Reporting and paying tax on UK residential property gains
Where a chargeable gain arises in respect of a UK residential property, since April 2020, the gain must be reported to HMRC and a payment made on account of the associated tax liability. The good news is that taxpayers now have longer to tell HMRC about the gain and to pay the tax.
When might a liability arise?
A chargeable gain may arise on the sale of a residential property if that property has not been the owner’s only or main residence throughout the period that they have owned it. This may be the case where the property is an investment property, such as a buy-to-let or a holiday let, or where it is a second home, such as a holiday home or city flat.
If any gain resulting on the sale or disposal of the property is not offset by allowable losses or sheltered by the annual exempt amount, there will be capital gains tax to pay.
Reporting the gain
Residential property gains not covered by private residence relief must now be reported to HMRC. To do this, it is necessary to set up a Capital Gains Tax on UK property account on the Gov.uk website and use this to report the gain.
However, if the gain is reported on a self-assessment return before the end of the reporting window, the gain does not also need to be reported via the online service.
The time limit for reporting residential property gains was increased to 60 days of the date of completion where this took place on or after 27 October 2021. Where the sale completed between 6 April 2020 and 26 October 2021, the gains must be reported to HMRC within 30 days of the completion date. This creates the slightly anomalous result that a gain on a sale completing on 20 October 2021 must be reported before the gain on a sale completing on 30 October 2021.
A penalty of £100 is charged for a failure to report the gain within the reporting window.
Paying tax on account
A payment on account of the tax due on the gain must also be made to HMRC within the same time frame as that applying for reporting the gain – 60 days where completion is on or after 27 October and 30 days where completion is earlier.
The amount paid on account is the best estimate of the capital gains that is due at that point in time. To calculate the amount due, the following should be taken into account:
Payment can be made online via the taxpayer’s Capital Gains Tax on UK property account. Interest is charged if the tax is not paid within the 30-day window.
The overall capital gains tax position for the tax year will depend on other disposals in the year. If other disposals are made in the year, the position is recalculated after the end of the year on the self-assessment return.
Treating deposits from tenants correctly for tax purposes
A landlord will normally take a deposit from a tenant when letting a property to cover the cost of any damage caused to the property by the tenant. A deposit of this nature may be referred to as a security deposit, a damage deposit or a rental deposit. The landlord may also ask for a holding deposit in return for taking the property off the market while the necessary paperwork is undertaken.
The purpose of the deposit is to cover items such as damage to the property that extends beyond normal wear and tear. The deposit may be used for cleaning costs if the property was not left clean and tidy, replacing broken items, etc. It may also be used to recover unpaid rent.
The deposit that may be required from a tenant is capped at five weeks’ rent where annual rent is less than £50,000 and at six weeks’ rent where annual rent is more than £50,000.
Deposits taken by a landlord or agent for an assured shorthold tenancy in England or Wales are protected by Government authorised schemes. The various schemes each feature an alternative dispute resolution service, removing the need to go to court in the event of a dispute.
In a straightforward case, the landlord will hold the deposit for the duration of the tenancy and, if there is no damage for the tenant to pay for, the landlord will return the deposit to the tenant. In this situation, the deposit does not form part of the income of the property rental business, and is not taken into account in working out the taxable profit.
If there is damage to the property or the furniture, or if the property has not been cleaned in accordance with the tenancy agreement, the landlord may wish to retain some of the deposit to cover these costs. The landlord cannot simply keep the money – the amount retained must be agreed with the tenant. If agreement is not reached, the dispute will go to arbitration. It should be noted that the burden of proof falls on the landlord, who should provide evidence to support their claim to retain all or part of the deposit.
In the event that some or all of the security deposit is retained by the landlord, the amount retained should be included as income of the property rental business. However, any costs incurred by the landlord can be deducted in working out the taxable profit.
A landlord may take a holding deposit from the tenant, particularly when the rental market is buoyant. The tenant pays the deposit in return for the landlord holding the property for them while the paperwork is completed. The holding deposit cannot be more than one week’s rent.
If the agreement falls through, the landlord may retain some or all of the holding deposit to cover his costs. The deposit retained is included as income of the property rental business. However, corresponding costs, such as drawing up the agreement or undertaking viewings, can be deducted as expenses.
If the deposit is returned to the tenant, it is not treated as income of the property.
If the let goes ahead, the deposit may be returned to the tenant, in which case there are no tax implications; treated as payment on account of rent, in which case it is included as rental income of the business; or used as part of the security deposit, the tax implications of which are set out above.
Settlement provisions & dividends - settlement 'tests'
When an asset is placed within a trust it is termed as being ‘settled’. However, the tax legislation defines the word 'settlement' widely as including ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets’. Therefore a ‘settlement’ situation may present itself within owner managed companies when a shareholder (or associate of a shareholder) enters into an ‘arrangement’ of diverting income one to another, resulting in a tax advantage.
A common example of where such an arrangement may be found is a company incorporated with nominal share capital, which is owned jointly by husband and wife (or by people living together or closely connected by personal or family ties) and one is taxed at a lower tax rate than the other (or not subject to tax). In this situation it would seem tax efficient for one spouse to gift or issue an appropriate number of shares to their non taxpaying or lower rate taxpaying spouse; the company would then pay sufficient dividends to that lower or non taxpaying spouse only (or a small dividend to the higher earner and a larger one to the lower). However, HMRC have been known to question such arrangements not least where one of the owners works full-time in the business (or does most of the work) and the other's involvement is much less - all that has to be shown is a definite plan to use a company's shares to divert income. In instances where the settlements legislation is found to apply, the arrangement is deemed null and void with all of the income being treated as that of the settlor (invariably the higher rate shareholder). There is an exemption for outright gifts to spouses but this only applies if both of the following conditions apply:
• The gift carries the right to the whole of the income arising and
• The property is not wholly or substantially a right to income.
The settlement ‘tests’
Tax cases using similar arrangements are becoming increasingly common such that in the main case under this heading of Jones v Garnett  UKHL 35 (colloquially known as the Arctic Systems case). Although HMRC lost the case the judge did consider the answer two questions:
1. Is the arrangement one which might realistically have been entered into by parties acting at arm's length?
2. in arrangements between spouses - is the gift an outright gift and not wholly or substantially a gift of income?
If the answer is 'yes' to both then the 'settlement' rules do not apply, and the arrangement is valid.
HMRC will pursue those whom they believe are transferring income (or ‘purely’ income between spouses) in any manner which is uncommercial and results in less tax being paid. Alphabet shares, whilst common, are just such a tool for doing this; as are dividend waivers.
An arrangement that frequently attracts HMRC’s interest is where each spouse owns shares in a family-owned company but one spouse voluntarily ‘waives’ their right to the income usually because the receiving spouse is taxed at a lower marginal tax rate. HMRC’s argument is that the waiver indirectly provides funds for a ‘settlement’ on the receiving spouse. When considering whether the 'settlement' rules apply, HMRC look at the commercial reality of such waivers and especially whether the arrangement was one which the parties would normally have entered into with someone who was not so close (i.e. 'at arm's length').
Husband and wife companies need to take care as HMRC often look at the pattern of dividend waivers made regularly to determine whether there has been a diversion of income. The use of different classes of shares to pay separate levels of dividend (Alphabet shares) may be more tax efficient should one spouse will be taxed at a higher marginal rate from the other.
Residential Property Developer Tax
Legislation has been published in draft which will bring a new tax – the Residential Property Developer Tax (RPDT) onto the statute book. The publication of the draft legislation, on which comments were sought, follows a consultation earlier in the year on the design on the tax.
The tax is being introduced as part of the Government’s Building Safety Package announced in February in the wake of the Grenfell tower cladding scandal. It aims to raise revenue to help fund vital remediation works. The Government’s expectation is that building owners and developers should meet the costs of remedial to ensure all cladding is safe without passing on to the leaseholder. However, where they have not met the cost, or the builder or developer no longer exists, the Government will provide support in meeting the costs.
The RPDT is one of two revenue-raising measures contained in the package; the other being a new Gateway 2 levy which will be applied when developers seek permission to develop certain high-rise buildings in England.
Nature of the new tax
The RPDT is a time-limited tax that will apply to the largest residential property developers in respect of money that they raise from UK residential development. The tax will be introduced in 2022. The stated aim is to raise £2 billion over the next 10 years.
The tax will apply to companies within the charge to corporation tax that undertake residential property development activities. Residential property development activities are activities that are carried out by a residential property developer on, or in connection with, land in the UK in which the residential property developer has an interest and which are for the purposes of the development of residential property. This may include:
Certain properties fall outside the definition of ‘residential property’, including residential homes for children, residential care homes, student accommodation, residential accommodation for the armed forces, members of the emergency services and those working in a hospital.
