on the actual profits from the start of the business until 5 April at the end of that tax year. The basis period for year two depends on whether there is an accounting date (i.e. the date to which accounts are prepared) in that year and if so, whether that date is more or less than 12 months from the start of the business. Once year three is reached, the current year basis applies, and profits taxed are those for the 12 months to the accounting date ending in that year.
The following table shows the rules applying in the opening years.
|Year 1||Date of commencement to following 5 April
|Period 12 months or less,
ends during year
|Tax is paid on profits of first 12 months trading|
|Period 12 months or more,
ends during year
|Tax is paid on 12 months profits to the accounting date|
|No period end during year||Tax is paid on profits of the tax year|
|Year 3||Tax is paid on profits of the period ending during year 3|
When applying the opening year rules for Years 1 and 2, accounts drawn up to 31 March or to 1, 2, 3 or 4 April are treated as being equivalent to the tax year unless the taxpayer elects otherwise.
Lulu started trading on 1 June 2016. She prepares accounts to 30 April each year. The basis periods for the first three tax years are as follows:
Year 1 – 2016/17: 1 June 2016 to 5 April 2017 (actual)
Year 2 – 2017/18: 1 June 2016 to 31 May 2017 (first 12 months)
Year 3 – 2018/19: 12 months to 30 April 2018.
Overlap profits - Because of the way the rules work, some profits may be taxed twice. In the above example, the profits from 1 June 2016 to 5 April 2017 are assessed in both 2016/17 and 2017/18 and those from 1 May 2017 to 31 May 2017 are assessed in 2017/18 and 2018/19. These are known as `overlap profits’.
Relief for these overlap profits are given either when the trade ceases or there is a change of accounting date and the basis period for the year in which the change occurs is longer than 12 months.
Many people, particularly as they age, worry about how they can provide for their family without the taxman taking a large slice. While many people are aware of the existence of the nil rate band allowing them to leave £325,000 tax -free (plus any unused portion from the earlier death of a spouse or civil partner), supplemented from 6 April 2018 by the residence nil rate band, not everyone knows that it is possible to make substantial and regular tax-free gifts as long as those gifts count as `normal expenditure out of income’. Where the conditions are met, the gifts are automatically tax-free, regardless of the availability of the nil rate band and whether or not the donor survives a further seven years.
For the gift to be exempt, the following three conditions must be met:
In assessing whether the gift forms part of the donor’s normal expenditure, the test is whether it is normal for the donor – there is no general standard of what is normal. While the gift does not have to be regularly or annually, there must be some pattern of giving - a one-off gift for a specific purpose does not fall within this exemption (although it may be exempt as a small gift or a gift in consideration of marriage). Although it is easier to demonstrate that the exemption applies if the gifts are regular and of a similar size – for example, a gift of the same amount made each month by direct debit – the exemption can still apply if the gifts vary in size, particularly if the income source (such as dividends) is also variable. The key is to establish a pattern, whether a regular monthly gift from left-over pension income or a gift each time a dividend is received.
Out of income
As the name suggests, for the exemption to apply, the gift must be made out of income rather than capital. So, giving away some of your pension each month would count, whereas making a regular gift from savings would not. Where the donor has a rental property, the gift could be made from the rent. Likewise, where the donor has savings or investments, the gifts could be made from dividends or interest payments.
Maintaining standard of living
The final condition is that after making the gift, the donor should be able to maintain his or her normal standard of living. So, the gift can be made once the donor has met his or her bills and continued to do his or her usual activities, etc.
A useful exemption
This is a very useful exemption and there is a lot of scope to make the most of it. Examples could include grandparents paying school fees for their grandchildren or giving them a monthly allowance while at university, or even paying for an annual holiday for family members.
NIC and the self-employed
Change is on the horizon – from April next year, the self-employed will only pay one Class of National Insurance rather than the two currently payable.
Depending on the level of their profits, the self-employed may currently be liable for two Classes of National Insurance contribution – Class 2 and Class 4.
Class 2 is payable at a flat weekly rate for each week of self-employment in the tax year. For 2017/18, the contribution rate is £2.85 per week. A contribution liability only arises if profits exceed the small profits threshold, set at £6,025 for 2017/18. The contributions for the year are payable by 31 January after the end of the tax year and are payable under the self-assessment system (although they are not taken into account in working out payments on account. Payment of Class 2 contributions earns entitlement to the state pension and certain contributory benefits.
