Helpsheets ... continued 24 from homepage

The nature of a gift is that it is something that is given to some without receiving a payment in return. Consequently, as nothing is received in return it would, at first sight, seem unlikely that making a gift could trigger a capital gains tax liability.

However, unfortunately that is not the case and the making of a gift can indeed, in certain circumstances, give rise to a capital gains tax liability.

Market value - The making of a gift is a disposal for capital gains tax purposes. As the disposal is not by way of an arm’s length bargain (i.e., the price in a free market), the disposal proceeds are the market value at the time the gift was made, rather than the amount received by the person making the gift (i.e. nothing). From a capital gains tax perspective, unless the gift is to a spouse and the no gain/no loss rules apply or is exempt from capital gains tax, rather than the donor making a loss equal to the cost of the gift, a gain may be realised instead.

Example - Dolly has a painting which her niece has always loved. She purchased the painting many years ago for £100. The artist is currently very popular and the painting is now worth £20,000.

On giving the gift to her niece, Dolly is treated as if she had disposed of the painting for its market value of £20,000. Consequently, she makes a capital gain of £19,900. Assuming her annual exemption of £12,300 remains available, she must pay capital gains tax on a gain of £6,800.

Gifts to spouses/civil partners - Transfers between spouses are deemed to be at a value that gives rise to neither a gain nor a loss. If instead of giving the painting to her niece, Dolly had given it to her husband David, the deemed consideration would be £100 (the value that creates neither a gain nor a loss) and David would be treated as having acquired the painting for £100. In this situation there is no capital gains tax liability on the gift.

Gifts to a charity - Capital gains tax is not payable on a gift to a charity.

Relief for gifts of business assets - The relief for gifts of business assets allows the capital gains tax that might arise on the gift of a business asset to be deferred by 'rolling over' the gain so that the recipients base cost is reduced by the deferred gain. However, while this means that there will be no capital gains tax to pay at the time of the gift, the recipient will realise a larger gain when they dispose of the asset. The relief effectively shifts the liability from the donor to the recipient.

Employers located in tax Freeports will soon be entitled to a new NI break.

In the 2021 Budget the Chancellor announced that various areas around the UK would be designated as “ Freeports ”. Businesses located in these areas are entitled to tax breaks, one of which is relief from secondary NI contributions. HMRC has recently issued more information and guidance on how to claim the new relief.

Timing. Before considering the conditions for the NI break employers should note that it can’t be claimed until the area in which they are located has officially been designated as a Freeport. While these were named by the Chancellor, the Freeport status doesn’t apply until authorised by law. The location of current and future Freeports is available on GOV.UK.

Conditions. Employers with a business premises in a Freeport site can claim the NI relief which will apply for 36 months for each qualifying employee from the start of their employment, as long as:

• the employment begins between 6 April 2022 and 5 April 2026
• the employee has not been employed in the previous 24 months by the same employer or person connected with the employer; and
• they spend 60% of their working time in the Freeport tax site. This requirement doesn’t apply for employees whose working arrangements have been adjusted to allow for disability, pregnancy or maternity.

The relief means employers only have to pay Class 1 NI on a qualifying employee’s wages to the extent they exceed £2,083 per month.

To obtain the NI relief all you need do is enter in your payroll software for each qualifying employee the special NI category letter indicated in HMRC’s latest guidance. The software will automatically calculate and take account of the relief.

Relief from employers’ NI contributions can be claimed from 6 April 2022 for new employees starting on or after that date. This is obtained by entering a special NI category letter in your payroll software.

Different stamp duty land tax (SDLT) rates apply to residential and to commercial properties. The residential rates are higher, particularly where the 3% supplement for second and subsequent properties applies.

Mixed land and property - Mixed-use land and property is land and property that comprises both residential and non-residential elements. Non- residential property includes commercial property, such as shops and offices; property that is not suitable for living in; forests; agricultural land which is part of a working farm or which is used for agricultural purposes; any other land or property that is not used as part of a dwelling’s garden or grounds; and six or more residential properties purchased in a single transaction.

An example of a mixed-use property would be the purchase of a shop with a flat above.

SDLT on mixed-use properties: current rules - Under the current rules, the commercial property rates apply to mixed dwellings regardless of the split between the residential and non-residential elements. The SDLT payable on a mixed-use property can be significantly less than on a residential property of the same value.

Example - Harry buys a shop with a flat above it on 1 March 2022 for £500,000. His brother Luke buys a house for £500,000 completing on the same day.

Harry pays SDLT at the commercial rates, resulting in an SDLT bill of £14,500 ((£150,000 @ 0%) + (£100,000 @ 2%) + (£250,000 @ 5%)).

Luke pays SDLT at the residential rates, resulting in an SDLT of £15,000. If the second and subsequent property supplement applies, the SDLT bill will be £30,000. The supplement adds an additional £15,000 to the bill (£500,000 @ 3%).

Having a non-residential element, particularly where the 3% supplement would apply to a residential purchase, can significantly reduce the SDLT payable.

Possible changes to the rules - In November 2021, the Government published a consultation exploring changes to the way in which SDLT is charged on mixed-use properties. The consultation ran until 22 February 2022.