The tax will apply to the developer’s residential property profits (as calculated in accordance with the formula set out in the draft legislation), to the extent that they exceed its allowance for the accounting period.
The allowance limits the scope of the tax only to large residential property developers.
As announced in the Autumn Budget on 27 October 2021, the tax will apply on profits in excess of £25 million and will be charged at the rate of 4%.
Different ways of deferring CGT
Capital gains tax (CGT) is levied on capital gains made on the disposal (including gifts) of most assets. However, if the disposal is of 'business assets' by a trader (including a personal trading company) then it is possible to defer the charge. Methods of deferral available for both self employed and companies are via the purchasing of a replacement asset ('Business Asset Rollover relief') or 'Hold over relief'.
'Roll over' relief
This deferral relief is available to traders who dispose of business assets replacing them with others. To qualify the business must be trading (although not necessarily in the same business which could be helpful if the trader is embarking on a new venture), both the 'new' and 'old' asset must be used in the business for the whole period of ownership and the new asset be purchased within three years of selling or disposing of the old one (or up to one year before). The deferral works by reducing the cost of the replacement asset such that there is a lower cost and higher capital gain.
The replacement assets must have a predictable life of more than 60 years, so we are looking at land, buildings, fixed plant or machinery, aircraft, goodwill and farming items. The assets do not have to be the same but need to have the same predictable life span. One crucial condition is that some consideration must be received although this need not necessarily be cash. If only part of the sale proceeds is used, then the remaining part of the gain is chargeable immediately, subject to any further relief such as the Business Asset Disposal Relief (BADR), where relief is also possible on the associated disposal of assets used in the company when a company is sold. A point to note regards the order of BADR and 'roll over' relief such that BADR cannot be claimed on a gain that has been 'rolled over'. If a full 'rollover' is not possible, e.g. not all proceeds are reinvested, a BADR claim may be made for the remaining gain.
The new asset must be brought into use in a trade as soon as it is acquired, although HMRC will allow a short gap if improvements/alterations are needed to the new asset and it is not used for anything else in the meantime.
'Rollover' relief is also available where an asset owned personally but used in the business (including the owner's personal company so long as the shareholder owns 5% or more of the voting rights) is disposed and replaced.
'Hold over' relief
Deferment relief is more likely to be claimed as 'hold over' relief as most business assets will be those whose depreciation life is less than 60 years. The method of giving relief is different from 'roll over' relief such that the gain does not reduce the capital gains tax cost of the asset, instead the gain is held over for a maximum of 10 years becoming chargeable either the replacement asset is sold or ceases to be used in the business.
Another possible claim
If the above reliefs cannot be used then a claim under either 'gift relief' may be possible. This relief is not restricted to outright gifts but can be claimed for at least partial relief where a business asset used in trade has been sold at an undervalue with any cash proceeds being taxable in the year of disposal. This relief works by both parties claiming that the actual gain is reduced by the amount of the relief and the donee’s deemed consideration is reduced likewise.
Avoiding an investigation: How does risk assessment work?
Last year apart, the number of tax enquiries is on the increase; the reason is not because more taxpayers are seeking to defraud the tax system but because advances in digital technology and data exploitation are enabling more efficiently targeted enquiries. For example, although HMRC undertook fewer stamp duty land tax investigations last year, the same amount of unpaid tax was achieved by targeting higher-value sales.
The more common type of enquiry for individuals or trustees focuses on entries made on a specific tax return. Such an enquiry must be opened within 12 months of the return’s submission, unless submitted late. HMRC will request information and documents to enable it to check any aspect of the return, comparing with information already held to ensure the return is complete. In some cases, HMRC’s Fraud Investigations Service may open a Code of Practice (COP) 8 or 9 investigation. COP9 is used for suspected fraud or deliberate errors cases whereas COP8 tends to be used for cases where fraud is not suspected so the problem is more likely to be a technical issue (e.g. whether a source of income is taxable in the UK or not).
How investigations are triggered
Although many investigations are undertaken as a result of advice from a member of the public, over 90 per cent of cases are triggered by information and analysis generated by HMRC's sophisticated data matching and risking tool named 'Connect', designed to process and analyse large volumes of data. The system incorporates many analytical tools and methods including predicting trends and individual behaviour patterns. Data is collated from government databases including Land Registry, local government planning consents, the Border Agency, the DVLA, Companies House, Council Tax, Business Rates, PAYE/corporation tax/VAT/CIS returns, import and export records and private sector financial information from credit card issuers and companies such as eBay, PayPal and Airbnb.
All credit and debit card payments made to UK businesses via the companies that process card payment transactions can be accessed to ascertain the value of transactions completed by a specific trader, the information is then used to compare card sales made by a business each month with the taxes paid. Any inconsistencies may be queried. The system also indicates where more in-depth investigations might be required, identifying “hidden” relationships between people, organisations and data that could not previously be identified.
The department dealing with the collation of data is the 'Risk and Intelligence Service' and by using 'Connect' it can automatically:
• Obtain third party information from sixteen business categories including employers, banks, insurance companies, financial institutions, brokers, auctioneers, estate agents and charities
• Review employment records, which can also assist in profiling a business as well as identify those operating by using persons who may be termed as 'self employed' but may really be employed
• Connect taxpayers to companies/entities
• Connect bank accounts
• Collate social media information
• Compare taxpayer/business profiles to identify those that are similar
Patterns in behaviour
Most importantly the computer programme can uncover patterns in taxpayer behaviour, cross matching the data with information already held (or declared on the tax return with such third party items). HMRC can use the data pattern to seek anomalies between bank interest, property income and other lifestyle indicators. It risk assesses business sectors in local and geographical areas, comparing similar businesses within the sector, cases for enquiry being identified as a compliance risk and sent to the appropriate local office for possible enquiry.
Post pandemic, HMRC is restarting tax investigations that had been paused and already over 100,000 compliance investigations have been opened in the first quarter of 2021, a 36 per cent increase from 75,000 compliance investigations in the last quarter of 2020. The number will only increase the more sophisticated the 'Connect' programme becomes.
Companies limited by guarantee
Companies Limited by Guarantee (CLG) are private companies that do not have shares or shareholders but instead have members called 'guarantors'. The members agree to contribute a certain amount (usually a nominal £1 - £10) to the company’s assets if the company is wound up and as such the main reason for a CLG is to protect the people running the company from personal liability for the company's debts. Limited liability is allowed provided the members have not acted negligently or fraudulently and not allowed the company to continue trading whilst insolvent. As with a company limited by shares, a CLG is a legal identity separate from the members and this allows the company to own property in its own name and even run a business.
Companies best suited to being CLG's are non-profit making associations such as charities, professional, trade and research associations, social or sporting clubs supported by private subscriptions and other groups of people with mutual interests. Many flat management companies are CLG as are community interest companies and academy trusts. Sometimes funding bodies, such as local authorities, insist on an organisation being registered as a CLG.
Profits of CLG companies are generally reinvested back into the company or used for some other purpose as specified in the Articles of Association. Payments to board members can be made but only as remuneration (unless repayment of expenses only) and not dividend. CLG's have no shares so cannot distribute profit to shareholders or sell the shares. Technically CLGs can distribute profits to members (unless the Articles of Association say otherwise) but all charities and most other CLGs have a "not for private gain" clause so any profits cannot be distributed as otherwise the company's charitable status becomes invalid.
Commercial trading CLGs will likely use the term 'profit' in their accounts to describe any excess of income over expenses, voluntary membership organisations usually use the term 'surplus'. The moment a trading activity (that is not mutual) is undertaken then that is a taxable activity. Unfortunately, this means that any grants and donations that cannot be specifically identified as relating to a non-trading activity are regarded as being used to off-set the trade expenditure and so become taxable.
A CLG has the same legal requirements as a private company limited by shares, as being registered at Companies House, submitting accounts and an annual return each year to both Companies House and HMRC within the usual deadlines. Also similarly to a share company, a CLG company can borrow money and issue debentures which can aid the task of securing external funding. Charitable organisations may also obtain capital through grants from the government or local authorities, by procuring charitable donations from the public, or charging a membership fee.
Community Interest Companies ('CIC's)
People who want to run a business or other activity for community benefit rather than for private advantage can register either as a company limited by shares or by guarantee but most CICs are CLG. The CIC limited by shares is useful where the company is being backed financially by one or more outside bodies or individuals who can invest in it by taking shares. There is, however, a statutory dividend cap, restricting the payment of profits out of the company.