Class 4 contributions currently earn no pension and benefit entitlement. They are payable at the main rate of 9% on profits between the lower profits limit of £8,164 and upper profits limit (UPL) of £45,000 and at the additional rate of 2% on profits over the UPL of £45,000 (2017/18 rates and limits). They too are collected via self-assessment but are taken into account when working out payments on account.
From April 2018
From 6 April 2018 (2018/19 tax year), the self-employed will only pay Class 4 contributions. Class 2 contributions are abolished from that date and Class 4 is reformed to provide the mechanism by which the self-employed earn pension and benefit rights.
The reformed Class 4 looks a lot like Class 1 when assessed on an annual basis (as for directors) – but (for the time being at least), a lower rate.
In the Spring 2017 Budget, the Government announced plans to increase the main rate to 10% from April 2018 and again to 11% from April 2019 – only to swiftly back track. For now, this looks likely to remain at 9% come April 2018 – but it remains to be seen how long it stays there.
Interest Relief for Lettings - Making The Most of The Old Rules
The mechanism by which landlords receive tax relief for interest and other finance costs is changing from April 2017 … and not for the better. The current rules are more generous than the new rules in that they enable the landlord to receive tax relief at his or her marginal rate of tax. By contrast, the new rules - which are being phased in - will, when fully implemented, provide relief only at the basic rate. Further, relief will be given as an income tax reduction rather than as a deduction from rental income when computing taxable profits.
Current rules - Under the existing rules, interest and other finance costs, such as fees for arranging a mortgage or loan, are deducted as an expense when working out taxable profits.
Example - John has two properties which he lets out. In 2016/17, he pays mortgage interest of £10,000 on mortgages taken out to buy the properties. He receives rental income of £18,000 in the year and incurs other allowable expenses of £2,000.
The properties are investment properties. John is employed as an IT consultant and in 2016/17 he receives a salary of £70,000. He is a higher rate taxpayer.
For 2016/17 he can deduct the mortgage interest, along with the other expenses, to arrive at a taxable profit of £6,000. Thus, he obtains relief for the mortgage interest at his marginal rate of tax of 40% - thereby reducing his tax bill by £4,000.
Looking ahead - Relief for finance costs is to be gradually restricted from 2017/18 onwards, although the restriction only applies in relation to residential properties. It does not affect commercial lets.
The restriction is to be phased in from April 2017 and will be fully in place from the 2020/21 tax year.
In the transitional period, some relief will be given as for the current rules as a deduction in computing profits and relief for the remainder will be given as a basic rate tax deduction.
Based on the facts in the above example, once the restriction is fully implemented, John will receive relief for his mortgage interest costs as a reduction in his tax bill of £2,000 (assuming a basic rate tax of 20%). The change in the rules will ultimately cost him £2,000 a year compared to the current position.
The current rules are more generous than the new rules, and where costs can be brought forward to 2016/17 rather than 2017/18, this can be potentially advantageous to higher and additional rate taxpayers.
Partner note: ITTOIA 2005, s. 272A, 272B, 274A (as inserted by F(No. 2)A 2015, s. 24).
Student Loan Repayments
Changes to student loan collection from April 2016.
Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HM Revenue and Customs (HMRC). Employers have an obligation to deduct student loan repayments in certain circumstances, and to account for such payments 'in like manner as income tax payable under the Taxes Acts'.
With effect from 6 April 2016, there are two plan types for student loan repayments:
Plan 1 loans are pre-September 2012 income contingent student loans, and repayments will start when the £17,495 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £21,000 is reached. Previously, these have been repaid outside of the payroll directly to the SLC. From April 2016, they are to be calculated and repaid via deduction from an employer's payroll. So, employers and payrolls must now be capable of coping with both types of plans.
Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:
Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.
Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee's pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).
Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.
Claiming tax relief for employment expenses
In most cases, employees will be able to claim back any expenses that they incur in doing their job from their employer. However, where the employer will not reimburse the employee’s expenses, there may be tax relief to be had.
Relief can only be claimed for qualifying expenses. These may be either qualifying travel expenses or expenses wholly, exclusively, and necessarily incurred in performing the duties of the employment. Any expense that meets this condition is eligible for relief, although those seeking to make a claim should be warned that this is a strict test.