Under the asset lock provisions for CLG, the assets and profits must be permanently retained within the company and used solely for community benefit, or transferred to a charity or another CIC.
If the company is a charity, registered with the Charity Commission, HMRC will usually require a corporation tax return but there will be no corporation tax to pay. As well as filing accounts a CIC must complete and submit a community interest company report. This report is placed on the public register, available to download.
New furnished holiday lets – Applying the test
All business must start at some point, and a furnished holiday lettings (FHLs) business is no exception. Unlike other rental properties, furnished holiday lettings enjoy special tax rules. As a result, they are able to benefit from capital gains tax reliefs for traders and claim capital allowances for furniture, fixtures and fittings. The profits from a furnished holiday lettings business also count as earnings for pension purposes.
However, to access these reliefs, the let must meet several tests for it to be considered a FHL.
The property must be let furnished and must be in the UK or the EEA. It must also pass all three of the following occupancy conditions:
Condition 1 – The pattern of occupation condition
Continuous lets of more than 31 days must not exceed 155 days in total in the year.
Condition 2 – The availability condition
The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year. Days when the landlord stays in the property are not counted.
Condition 3 – The letting condition
The property must actually be let as furnished holiday accommodation for at least 105 days in the tax year. Longer-term lets of 31 days are excluded, as are periods when the property is let to family or friends for free or at a reduced rate.
Period for which the tests are applied
For a continuing holiday let, these tests are applied on a tax year basis to determine whether the property qualifies as a furnished holiday letting for the tax year.
However, different rules apply for the first year and the tests are applied over the 12-month period from the date that the holiday letting began. This means that some periods will be taken into account twice in working out whether the property qualifies.
Rueben buys a cottage in Devon, which he plans to let as a furnished holiday let. The sale is completed in August 2021. He spends a couple of months refurbishing the property and it is let as a holiday let for the first time on 14 October 2021. Letting commences in the 2021/22 tax year.
For year one, the tests are applied for the first 12 months, from 14 October 2021 to 13 October 2022.
Thereafter, the tests are applied on a tax year basis.
Payments on account – How are they calculated?
The self-assessment tax return for 2020/21 must be filed online by midnight on 31 January 2022 if a late filing penalty is to be avoided. The exception to this is where a notice to file a return for 2020/21 was issued after 31 October 2021, in which case the filing deadline is three months from the date on which the notice to file was issued.
Any remaining tax and National Insurance for 2020/21 must also be paid by midnight on 31 January 2022. This is also the deadline for making the first payment on account of the 2021/22 liability.
Requirement to make payments on account
You will need to make payments on account for 2021/22 if your tax and Class 4 National Insurance liability for 2020/21 was at least £1,000, unless you paid at least 80% of what you owe under deduction at source, for example, under PAYE.
Calculating the payment on account
When calculating your payments on account for 2021/22, the starting point is your tax and Class 4 National Insurance liability for 2020/21. It is assumed that the liability remains roughly constant year on year. Consequently, the payments made on account will collect an amount equal to the previous year’s liability.
Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Class 2 National Insurance contributions are not taken into account in working out payments on account.
Payments on account are due by 31 January in the tax year and by 31 July after the tax year; 2021/22 payments on account must be paid by 31 January 2022 and 31 July 2022.
Where the eventual liability is more than that paid on account, the balance must be paid by 31 January after the end of the tax year, together with any Class 2 National Insurance due for the year. If the liability has fallen, the excess can be offset against future liabilities (for example, payments on account for the following year) or, where this is not possible, refunded.
Option to reduce payments on account
If you think that your liability for 2021/22 will be lower than for 2020/21, you can opt to reduce your payments on account. This may be the case if, for example, you have lost a key customer or are struggling to recruit staff or secure supplies.
There are various ways in which you can tell HMRC that you want to reduce your payments on account. This can be done by signing into your online personal tax account and using the ‘reduce payments on account’ option or by completing form SA303 and sending it to HMRC. You can also tell HMRC that you want to reduce your payments on account in the ‘other information’ box on the self-assessment tax return. You will need to specify what you want to pay and the reason for the reduction.
However, beware of reducing the payments on accounts below that which you will eventually owe – while this may help your cashflow temporarily, you will be charged interest on the difference between what you should have paid and what you have paid.
The future for tax payments
The government receives its tax money on different dates depending upon the type of tax charged. Taxpayers taxed under PAYE usually pay their tax bills monthly; the self employed make two Payments on account plus a balancing payment, companies pay nine months and one day after the company year end and ‘Large Companies’ (broadly those with profits above £1.5m) make quarterly instalments.
If any taxpayer finds that they cannot pay by the due date then an agreement may be reached with HMRC in an attempt to provide some 'breathing space' for the taxpayer allowing cash flow to improve and HMRC more certain that payments will be made and made on time. A 'Time to Pay' (TTP) arrangement is a method by which tax payments are spread over a more extended period of time than would otherwise be available and is used for arrears of corporation tax, VAT and PAYE.
HMRC also offers a little-known 'Budget Payment Plan' (BPP) for taxpayers who are up-to-date with their past payments and wish voluntarily to make regular weekly or monthly payments towards the next tax bill. If the total paid during the year does not fully cover the taxpayer’s bill, the difference must be paid by the usual payment deadline.
The similarity between the two plans is that provided the agreement is adhered to, no interest and penalties will be due on any tax paid after the normal due date. Payment plans can be entered into for income tax, Capital Gains Tax, or corporation tax. The difference between the 'BPP' and 'TTP’ arrangements is that the 'Budget' plan is for future tax payments whereas 'TTP' plans are for tax already due.
Under HMRC's initiative 'Making Tax Digital' they are looking to take the 'Budget plan' one step further intending to bring the tax calculation closer to the point where the income or profit arises. HMRC believes that submitting quarterly reports will enable the taxpayer to 'budget' for their future tax bill more effectively as the calculation will be based on the taxpayer’s current year position using, where possible, up to-date data.
MTD reforms announced so far do not change payment dates or amounts and HMRC has said that more regular reporting under MTD need not lead to more frequent payments being forced on the taxpayer. Rather, HMRC believes that taxpayers will be able to estimate their tax liability for the year based on updated information and as such, this will prepare the taxpayer for future payments, leading to reductions in tax debt collection.
However, it is clear from various consultation papers issued by HMRC that their preference for the future will be for all taxpayers to use a variation of the 'Budget' scheme and make monthly payments on account of the calculation of the final tax liability. Their reasoning is that they are aware that the current payment timings can cause difficulties for some taxpayers coming into self assessment for the first time - particularly for the newly self-employed and new landlords. Many self employed are unaware that (depending upon the choice of year end) the first tax bill could be up to 22 months after commencement of trading and this can lead to taxpayers getting into debt which impacts on HMRC as additional cost for collection.
Currently the 'Budget' scheme allows the taxpayer to be flexible in their payments. There is no set amount to pay and many of those taxpayers who use the scheme do so in a similar guise as putting money aside in a separate bank account (although the 'downside' is no interest and once the payment is made it cannot be clawed back). HMRC believes that making monthly payments mandatory will lead to surety not only for the taxpayer but will also mean more certainty for the governments' cash flow.
'Dynamic' PAYE Tax Coding
Under the PAYE 'Real Time Information' scheme employers report to HMRC electronically before making any salary or wage payments. To ensure that the right amount of tax is deducted the employer uses the Code issued by HMRC. However, every PAYE Code Number is an estimate, since HMRC cannot guarantee the allowances or deductions included in the calculation of a PAYE Code number are accurate. As a result many taxpayers find that the amount of tax deducted by the end of the tax year is wrong.
Under the system named 'Dynamic coding', Codes are issued as soon as HMRC receives notification from employers, pension companies or the taxpayer themselves (via entries on their personal tax accounts). HMRC looks to amend the code within the tax year so that there is no delay in issuing a tax refund or, if the amendment results in an underpayment of tax, the taxpayer is not faced with an unexpected bill at the year end. To achieve this HMRC use the information they receive, estimate the amount that would have been owed at the tax year end and include this amount as a restriction in the current year’s tax code (termed 'in-year adjustments'). The assumption is made that an employee will continue to receive the same level of pay for the rest of the tax year as they have to date and so unless a 'trigger' is subsequently made the code will remain until another 'trigger' is applied. The limit to the amount of tax that can be collected through the PAYE code is less than 50% of income and the tax liability cannot be doubled.
Only specific 'trigger' events generate changes to tax codes. Such events are notifications of change in an employee's circumstances, e.g. a new employment, a new benefit-in-kind, increase in salary, etc. The receipt of data from employers will not be a 'trigger' point, unless the employer’s monthly Full Payment Submission includes a start date for a new employment.
The receipt of a pension can cause problems under such a system. For example, if a taxpayer is employed and starts to receive an occupational pension during the year, the pension company will supply the information to HMRC and as such there will be a 'trigger' event. Unless being the primary source of income, an occupational pension will always be treated as the secondary source such that personal allowances will be allocated against the primary income (ie the salary in this instance). The taxpayer may want the allowances to go against the pension first and the only way to change this is by the employee contacting HMRC.
As codings can only be amended following a 'trigger event, one of the areas where problems can arise is when an employee leaves. This is because employers are only permitted to send HMRC leaver information before employees are paid which means that HMRC are unable to make the 'new' job the primary employment (and therefore restore a cumulative personal allowance) until the ‘leaving’ notice (a Full Payment Submission) is submitted by the previous employer.
Bonuses can also cause problems as estimated pay may be considerably higher than actual pay. HMRC's estimated pay calculation assumes that pay accrues evenly throughout the year, and where a bonus has been paid, average weekly or monthly pay will be higher than normal for that month.
HMRC have increasingly been issuing codings to include an estimated amount of dividends or rental income based on the previous year's tax return information resulting in a reduction in monthly pay. Tax on such income is not due until 31 January after the tax year end and therefore HMRC is, in effect, collecting tax in advance.
If you believe your tax code is wrong you should contact HMRC who will issue your employer with a revised tax code as required.
Income from savings – What is tax-free
Not all types of income are equal from a tax perspective, and savings income enjoys dedicated allowances, tax rates and reliefs which allow a taxpayer to enjoy some or all of their savings income tax-free.
Personal allowance - The personal allowance for both 2021/22 and 2022/23 is set at £12,570. Any savings income that is sheltered by the personal allowance can be enjoyed tax-free.
Personal savings allowance - Taxpayers who pay tax at the basic or higher rates of tax also receive a dedicated savings allowance – the personal savings allowance. For both 2021/22 and 2022/23 this is set at £1,000 for basic rate taxpayers and at £500 for additional rate taxpayers. The personal savings allowance is available in addition to the personal allowance.
Taxpayers who pay tax at the additional rate do not benefit from a personal savings allowance.
The personal savings allowance is available to shelter interest from bank and building society accounts, saving and credit union accounts, unit trusts, investment trusts and open-ended investment companies, peer-to-peer lending, trust funds, payment protection insurance, Government or company bonds, life annuity payments and some life insurance contracts. Interest from tax-free savings accounts does not count towards the allowance.
Savings starting rate - Individuals whose non-saving income is low may also benefit from the special starting rate of tax on savings income of up to £5,000. This is set at 0%, meaning savings income which falls within the starting rate band is received tax-free.
The availability of the savings starting rate depends on the amount of taxable non-savings income that a person receives in a tax year – the more non-savings income that a person has, such as employment income or a pension, the less they are able to benefit from the savings zero rate.
If a person has non-savings income of £12,570 or less, their income will be covered by their personal allowance. Where this is the case, they will be able to benefit from the full savings starting rate band of £5,000, and receive savings income of £5,000 tax-free in addition to any savings covered by their savings or personal allowance or received from tax-free accounts, such as ISAs. Where the personal allowance is not used in full, any unused personal allowance can be set against savings income, increasing the amount of savings income that can be received tax-free.
Where a person has other income in excess of the personal allowance, this will eat into the savings starting rate. If the taxable income (i.e. income in excess of the personal allowance) is less than £5,000 (as will be the case where non-savings income is between £12,570 and £17,570), the savings starting rate band is reduced by the amount of the taxable non-savings income. This is illustrated by the following example.
Example - Elsie receives a pension of £14,000 a year. She also has savings income of £7,000 a year.
Her personal allowance is set against her pension, reducing her taxable pension income to £1,430.
As this is less than £5,000, her savings starting rate band is reduced by her taxable non savings income of £1,430 to £3,570.
Consequently, the first £3,570 of Elsie’s savings income will benefit from the starting savings zero rate, while the next £1,000 will be sheltered by her personal savings allowance.
The remaining £2,430 (£7,000 - £3,570 - £1,000) will be taxed at the basic rate of 20%.
The starting savings rate band is eliminated in its entirety where a person has taxable non-savings income of £5,000 or above. This will be the case where they have non-savings income of at least £17,570.
Tax-free savings of £18,570 - A person who receives the basic personal allowance and only receives savings income can enjoy savings income of up to £18,570 a year tax-free (in addition to any savings income from tax-free savings account). This is made up of the personal allowance of £12,570, the savings starting rate band of £5,000 and the personal savings allowance of £1,000.
This figure will be higher if the person has the marriage allowance (worth an additional £1260) or receives the married couple’s allowance (available where at least one spouse or civil partner was born before 6 April 1935).
Tax-free savings - In addition to the above, a person can enjoy savings income from tax-free savings accounts tax-free. Interest on ISAs and some National Savings and Investment accounts is free of tax.
Increasing the normal minimum pension age
Relief for replacement of domestic items
In a furnished let, wear and tear of domestic items is inevitable and there will come a time when the landlord will need to provide replacements. From a tax perspective, special rules apply to provide relief for the cost of replacement domestic items. The rules only apply to residential lets, not to furnished holiday lettings.
No relief for initial cost
A feature of the relief is that relief is given for the cost of the replacement, not for the initial cost of providing the item.
Tax relief for the cost of replacing a domestic item is contingent on the following conditions being met:
1. The individual or company carries on a property business which includes the letting of at least one dwelling house.
2. An old domestic item provided for use in the property is replaced by a new domestic item which is provided for the exclusive use of the tenants. The old item is no longer available for their use.
3. A deduction for the new item would not be prohibited by the wholly and exclusively rule, but a deduction for the cost is denied, either under the accruals basis because the expenditure is capital not revenue or under the cash basis where the capital expenditure rules prohibit a deduction on the provision, alteration or disposal of a capital item for use in an ordinary residential property.
4. Capital allowances have not been claimed in respect of the new item.
Conditions 3 and 4 ensure that relief is not given twice for the same expenditure, and relief is only available under the replacement of domestic items rules where relief is not otherwise available.
A domestic item is an item for domestic use. HMRC provide the following illustrative list of items that would be classed as domestic items:
• moveable furniture such as sofas, tables and bed frames;
• furnishings such as curtains, carpets and rugs;
• household appliances such as fridges, freezers and washing machines; and
• kitchenware such as utensils, crockery and cutlery.
A distinction is drawn between domestic items, which qualify for relief, and fixtures which do not. Fixtures are things like plant that is fixed to the property such that it becomes part of it, and boilers or water-filled radiators installed as part of a space heating system.
Relief is given, as a deduction in computing the taxable profits of the property income business, for the cost of a like-for-like replacement, and also any costs of disposing of the old item and acquiring the new item (for example, delivery costs). The deduction claimed must be reduced by any sale proceeds received in respect of the old item.
Where the replacement is superior to the original, the deduction is limited to the cost of a replacement equivalent to the old item. For example, if a fridge is replaced by a fridge-freezer, the landlord would be allowed a deduction for the cost of an equivalent fridge if this is less than the cost of the new item.
Relief for rental losses
While the intention is to make a profit from letting out a property, this is not a given, and a landlord might instead realise a loss. Where this is the case, can the loss be utilised to save tax?
Calculating the loss
Any loss arising from the property rental business is calculated in the same way as profits. Under the cash basis, the loss for the period will be the cash received by the property rental business less the cash paid out. The cash basis is the default basis of preparation for unincorporated landlords with rental income of £150,000 or less.
Automatic set off against properties in the same property rental business
As profits and losses are calculated for the property rental business as a whole, if there is more than one property in the rental business, a loss on one property is automatically set against any profit from other rental properties in the same business.
Dorothy owns three properties – Lilac cottage, Rose cottage and Foxglove cottage.
In 2021/22 the rental income and associated expenses for the three properties are as follows:
The profit for the property rental business as a whole is £16,000. The loss on Foxglove Cottage is automatically relieved against the profit on the other two cottages.
Utilising a loss
Where there is a loss for the property rental business as a whole, the general rule is that a loss on a property rental business can be carried forward and set against profits from the property rental business in the following year. If there is a loss in the next year or profits are not sufficient to fully utilise the loss, any unused part of the loss can be carried forward to the next year and so on until it can be used. There is no limit on the number of years for which the loss can be carried forward.
The loss cannot be used in other ways.
The same property business
Losses can only be set against the future profits of the same property business. If the landlord has more than one property business, for example a UK property business and an overseas property business, the losses from one cannot be set against the profits of another. Losses from a furnished holiday letting business can only be carried forward and set against profits of that business.