Employees may incur travel expenses as part of their job. While there is generally no deduction for the normal day to day costs of travelling between home and work (unless the employee is temporarily working at another location for less than two years), employees may be able to obtain tax relief for the cost of business journeys where this is not met by the employer. To qualify, the journey must be a business journey and not substantially the same as the normal home to work journey – for example, travelling to visit a supplier in another part of the country or attending a meeting during the day at a customer’s premises. A deduction may be claimed for the cost of public transport, parking, etc.
A deduction may also be claimed for associated expenses on food, drink, and overnight accommodation.
Where the employee uses his or her own car for business travel and the employer does not meet the cost, the employee can claim a deduction based on 45p per mile for the first 10,000 business miles in the tax year, and 25p per mile thereafter. If the employer does pay a mileage allowance, but it is less than this, the employee can claim relief for the shortfall.
Fees and subscriptions
If the employee pays a subscription to an approved professional body and the employer does not meet the cost, the employee is entitled to the tax relief as long as membership is necessary or helpful to his or her job.
Working at home
Where the employee works at home, they may be able to claim relief for the additional costs incurred as a result, such as additional electricity and gas used. A claim of £4 a week does not need to be substantiated.
If the employer meets some but not all of the cost, the deduction claimed must be reduced by the amount reimbursed by the employer.
Making the claim
Tax relief for employment expenses can be claimed via the self-assessment return where the employee needs to complete one. If the employee does not need to complete a tax return and the claim is not more than £2,500, it can be made on form P87.
Help to Save
The introduction of Universal Credit has been anything but smooth, but for those claimants who manage both to receive the benefit and save some of it, there is extra cash to be had.
Help to Save accounts are aimed at people on a low income and are designed to help those falling in this income bracket to build up their savings.
Help to Save accounts will be available to adults in receipt of Universal Credit who have minimum weekly household earnings equivalent to 16 hours at the National Living Wage (currently set at £7.50 per hour), or those in receipt of Working Tax Credit.
A Government bonus is available under the scheme as an incentive to save. The Government bonus is payable at a rate of 50% on savings up to £50 per month, saved in a Help to Save account. To encourage people to leave the money saved in the account, the bonus will not be paid for two years. Savers will then have the option of continuing to save for a further two years; receiving a further Government bonus at the end of the second two-year period.
Building up a rainy-day fund
A person who saves £50 per month into a Help-to-Save account will have saved £1,200 at the end of the first two-year period. At this point, they will receive a Government bonus of 50% of the amount saved – taking the balance on the account to £1800. The saver will then have the option of saving for a further two years. Assuming they continue to save £50 per month, they will add a further £1200 to their savings during this period. At the four-year point, they will receive a second bonus of 50% of the amount saved in years 3 and 4 – a further £600 (50% of £1200). At this point, the balance on the account will be £3600 (plus any interest saved), of which the saver will have saved £2400 and the Government will have contributed £1200.
Only one account
An individual opening a Help to Save account will only be allowed to have one Help to Save account open at any one time. Eligibility will be checked when the account is opened.
Change in circumstance
If the individual is eligible for a Help to Save account at the time it is opened, any subsequent change in circumstance (for example, ceasing to be eligible for Universal Credit or Working Tax Credit) will not affect their entitlement to continue to save under the scheme for the full four-year period.
Individuals can withdraw any money that they save at any point (although this may affect the bonus paid). The Government bonus can only be accessed when the account matures – either after two years or if the saver opts to save for a further two years, at the end of that period.
Accounts will be open to new applicants for five years from the 2018 launch date.
Claiming Tax Back on Gift Aid Donations
Gift aid can be very valuable to charities and to community amateur sports clubs (CASCs), as for every £1 donation made under the scheme, the charity or CASC can reclaim 25p from HMRC.
To benefit from the gift aid scheme, the recipient must be recognised as a charity or CASC for tax purposes.
Gift aid can only be claimed on donations made by individuals who have made a declaration giving the recipient permission to make a claim and who are UK taxpayers. The declaration must include the name of the charity or CASC, the name of the donor, and the donor’s home address. Gift aid declarations should be kept for six years.
The individual must have paid sufficient income tax or capital gains tax. The tax paid to the charity is funded by the tax paid by the individual – who receives tax relief on their donation.
Gift aid cannot be claimed on donations made by limited companies or those made under the Payroll Giving scheme. Payments that are for goods and services purchased from the charity or CASC are not donations and as such do not attract gift aid. Likewise, payment of membership fees cannot be made under gift aid.