Losses lost if property rental business ceases
If the property rental business ceases before the losses have been used up, the losses are lost. This remains the case if the landlord starts a new property business after a gap as the new business will be a different property rental business.
Derek has two properties which he lets out. In 2020/21, the property rental business makes a loss of £20,000. The loss is carried forward. In 2021/22, the business makes a profit of £7,000, against which £7,000 of the loss from 2020/21 is set. The balance of the loss (£13,000) is carried forward to 2022/23. The loss can be carried forward and set against future profits from the same property rental business until utilised or the business ceases.
Keeping the Christmas party tax-free
Last year, the Covid-19 pandemic and national lockdown took Christmas parties (other than virtual ones) off the agenda. This year, they may be a temptation to make up for lost time. How can you celebrate the festive season without triggering a tax liability in the process?
Limited tax exemption
There is a limited tax exemption for annual parties and functions, which can be used to ensure that no benefit in kind tax charge arises in respect of the provision of the Christmas party. However, as with all exemptions, there are conditions to be met. The exemption applies equally to virtual parties as to ‘real life’ events.
Function must be annual
The exemption only applies to annual functions. If you hold a Christmas party every year (Covid-19 restrictions aside), the exemption will be available. If, however, you decide to hold a one-off event, the resulting benefit will be taxable.
£150 per head limit
The exemption only applies if the cost of the function is not more than £150 per head. This is the total cost of the function (including VAT) divided by the number of people attending (guests as well as employees). If the cost per head is more than £150, the full amount is taxable, not just the excess over £150. If the employee brings a guest, the taxable benefit is the cost of the employee’s attendance at the event, and also that of their guest.
If you hold more than one annual function each year, you can use the £150 per head limit to achieve the best outcome. Remember that it can only be used to shelter ‘whole’ functions – it is not a tax-free allowance. In working out the best possible use of the exemption, you will need to consider the impact that guests will have on the amount that would be taxable in the absence of the exemption. The exemption is better used to cover an event costing £30 per head where the employee can bring a guest than one costing £40 per head which is for employees only. If the exemption is not available, the taxable amount for the former for attendance by both the employee and their guest is £60 (2 x £30), whereas for the latter, it is only £40.
Taxable benefit? Use a PSA
If you are not able to benefit from the exemption for your Christmas party, but want to preserve employee goodwill, you may wish to meet the associated tax liability by including the benefit within a PAYE Settlement Agreement.
Tax & NIC - private bills being paid for by a company
Working from home during the Coronavirus pandemic created a range of tax issues, not least where private bills, such as for internet usage, were paid for by the company. The tax and NIC implications are different depending on who pays for the item or service and how the payment is made. The first point to consider is in whose name is the contract - the employee, or the employer.
• Where the employer indirectly pays a bill that is in the employee’s name by giving them the cash with which to pay (or reimburse if already paid), then PAYE is operated as normal as the employer is paying cash earnings to the employee. The employee has made the contract but it is the employer who has provided the money, so Class 1 NIC for both employee and employer is chargeable.
• Should the contract/ purchase be in the employee’s name but the employer pays the bill direct, then the employer would have discharged the employee’s debt. The employer is required to apply NICs as if the employee had been paid in cash as the employer is making a payment which is remuneration or profit derived from the employment made for the benefit of the employee. The amount is included in gross pay for NIC. However, the approach for income tax purposes is that tax cannot physically be deducted from a payment that has been made to a third party and, instead, the payment needs to be recognised as a taxable benefit-in-kind on the employee’s Form P11D section B (Pecuniary Liability) for the tax year. Class 1 NIC is accounted for in the tax month that the bill is paid on the employee’s behalf. The end result, however, is the same as if the employee had been paid in cash such that the employee pays both income tax and primary NICs, and the company pays employers’ NICs on the same amount.
If the employer makes the contract, then it is a company expense and probably a benefit-in-kind assessable on the employee as the employer is providing a free service in kind. The cost is reported on the employees form P11D and the employer is liable to Class 1A NIC on the value of the benefit. The key difference being that, as a benefit-in-kind, there is no exposure to employees’ NICs although Class 1 NIC is payable by the employer.
If the employer makes payments to, or on behalf of, the directors for their personal bills, and (importantly) these payments do not form part of their remuneration package, then according to the HMRC’s ‘Checklist for Directors’ Loan Accounts’ these payments should normally be debited to the appropriate director's loan account (DLA). The employer is paying for something on the basis that the employee/director will eventually reimburse the company – i.e. a loan. Overdrawn DLA's are settled either via payment of a salary (or bonus) or dividends (or repayment of the overdrawn amount). A NIC liability will only arise where the overdrawn balance in respect of the bill is cleared by a payment of salary or by a bonus.
If the company owes the director money because the loan account is in credit, and the director requires the company to apply some of his or her funds to the settlement of a third party debt, then that payment does not arise out of the director’s employment, does not become earnings and as such is not liable to NIC.
'Bed and breakfasting rules' - DLA
Throughout an accounting period a director will withdraw monies from the company against the director’s loan account (DLA), the withdrawals being satisfied usually by the taking of a salary and/or bonus) and/or dividends (dividends being preferable as no NICs are payable) or by repaying the monies withdrawn. However, by the end of that period it may be that insufficient repayments have been made to cover the amount that has been withdrawn, such that the DLA shows a debit balance owed back to the company i.e. the director has effectively borrowed from the company (usually at no interest) and the loan has not been repaid. There will be tax implications if insufficient retained profits are available to enable a dividend to clear the borrowings or if the amount outstanding is not repaid by other means. Payment via a bonus may be way of repayment should there be no retained profits to facilitate a dividend.
Under the close company rules for loans to participators (which includes directors), a corporation tax charge arises on the outstanding loan balance if the loan has not been repaid nine months and one day after the year end in which the loan was taken out (the usual corporation tax due date). The charge is 32.5% of the loan balance (equal to the higher dividend tax rate) and is known as a ‘section 455’ charge. Before 2013 it was not uncommon for director-shareholders to replace the overdrawn amount just before the due date (thus avoiding the s 455 tax charge) and then withdraw the money soon afterwards (known as 'bed and breakfasting). In this way, it could be possible for the director to enjoy an interest free loan -- potentially for years. Therefore HMRC introduced restrictions to strengthen the regime, notably where loan repayments totalling at least £5,000 are repaid but then further loans of at least £5,000 are made within 30 days. Under these 'bed and breakfasting' rules, the repayments are matched against the later loans, in effect saying that no repayment has been made and the s 455 tax charge on the original loan amount stands. The s 455 tax is a temporary tax in that it is repaid if the loan is cleared – the repayment can be claimed nine months and one day after the end of the accounting period in which the loan was repaid.
There is an additional provision that operates where a s455 loan is £15,000 or greater. Under the 'motive test', if repayments have been made such that the '30 days rule' is not relevant, but at the time of repayment, arrangements have been made for new loans of at least £5,000 to replace some of the amount repaid, then the repayment will also be ‘matched’ as far as possible against the new chargeable payment instead of reducing the original s 455 charge. As with the 30-day rule, this provision does not apply should arrangements be in place to repay via a bonus or dividend, as this will give rise to an income tax charge. So, for example, if a bonus payment (which is subject to PAYE/NIC) is used to clear the overdrawn DLA in full by the date that the corporation tax liability is due then the charge will not arise. HMRC accepts that the crediting of an interim dividend to a loan account represents ‘payment’ when the relevant book entry is made, since the amount is then ‘placed unreservedly at the disposal of the directors/shareholders as part of their current accounts with the company.
Should the director have insufficient funds to repay the loan and the company cannot pay a dividend or bonus, one way of deferring the s 455 charge is for the company to shorten the accounting period to a date before the borrowing took place. This postpones the repayment deadline to nine months after the next accounting period's year end.
If the loan is outstanding at the end of the accounting period but cleared before the trigger date, it must still be reported to HMRC as part of the company tax return.
Is rent-a-room relief always worthwhile?
Rent-a-room relief aims to encourage those with spare rooms in their homes to let them out to increase the supply of furnished rental accommodation. Under the scheme, a person can earn up to £7,500 each tax year tax-free from letting out furnished accommodation in their own home. The limit is halved where the income is shared by two or more people, each person being able to earn £3,750 tax-free a year.
Where rental income is less than the rent-a-room limit of £7,500 (or £3,750 where income is shared), the tax exemption is automatic. There is no need to tell HMRC about the rental income, or claim the relief.
Rental income of more than the tax-free limit
If the rental income that a taxpayer receives from letting a room in their house exceeds the rent-a-room limit of £7,500 (or £3,750 where income is shared), the taxpayer has the option of claiming rent-a-room relief or working out the associated rental profit in the usual way. Where rent-a-room relief is claimed, the taxpayer simply deducts the rent-a-room tax-free limit from their rental income to arrive at their taxable rental profit.
Where rental profit exceeds the tax-free rent-a-room limit, the taxpayer must complete a self-assessment tax return. If the relief is to be claimed, the claim can be made in the tax return. Whether a claim is worthwhile or not will depend on whether actual expenses are more than the rent-a-room tax-free limit.
Maisie lives alone and lets out a furnished room in her home, receiving rental income of £10,000 for the tax year. Her associated expenses are £2,000. If she claims rent-a-room relief, she will pay tax on rental profits of £2,500 (£10,000 - £7,500). However, if she does not claim the relief, she will pay tax on the excess of her rental income over her actual expenses, a taxable rental profit of £8,000 (£10,000 - £2,000). Opting into the scheme is clearly beneficial as this reduces her taxable rental profits by £5,500. If Maisie is a higher rate taxpayer, this will save her tax of £2,200 (£5,500 @ 40%).
Mathew also lives alone renting out a furnished room in his home. His rental income is also £10,000, but his associated expenses are £9,000. In Matthew’s case, opting into the rent-a-room scheme is not beneficial as doing so will increase his taxable profit from £1,000 (£10,000 - £9,000) to £2,500 (£10,000 - £7,500).
The rent-a-room scheme cannot be used to create a loss, and where actual expenses exceed rental income, it will generally be better not to opt into the scheme in order to preserve the loss so that it can be carried forward and set against future rental profits. However, if the likelihood of being able to use the loss is small, it may be preferable to take advantage of the rent-a-room exemption to save work.
Maud lets a furnished room in her own home, receiving rental income of £3,000. The associated expenses are £4,000. If she chooses to use the rent-a-room scheme (which may be attractive due its simplicity) she does not need to report the income to HMRC. However, if she wishes to preserve the loss of £1,000 (£3,000 - £4,000), she will need to complete the property pages of the self-assessment tax return.
No one size fits all
The extent to which it is beneficial to claim rent-a-room relief will depend on personal circumstances.
SDLT and uninhabitable properties
For many the lure of a renovation project is strong and for those looking to generate rental income, doing up a dilapidated property to let out may make commercial sense.
When buying an investment property, the addition of the 3% SDLT supplement means that the SDLT hit may be significant. However, as this only applies to residential dwellings, buying a derelict property that does not meet the definition of a ‘dwelling’ can deliver substantial SDLT savings. Not only is the purchase price on which SDLT payable low as the renovation costs are incurred post sale and SDLT-free, SDLT is charged at the non-residential rates and the 3% supplement does not apply.
The Bewley case
In 2019, the First Tier Tribunal ruled in the case of Bewley v HMRC that a bungalow and plot of land, which had planning permission for the demolition of the existing building and the construction of a new dwelling was not suitable for residential use at the effective date of the transaction. As a result, SDLT was payable at the non-residential rates rather than the residential rates, and consequently the 3% SDLT supplement did not apply.
Use or suitable for use as a dwelling
The legislation defines a ‘dwelling’ as a building that is used or suitable for use as a single dwelling or which is in the process of being constructed or adapted for such use.
In the Bewley case, the property was not used as a dwelling on the effective date of the transaction; the question therefore was whether it was ‘suitable’ for use at that date.
The radiators and heating pipes had been removed from the bungalow and the presence of asbestos prevented repairs and alterations being carried out without posing risks. As a result, the tribunal found that the property was not suitable for use as a dwelling. Consequently, SDLT was payable at the lower non-residential rates, in respect of which the 3% supplement does not apply.
The test as to whether the property is a dwelling is undertaken at the effective date of the transaction – the completion date. All that matters is whether it is used as or is suitable for use as a dwelling at that date or in the process of being constructed or adapted at that date – it is irrelevant whether it has previously been used as a dwelling, or may be used as one in the future.
More than modernisation
The test of whether a property is uninhabitable is a strict one and an uninhabitable property will lack basic facilities necessary to live in it, such as a functioning bathroom and kitchen and heating. A property which is in need of modernisation and redecoration may still be habitable and count as a dwelling – the fact that a property is a renovation project will not in itself mean that non-residential rates apply.
Reporting income from property
The deadline for filing the 2020/21 self-assessment tax return online is 31 January 2022. If you received income from property, you may need to tell HMRC about it on your return. There are designated property income pages for providing details of your property income.
Income from property of £1,000 or less
The property income allowance, set at £1,000, means that you do not need to tell HMRC if you received income from property of £1,000 or less in 2020/21. However, if you have made a loss, you may want to complete the form so that you can benefit from the loss in the future.
If your property income is more than £1,000, but your expenses are less than £1,000, you can claim the allowance and deduct £1,000 when working out your profit rather than deducting your actual expenses.
If you rent out a furnished room in your own home, under the rent-a-room relief scheme you do not have to tell HMRC about the income if it is less than £7,500 (or if you share the income with other people, your share is less than £3,750). As with the property income allowance, you can deduct the relief rather than actual expenses when working out your profit if your rental income is more than the allowance.
Property income business
All let properties owned by the same person or persons in the UK, with the exception of furnished holiday lettings, comprise a property income business. Profits and losses are computed for the business as a whole, rather than on a property by property basis. This means you deduct total expenses from total rental income – there is no need to match the expenses to each individual property. The income and expenses are reported on the property income pages of your return (SA 105). Remember, if you let residential property, you cannot deduct interest and finance costs. Instead, relief is given by reducing your tax bill by 20% of your interest and finance costs. The interest and finance costs go in box 44, and if you have any finance costs unused from previous years, these are entered in box 45.
Furnished holiday lettings
Income and expenses relating to furnished holiday lettings are entered separately, in boxes 5 to 19. Unlike residential lets, interest and finance cost are an allowable deduction and can be deducted in full in calculating the profits for your furnished holiday lettings business.
If you received any Covid-19 support payments, such as small business rates grants or hospitality and leisure grants, you will need to include these too.
Understanding how dividends are taxed
Dividends have their own tax rules and their own rates of tax. The rules and the rates apply in the same way regardless of whether the dividends are paid from your personal or family company as part of a profit extraction strategy, or whether they represent investment income on shares. As part of the Government’s health and social care plan, the rates at which dividends are taxed are to increase by 1.25% from 6 April 2022.
Dividends have already suffered corporation tax
Dividends can only be paid out of retained profits. This means that if you want to pay a dividend from your personal or family company, you can only do so if you have sufficient retained profits from which to pay. 'Retained profits' are post-tax profits which have not yet been paid out. Consequently, they have already suffered corporation tax. The rate of corporation tax is currently 19%, but is due to increase from 1 April 2023 where the company’s profits are more than £50,000.
Dividends covered by the dividend allowance are tax-free
All taxpayers, regardless of the rate at which they pay tax, are entitled to a dividend allowance. This is available in addition to the personal allowance, and, unlike the personal allowance, is not abated once income reaches £100,000.
Although termed a dividend ‘allowance’, it is not an allowance as such; rather it is a nil rate band. Dividends that are covered by the dividend allowance are taxed at zero rate. However, they count as part of band earnings. The dividend allowance is set at £2,000 for 2021/22.
Dividends are treated as the top slice of income
Dividends are taxable to the extent that they are not sheltered by the dividend allowance or, if not fully used elsewhere, the personal allowance. In determining the appropriate rate of tax, dividends are treated as the top slice of income.
Dividend tax rates are lower than income tax rates
Dividends have their own tax rates. These are lower than the usual rates of income tax. However, as noted above, dividends are paid from profits which have already suffered corporation tax.
Dividends are taxed at the dividend ordinary rate to the extent that they fall within the basic rate band. This is set at 7.5% for 2021/22. It is to increase to 8.75% from 6 April 2022.
Dividends are taxed at the dividend upper rate to the extent that they fall in the higher rate band. This is set at 32.5% for 2021/22. It is to increase to 33.75% from 6 April 2022.
Dividends are taxed at the dividend additional rate to the extent that they fall in the additional rate band. This is set at 38.1% for 2021/22. It will increase to 39.35% from 6 April 2022.
New reduced rate of VAT for hospitality and leisure
The hospitality and leisure industry were particularly hard hit by the effects of the Covid-19 pandemic and associated lockdowns. To help the industry recover they benefitted from a reduced rate of VAT of 5% from 15 July 2020 until 30 September 2021.
As a temporary measure, a new reduced rate of VAT of 12.5% applies from 1 October 2021 until 31 March 2022.