It is also possible to claim gift aid on small donations, such as those obtained via a collection, without the need for a gift aid declaration. Under the gift aid small donations scheme (GASDS), gift aid can be claimed on cash donations of £20 or less, and on contactless card donations of £20 or less where these are made on or after 6 April 2016. From 6 April 2016, the charity can claim up to £2,000 in a tax year (for earlier years, the figure was £1,250). However, the amount that can be claimed under the GASDS cannot be more than ten times that claimed under the gift aid scheme and supported by gift aids declarations. So, to claim the maximum £2,000 under the GASDS, the charity must claim a minimum of £200 under the gift aid scheme, with the necessary gift aid declarations. Records of cash donations should be kept.
Making a claim
A claim for gift aid can be made online (see www.gov.uk/claim-gift-aid-online), using either compatible software (such as a database) or a spreadsheet of donations. Applications can also be made by post on form ChR1, which can be obtained from the charity’s helpline. Claims under the GASDS are made in the same way.
Gift aid claims must be made within four years of the financial period in which the donation was received; for small donations, the claim must be made within two years of the end of the tax year in which the donations were collected.
Gift aid is paid by BACS, normally within four weeks where the claim is made online and within five weeks where the claim is made by post.
Property development – are you trading?
For many, buying a property, doing it up and selling it for a profit is an attractive proposition. However, it will not always be clearcut when the line between simply investing in property and trading is crossed. From a tax perspective, the distinction is important as the tax consequences are not the same.
Which tax? - Assuming the goal of selling the property for more than it cost to buy and do up is realised, for tax purposes, it is important to determine whether that surplus is a chargeable gain liable to capital gains tax or a trading profit liable to income tax.
A gain in an investment property is taxed as chargeable gain (and conversely, if the property market fell and the property was sold at a loss, the loss would be an allowable loss). To the extent that it would remain available, any gains in excess of the annual exempt amount would be charged at the residential property rates of capital gains tax, which for 2017/18 are 18% where the taxpayer is a basic rate taxpayer and 28% where the taxpayer is a higher or additional rate taxpayer.
By contrast, a property developer who is trading and running an unincorporated business would be taxed at his or her marginal rate of tax once the personal allowance has been utilised – 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 45% for an additional rate taxpayer.
Investment vs trading – a question of intention
The starting point for determining whether the taxpayer is investing in property or trading is the original intention when buying the property.
Scenario 1 - Ben buys a run-down property as a long-term investment with a view to doing it up and then renting it out. Following a change in his personal circumstances, he sells the property shortly after completing the renovations, realising a gain of £30,000. His intention was to hold the property as an investment and this has not changed as a result of the sale. The gain is, therefore, chargeable to capital gains tax.
Scenario 2 - Bill also buys a run-down property, but he sees it as an opportunity to make a quick profit. He renovates the property and sells it once the renovations are complete. He makes a profit of £30,000 which he invests in another property that he also does up and sells, this time realising a profit of £50,000.
Unlike Ben, Bill is trading. His intention is to buy and sell property to make a profit. The profit is charged to income tax as trading income.
Determining intention will not always be clear cut. HMRC will consider factors such as how long the taxpayer owned the property, whether the sale and purchase is a one-off or one of series of transactions, whether the property has been rented out, whether it was acquired for personal enjoyment and whether there is a connection with the existing trade. This will provide a picture that determines whether the taxpayer is investing in or trading in property.
To ensure that the unwary do not get caught by unintended tax consequences, the question of whether the taxpayer is making an investment or trading should be determined at the outset.
NMW and sleep-in shifts
There has, historically, been some confusion as to whether, and when, the National Living Wage (NLW) or the National Minimum Wage (NMW) needs to be paid to workers while they are sleeping. HMRC have recently launched a new compliance scheme for social care employers who may have incorrectly paid workers below the legal minimum for sleep-in shifts.
When must the NLW/NMW be paid?
The extent to which a worker must be paid when sleeping between duties depends on whether the worker is still regarded as ‘working’. A worker who is found to be working, even though he or she is asleep, is entitled to be paid the NLW or NMW, as appropriate for their age, for the entire time that they are at work.
A worker may be regarded as working while they are asleep if, for example, there is a statutory requirement for them to be present and they would face disciplinary action if they left the workplace. An example of this may be a person who works overnight shifts in a care home and sleeps on the premises, but there is a statutory duty for someone to be present. Such a person would be considered working for the entire shift, even when sleeping, and would be entitled to the NLW/NMW.