The rate will revert to the standard rate of 20% from 1 April 2022.
Supplies benefitting from the reduced rate
The following supplies, which benefitted from the reduced rate of 5% until 30 September 2021, will also benefit from the new reduced rate of 12.5% from 1 October 2021 to 31 March 2022.
Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
Hot takeaway food and hot takeaway non-alcoholic beverages.
Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
Admission to cultural attractions that do not already benefit from the cultural VAT exemption, such as theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and other similar cultural events and facilities.
Where an admission to an attraction is within the existing cultural VAT exemption, this takes precedence over the reduced rate.
Partner note: FA 2021, s. 93; the Value Added Tax (Reduced Rate) (Hospitality and Leisure) Order 2020 (SI 2020/728).
Electric charging points – Is there a tax liability?
As part of the Government’s push to encourage drivers to ‘go electric’, the Transport Secretary, Grant Shapps, announced an extension to a £50 million Government fund to install electric charge points. The fund aims to help small business to gain access to the workplace charging scheme and provide grants to meet up to 75% of the cost of installing electric charging points at domestic premises.
While tax advantages are available where employees opt for an electric company car, does a tax charge arise if an employer provides a charging point to enable employees to charge their own cars at work?
Workplace electric vehicle charging
A tax exemption applies to remove the charge that might potentially arise where an individual charges the battery of a vehicle that is used by the employee.
The exemption means that an employee is able to charge their own car, or one that they are driving or a passenger in, using a workplace charging free of any associated benefit in kind tax charge. There is no requirement that the electricity provided is used for business journeys; the exemption applies regardless of whether the charge powers business or private journeys.
The exemption covers:
However, the exemption only applies if the following conditions are met:
Likewise, no tax charge arises if an employee uses a workplace charger to charge an electric company car. There would, in any event, be no tax charge in respect of electricity provided for business journeys. However, as electricity is not treated as a ‘fuel’ for company car purposes, the use of a workplace charging facility does not trigger the fuel benefit charge if the charge provided powers private journeys.
The tax exemption does not apply to the reimbursement or payment of an employee’s personal expenditure in respect of charging a battery in a private vehicle away from the employer’s premises, for example, at a motorway service station. Where the vehicle is used for business journeys, mileage allowances may be paid tax-free up to the approved amount.
However, no tax charge arises in respect of the provision of electricity for a company car for private mileage as electricity is not treated as a fuel for the purposes of the fuel benefit charge.
A first-year capital allowance of 100% of the expenditure is available for expenditure on electric charge-point equipment. The allowance is available for expenditure incurred before 1 April 2023 for corporation tax purposes and before 6 April 2023 for income tax purposes.
CIS - How to work out whether it applies
The Construction Industry Scheme (CIS) requires registration of anyone who works in that industry, be that a sole trader or a company. The registration rule includes the largest of businesses if that business is paid by another engaged in construction operations. Since 6 April 2021 non-construction businesses that regularly carry out or commission construction work on their own premises or investment properties are deemed to be contractors should that work have exceeded £3 million within the previous 12 month period. Smaller non-construction businesses are excluded from the scheme as are private households. However, where a builder working in a private property then subcontracts work to other tradesmen (e.g. bricklayers, electricians, plumbers etc), then that builder must operate the CIS even though the works are undertaken on a private home because the contract is between the two businesses.
In some instances, it may be difficult to decide whether work is 'construction' in nature but if there is any doubt, registration should be made; this would be the case even if those works/services are not actually undertaken. Where various types of works are undertaken, some of which would be outside CIS (e.g. plumbing work) and some inside CIS (e.g. painting and decorating), then all of the works undertaken or services provided under that contract will be within CIS.
How much to deduct
The contractor is required to withhold an amount which is then deducted from the tax liability of the sub contractor incurs following submission of the self assessment tax return.
There are 2 rates of deduction:
standard 20% rate - applied to payments made to those subcontractors that are registered and been 'verified' (confirmed as being registered) with HMRC and
higher 30% rate - applied to payments made to subcontractors with non verification
Gross payment status can be claimed under strict conditions including complying with tax obligations and meeting turnover limits (e.g. £30,000 for sole traders).
Interaction with PAYE
When a company contractor pays CIS and PAYE deductions for employed workers, all deductions are combined and made as one payment. If a company suffers CIS deductions then such deductions can be offset and the balance paid.
If a company has no employees, there can be no PAYE offset and no automatic method of reclaiming the CIS suffered; the company therefore needs to submit a formal claim for the refund which can be done online. The CIS deductions suffered will then be refunded directly into the company bank account or the claim can request deduction from the corporation tax or VAT liabilities. HMRC are notoriously slow in making these refunds and it is not unusual for a company to be required to pay their corporation tax and then receive a refund of the CIS suffered at a later date. HMRC system will check for any unpaid liabilities or penalties before processing the claim and these will be deducted from the repayment.
Unfortunately this offset system is not available to sole trader and partnership subcontractors who can only offset the CIS deductions against personal self assessment liabilities.
The submission date for monthly returns is 14 days after the 5th of the month end. Penalties are levied for non submission as follows:
One facility that might not be known is that if a contractor realises a return will not be submitted on time, an application can be made for an extension. A penalty will not be raised so long as the application is made before the submission date and the reason given for the late submission falls within the usual definition of a 'reasonable excuse'.
A shareholder/ director is permitted to withdraw monies from the company’s bank account as salary, bonus or dividend (or possibly a loan'). However, there are set rules that need followed with regard to dividends and it is easy to fall into a 'trap' if those rules are not followed.
Trap 1 - Timing
The payment date of a dividend is important. If the director has withdrawn funds resulting in an overdrawn directors’ loan account at the end of the year, dividends (or other payments /deposits) may need to be declared to clear the overdrawn account. The relevant date for an interim dividend is either the actual date of payment or the date that the payment is placed at the directors/shareholders disposal. HMRC consider the payment date of an interim dividend to be the date of entry in the company’s books. Therefore if the company’s books are not made be up for some weeks after the payment has been made for whatever reason then this ‘timing’ trap could mean that a payment is deposited into the directors’ bank account in one tax year but recorded in the next. With no resolution in place HMRC will take the latter date as the payment date which could mean that the director/shareholder is pushed into the higher rate tax band if usually a basic rate taxpayer. This ‘trap’ is more likely to occur with interim dividends because a final dividend becomes an enforceable debt only when approved by board resolution with the relevant date being the date of declaration at a general meeting - the date of which can be planned accurately.
Trap 2 - 'Illegal' dividend
The Companies Act 2006 requires dividends to be paid out of retained profits after corporation tax has been deducted. If the company does not have sufficient (or any) retained profits it cannot pay a dividend. Companies must ensure that either reliable management accounts or a set of specially prepared interim accounts are reviewed every time it is intended to declare a dividend to ensure that profits are available; if not available then the dividend may be illegal and must be repaid.
Trap 3 - 'Optimum salary'
National Insurance contributions (NIC) are levied on salary or earned income only and not on investment income which includes dividends. However, no NIC means no entitlement to earnings related state benefits including the state pension. Therefore a salary of at least the NIC Lower earnings limit (£520 for 2021/22) needs to be paid to ensure state benefits.
If the employment allowance is not available (which is the usual situation in respect of sole director/shareholders for example), once a salary equal to the primary threshold (£9,568 for 2021/22) has been paid, it is more tax efficient to pay a dividend to utilise the remainder of the personal allowance and the £2,000 dividend allowance.
This figure is taken because there are no employees NIC on this amount and the corporation tax reduction outweighs the employers NIC payable.. Paying the primary threshold of £9,568 will trigger an employer’s NIC liability however, the additional salary plus the associated employer’s NIC of £100.46 (totalling £828.46) will generate a corporation tax saving of £157.41 (19% of £828.46).The 'trap' is making payments as salary other than this 'optimum' amount.
Trap 4 - Diverting dividends - settlement?
Should one spouse be a higher rate taxpayer and the other a basic rate or non taxpayer, it is more tax efficient for the lower or nil rate taxpayer to receive at least some of the dividend income. This can be achieved by either creating a new class of shares (termed 'Alphabet shares') and allocating those shares to the spouse or transferring shares from one spouse to the other.
Should the 'transferring' route be taken, care is needed to ensure that the payments do not fall foul of the 'settlement’ rules'. The question here is whether by allowing the family member income from the business they are earning a PAYE salary or whether the owner-director has created a settlement and ‘retained an interest’ in the business. An ‘outright gift’ is not caught under these rules provided that the gift carries a right to the whole income and is not ‘wholly or substantially a right to income’.
Identifying a UK property rental business
Where a landlord runs an unincorporated property business, the profits from that business are charged to income tax. Where the business is carried on through a company, the charge is to corporation tax. There are four different types of property business:
Thus, the profits and losses of different property businesses are computed separately and taxed separately. However, within each business, the income and expenses from properties within that business are amalgamated.
UK property rental business - Profits that arise from UK land or property are treated for tax purposes as arising from a business – a UK property rental business.
A person carries on a rental business if:
Single UK property rental business - In most cases, income from all types of land in the UK are treated as part of the same single rental business. It does not matter how many different properties a person has (or has an interest in); what is important is whether the person derives the income from each in the same legal capacity. Where this is the case, the properties are part of the same UK property rental business.
A person can derive property income in a number of different capacities. For example, they may:
Income derived in different capacities belongs to different rental businesses.
Where a property is jointly-owned, only the person’s share of the income is included in calculating the profits of their property rental business. For spouses and civil partners, the default position for income from jointly owned properties where a form 17 election is not in force is a 50:50 split regardless of the actual underlying ownership.
Implications - Profits and losses are calculated for the property rental business as a whole, rather than on a property-by-property basis. This means that a loss on one property is automatically set against a profit on another property.
Example - Nancy owns two properties in her sole name and one property jointly with her husband (in respect of which a form 17 election is not in force). All three properties are let as residential lets. Income and expenses from the properties in Nancy’s sole name and 50% of the income and expenses relating to the jointly-owned property are taken into account in working out the profits of her property rental business.
Nancy is also a partner in NMO Ltd, which also lets a property. Her share of the profit forms a separate rental business.
It is important to remember that losses from one rental business cannot be set against profits of another rental business.
Furnished holiday lettings - Different rules apply to furnished holiday lettings in the UK, which form a separate UK furnished holiday lettings business. This is because the tax rules applying to furnished holiday lettings are different. Consequently, if an individual has two properties, one of which is let as a residential let and one as a holiday let, that person will have a UK property business and a UK furnished holiday lettings business.
Register for Child Benefit even if the HICBC applies
If you are responsible for bringing up a child who is under the age of 16, or under the age of 20 where they remain in approved education or training (such as A levels but not education at an advanced level, such as university), you can claim child benefit. Only one person can receive child benefit in respect of a particular child.
For 2021/22, child benefit is payable at the rate of £21.15 for the eldest or only child, and at the rate of £14 per week for any additional children. It is paid every four weeks.
The High Income Child Benefit Charge (HICBC) applies to claw back child benefit paid where the recipient, or their partner if they have one, has ‘adjusted net income’ of £50,000 or more. This is income before personal allowances and deductions for items such as Gift Aid.
The HICBC works by clawing back 1% of the child benefit paid for every £100 by which adjusted net income exceeds £50,000. Where adjusted net income exceeds £60,000, the HICBC is equal to 100% of the child benefit paid in the tax year.
Who pays the tax?
Where both the claimant and the claimant’s partner have adjusted net income in excess of £50,000, the HICBC is payable by the person who has the highest adjusted net income. If only one of them has adjusted net income in excess of £50,000, then that person is responsible for paying the tax. This means that the person on whom liability for the HICBC falls is not necessarily the same person who has received the child benefit.
For the purposes of the charge, a person is a partner of the claimant if they are married to the claimant or in a civil partnership with the claimant and not permanently separated, or someone who lives with the claimant as if they were married or in a civil partnership. The charge will apply regardless of whether the claimant’s partner is biologically related to the child in respect of whom the child benefit is paid, or is responsible for that child.
Elect not to receive child benefit
To eliminate the need to repay child benefit received in the form of the HICBC, where the charge is equal to 100% of the child benefit, it may be easier to elect for this not to be paid. Where child benefit is already being paid, the claimant can opt out of payments by completing the online form or contacting HMRC by post or by phone.
Register to benefit from National Insurance credits
Where HICBC applies but the claimant would not otherwise pay sufficient National Insurance contributions for the year to be a qualifying year for state benefit purposes (for example, where the claimant does not work or has low earnings and the HICBC is payable by the claimant’s partner), it is important for the claimant to register for child benefit in order to receive National Insurance credits to preserve their state pension entitlement. These are available where a person is registered for child benefit in respect of a child under 12.
At the time of registering, the claimant can elect for the child benefit not to be paid, where this is preferable to receiving it and paying the same amount in the form of the HICBC.
Do I need to top up my pension?
A full single tier state pension is payable to people who have 35 qualifying years. Individuals who have less than 35 qualifying years, but at least 10 qualifying years are entitled to a reduced state pension.
A person builds up qualifying years by paying sufficient National Insurance contributions and/or receiving National Insurance credits. Anyone who will not have sufficient qualifying years to secure a full state pension can top up their pension by making voluntary National Insurance contributions.
Obtain a state pension forecast
You can check your state pension forecast online at www.gov.uk/check-state-pension.
If you are unlikely to receive a full state pension when you reach state pension age, you may wish to consider whether it is worthwhile to make voluntary contributions.
If you are an employee, a year will be a qualifying year if you have earnings that are at least equal to 52 times the lower earnings limit for the tax year. For 2021/22, the lower earnings limit is £120 per week, and 52 times this is £6,240. You do not need to have earnings of more than the lower earnings limit for every earnings period, but must have earnings of at least £6,240 for 2021/22 for that year to be a qualifying year.
If you are self-employed, you earn qualifying years by the payment of Class 2 National Insurance contributions for the full taxpayer. This cost £3.05 per week for 2021/22.
You may also earn qualifying years as a result of National Insurance credits. These are given, for example, to people who have claimed child benefit in respect of a child under the age of 12 (even if they have chosen not to receive it), who are caring for someone or who are sick or disabled and receiving (or eligible to receive) Employment and Support Allowance.
Full details of the credits that are available can be found on the Gov.uk website (see www.gov.uk/national-insurance-credits).
Paying voluntary contributions
If you will not have sufficient qualifying years to secure a full state pension by the time that you reach state pension age, you may wish to look at paying voluntary contributions. There is a dedicated category of National Insurance contribution for this purpose – Class 3. For 2021/21, the weekly rate of Class 3 contribution is £15.40.
If you are self-employed but do not need to pay Class 2 contributions as your profits are below the small profits threshold (£6,515 for 2021/22), you can opt to pay these voluntarily. At £3.05 per week for 2021/22, this is significantly cheaper than paying Class 3 contributions.
Struggling to pay tax – What should you do?
The January self-assessment payment deadline is not well timed, falling as it does in a month when people may be already struggling to pay their Christmas credit card bills. However unpalatable the 31 January tax deadline is, it is not one that should be ignored.
Taxpayers who are within self-assessment will need to pay any remaining tax due for 2020/21 by midnight on 31 January 2022, and also any Class 4 and Class 2 National Insurance liabilities for 2020/21. Where their tax and Class 4 National Insurance liability for 2020/21 was at least £1,000 and less than 80% of their liability was collected at source, such as via PAYE, the first payment on account must also be paid by midnight on 31 January 2022.
If you are struggling to pay what you owe, what can you do?
Ignoring the problem will not make it go away; rather, it will make it worse. If you think that you are going to struggle to pay what you owe in full by the 31 January 2022 deadline, you should set up a time to pay agreement or contact HMRC as soon as possible, and ideally before 31 January 2022. However, if you miss this deadline, all is not lost and you may still be able to set up or agree an instalment plan.
Paying in instalments
It may be possible for you to pay what you owe in instalments by setting up a time-to-pay agreement.
You can do this yourself online via your Government Gateway account if:
If you do not meet all of the above conditions, you will not be able to set up an instalment payment plan online. However, you may be able to agree one with HMRC. To do this, you will need to call the Self-Assessment Payment Helpline on 0300 200 3822. The line is open from Monday to Friday from 8am to 4pm. If you cannot pay another type of tax, for example, corporation tax, you should instead call HMRC’s Payment Support Service on 0300 200 3835. The lines are open from Monday to Friday from 8am to 4pm.
When making the call, make sure that you have the following information to hand:
HMRC will take into account what you are able to pay in full, your monthly income and outgoings, any savings and investments that you have and what you can afford to repay each month. If you have savings or investments, you will be expected to use these to clear your tax bill.
There is no set length for a time-to-pay agreement – it will depend on how much you can afford to pay each month to clear the tax that you owe. The payments are usually made by direct debit, and once the agreement is in place, it is important that payments are not missed and future liabilities are paid on time. You can pay more than the agreed amount if you are able to clear the debt more quickly.
If you do not make the payments, or HMRC will not agree to a time-to-pay agreement, you will be expected to pay what you owe in full. HMRC may use their debt collection powers if you do not do this.