By contrast, a person who works in a pub and lives in a flat above the pub is not likely to be regarded as working, even if they are required to sleep there so someone is on the premises to reduce the chance of being burgled.
Social Care Compliance Scheme
The Social Care Compliance Scheme (SCCS) was launched in November 2017 to help employers in the social care sector with historic underpayments in relation to ‘sleep in shifts’ pay arrears without suffering financial penalties.
In July 2017, the Government announced that they would waive all financial penalties in relation to arrears arising before that date in respect of NMW underpayments for sleep-in shifts. Future underpayments will be subject to the usual penalties.
An interim National Minimum Wage enforcement approach for the social care sector was published on 1 November 2017. Social care employers at risk of NMW underpayments for sleep-in shifts will be offered the opportunity to opt-in to the SCCS (subject to meeting minimum criteria and at the discretion of HMRC). Social care employers who participate in the scheme will be offered a period of 12 months in which to conduct the self-review with access to HMRC technical support and a further three months to pay all arrears due to workers. Providing that all arrears are paid within this timescale, the employer will not be liable to financial penalties and naming and shaming. Regardless of when a social care employer enters into the SCCS, a final deadline of 31 March 2019 applies by which all arrears must be paid to workers.
Social care employers who choose not to opt into the SCCS will not be offered further concessions, will be subject to the usual investigative powers and will face the usual financial penalties (other than in relation to sleep-in shift arrears relating to periods before 26 July 2017).
Self-assessment payments on account
As the self-assessment deadline looms, it is not only necessary to consider what might be owing for 2016/17, but also whether any payments on account towards the 2017/18 liability need to be made.
When are payments on account required?
Self-assessment taxpayers must make payments on account, unless:
the self-assessment bill for the previous year was less than £1,000; or
more than 80% of the tax liability was collected at source, for example, through PAYE.
How much is each payment on account?
Each payment on account is equal to 50% of the previous year’s tax and Class 4 NIC liability. Although Class 2 contributions are now collected via the self-assessment system, they are not taken into account in working out payments on account and are payable in full no later than 31 January after the end of the tax year to which they relate.
When are they due?
Payments on account are due by midnight on 31 January in the tax year and by midnight on 31 July after the end of the tax year. Any remaining tax for the year must be paid by 31 January after the end of the tax year, along with any Class 2 National Insurance contributions due.
So, for 2017/18, payments on account equal to 50% of the 2016/17 income tax and Class 4 liability are due by 31 January 2018 and 31 July 2018, with any balance and the 2017/18 Class 2 National Insurance liability being paid by 31 January 2019.
Bill is a self-employed gardener. His profits in 2016/17 were £20,000, giving rise to a tax liability of £1,800 and a Class 4 National Insurance liability of £1,074.60 – a total of £2,874.60.
As his liability for 2016/17 is more than £1,000, he must make payments on account for 2017/18.
Each payment on account is £1,437.30 (50% of £2,874.60). The payments on account are due by 31 January 2018 and 31 July 2018.
What happens if income falls?
If circumstances change and a taxpayer knows that his income in the current year will be less than in the previous year, he or she can ask HMRC to reduce the payments on account to reflect the lower liability. This can be done via the taxpayer’s online account (by selecting `reduce payments on account’) or by sending form SA303 to the tax office.
Beware though, if the payments on account are reduced too much, interest will be charged on the shortfall.
Dividends have lost some of their appeal thanks to the changes announced in the 2015 Summer Budget, and implemented from 6 April 2016. Basically, the effective income tax rate on dividends has increased by 7.5% across the bands, significantly narrowing the efficiency margin. However, where the alternative is a bonus subject to employees' and employers' National Insurance contributions (NICs), they are still relatively tax-efficient, and are likely to remain the preferred method of extracting profits (broadly above the personal allowance) for many family-owned companies.
Beware of insufficient company reserves - The company may pay out as dividends only what it can afford to, when measured against its distributable profits - basically all the after-tax profits it has ever made since incorporation, after all previous dividends it has paid out. It does not necessarily matter if a company is making losses, or has just made losses in the latest accounting period; what matters is whether there remains an overall distributable surplus.
Get the balance right - Taxpayers often assume that they can vote dividends in the amounts they see fit, for various family shareholders. By default, dividends must be voted in proportion to shareholdings. This is arguably subject to the company’s Articles of Association, but it would be most unusual for the Articles to deviate from this standard.
Dividend waivers - One of the ways to get around this is to 'waive' one’s entitlement to a proposed dividend by means of a dividend waiver, in respect of some or all of one’s shares. The waiver can be in respect of a future dividend, or several future dividends, or apply for a given period.
Pitfalls with waivers - A waiver is a formal document: it is a legal deed of waiver so must be drawn up correctly, and must be signed and witnessed accordingly. Waivers cannot be implemented retrospectively; they must be in place before entitlement to the dividend arises. They should not last for more than twelve months.
Alphabet shares instead? - If waivers are likely to be a regular feature, then it may be better to issue a separate class of shares to the affected shareholder, that may well rank on an equal footing with the original class of shares, but effectively circumventing the presumption that all shares of a particular designation are equally entitled to a dividend. It is generally recommended that such shares rank on an equal footing so that they are demonstrably and significantly more than just a right to income.
Pitfalls in relation to timing of dividends - A common pitfall with otherwise valid dividends is that the dividend paperwork must also be in order - and timeous.
ln particular, interim dividends may be varied at any time up until they are actually paid, and if payment is effected by journal entry rather than with a money transfer (cheque, bank credit, etc.) HMRC’s position is that it is not effected until it is written up in the company’s books and accounting records. ln HMRC’s company taxation manual (at CTM15205), HMRC is quite clear that if the journals are written up later on, the dividend will be treated as paid on that later date - even if in a later income tax year.
Conclusion: Despite the government’s best efforts, dividends remain a very important component of the profit extraction/remuneration strategy of most family companies. There are, however, numerous opportunities to go wrong, and it is important to work with your accountant to develop (and stick to) a compliant regime that works for your business.
Savings income – do you need to claim back tax?
From 6 April 2016 onwards, bank and building society interest has been paid gross without the deduction of tax. However, previously basic rate tax was deducted at source unless you were a non-taxpayer who had registered to receive your interest gross.
If you had savings income in 2015/16, your taxable income was low, and if you hadn’t registered to receive your income gross, you may be due a repayment.
For 2015/16, the personal allowance was set at £10,600. To the extent that taxable non-savings income did not exceed the savings rate limit of £5,000, savings rate income was taxed at 0%. This meant that an individual could potentially receive up to £15,600 of savings income tax-free if they had no other income.
Case study 1
June is 74. In 2015/16, she receives a pension of £8,000 and bank and building society interest of £6,000 (gross) from which tax of £1,200 has been deducted.
Her total income for the year is £14,000.
Her pension of £8,000 is fully covered by her personal allowance of £10,600, leaving £2,600 of her personal allowance available to set against her savings income of £6,000.
The remaining £3,400 of her savings income is taxed at the savings starting rate of 0%. She has no taxable non savings income, so the full £5,000 nil rate savings rate band is available to her.
Therefore, no tax is due on June’s saving income of £6,000 and she is entitled to a repayment of the tax of £1,200 deducted at source.
Case study 2
Margaret is also 74. She receives a pension of £12,000 and building society interest of £6000 on which tax of £1,200 has been deducted.
Her personal allowance of £10,600 is set against her pension, leaving her with £1,400 of taxable pension income. The savings starting rate band of £5,000 is reduced by the amount of her taxable non-savings income, reducing the amount of savings income eligible for the zero rate to £3,600.
The first £3,600 of her savings income is tax-free. The remaining £2,400 is taxed at 20% - giving rise to a tax bill of £480. However, as £1,200 has been deducted at source, Margaret is entitled to a repayment of £720.
Claiming the repayment
The 2015/16 self-assessment tax return should have been filed by 31 January 2017. Where a tax return has been completed, the repayment can be claimed via the self-assessment system.
Where there is no requirement to file a tax return, a repayment of tax on savings income can be claimed on form R40.
Savings allowance from 6 April 2016
In most cases, the need to claim a repayment of tax deducted from savings income will disappear from 6 April 2016. From that date, bank and building society interest is paid gross and basic rate and higher rate taxpayers are allowed a savings allowance allowing them to receive savings income tax-free up to the level of the allowance, regardless of whether they have taxable non-savings income. The allowance is set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers for both 2016/17 and 2017/18. The savings rate limit and starting rate for savings remain, respectively, at 0% and at £5,000.