The current rules for taxing mixed-use property can lead to distortions as the commercial property rates apply regardless of the extent of the residential element. Consequently, a property with a very small non-residential element will pay SDLT at the lower commercial rates. The savings as against the residential rates can be significant, particularly where the additional dwellings supplement would apply were the property fully residential.

To address attempts to exploit the mixed-use property SDLT rules, the consultation sought views on the introduction of an apportionment basis for mixed-use property. Under the proposed rules,  purchasers would be required to apportion the tax for a property such that SDLT at the residential rates would be charged on residential land and SDLT at the commercial rates would be charged on the non-residential land. The consultation document contains the following explanation of how this would work.

‘This would be done firstly by working out the proportions of the whole consideration relating to residential and non-residential property elements. Tax would then be calculated on the assumption that the whole consideration was for residential property, and again separately on the assumption that the whole consideration was for non-residential property. The two tax figures produced would then be reduced by the proportions of the whole consideration relating to residential and non -residential property elements. Finally, the reduced tax figures would be added together to get the final tax bill.’

Example - Toby purchases a property for £1 million that includes grazing land which is commercially let to a third party for the grazing of horses. The additional dwellings supplement does not apply.

The grazing land accounts for 5% of the value of the property.

Under the proposed apportionment rule, the SDLT would be calculated as follows:

SDLT on the whole at the residential rates = £43,750

SDLT at commercial rates = £39,500

Apportionment calculations (£43,750 @ 95%) + (£39,500 @ 5%) = £43,537.50.

The SDLT under the proposed rules is £4,037.50 more than under the current rules.

Plan ahead - As a change to the rules look likely, those planning on purchasing a mixed-use property may wish to do so sooner rather than later to take advantage of the current SDLT rules for mixed-use property.

Interest on VAT repayments from HMRC - the current rules and proposed abolition of repayment supplement.

Under current rules, if a VAT return shows that a repayment is due then HMRC should repay within 30 calendar days of receiving the business’s VAT Return. If the repayment is not authorised within that time limit, the business will receive compensation in the form of a ‘repayment supplement’ being five per cent of the repayment (or £50 whichever is the greater), paid automatically with the VAT repayment. The return must have been submitted on time and the refund amount or amount shown on the return as due by way of payment must not exceed the actual payment by more than five per cent or £250 whichever is greater. Should HMRC decide to make enquiries into the claim, the VAT repayment should again be made within 30 days, but this time plus the number of days spent making ‘reasonable enquiries.’ If the claim is subsequently 'significantly adjusted' because of errors made on the return, no supplement is paid.

Future scheme

Under current rules, if a VAT return shows that a repayment is due then HMRC should repay within 30 calendar days of receiving the business’s VAT Return. If the repayment is not authorised within that time limit, the business will receive compensation in the form of a ‘repayment supplement’ being five per cent of the repayment (or £50 whichever is the greater), paid automatically with the VAT repayment. The return must have been submitted on time and the refund amount or amount shown on the return as due by way of payment must not exceed the actual payment by more than five per cent or £250 whichever is greater. Should HMRC decide to make enquiries into the claim, the VAT repayment should again be made within 30 days, but this time plus the number of days spent making ‘reasonable enquiries.’ If the claim is subsequently 'significantly adjusted' because of errors made on the return, no supplement is paid.

Future scheme

The repayment supplement scheme is to be scrapped for VAT periods beginning on or after 1 January 2023 and replaced by an interest payment scheme. Under this scheme should HMRC delay issuing the repayment because the figures are being checked then interest will be paid but at the annual interest rate (currently 0.5%).

This amendment of the rules will have the greatest impact in the situation where a VAT return has been submitted on time but HMRC does not make the repayment within the 30 days due to the figures being checked. The difference in amount of restitution for the taxpayer between the pre and post January 2023 schemes has no comparison.

Another situation that could arise is that should an error be made in the return and a voluntary disclosure made e.g. if a business forgets to make a claim for input tax on some new equipment, only realising their error months later when preparing year-end accounts, then currently no interest is received on this repayment. Post January 2023 interest will be made but at the same annual rate 0.5%.

The only other time that HMRC pays interest under a VAT claim is if a claim or refund has been delayed due to official error on the part of HMRC. An example of this instance would be where an officer rules that a particular product has been wrongly designated as standard rates and subsequently it was found that it should have been zero-rated, leading to a large VAT refund to the taxpayer. Interest would then be paid again at the annual rate of 0.5% and using 'simple' rather than 'compound' interest.

The reason for these rule changes is in readiness for 'Making Tax Digital' so that there is harmonisation across the board of all taxes. However, whilst harmonisation of interest payable and repayable ensures a fairer and more coherent regime, the situation will have a more significant impact on VAT registered businesses that are in a refund position. During the time if HMRC is making their enquiries in the intervening period the business looking for a VAT refund is left with an absence of funds which often form part of a business’s working capital. In addition, those of the more cynical disposition may be concerned that without the 5% supplement 'levy' there is less immediacy for undertaking enquiries in a timely fashion as the 'penalty' for doing so is no longer there.

These days there’s less reliance on physical documents for VAT claims as digital invoices are becoming the norm. However, there are situations where you might not have the correct evidence or any at all. When are you still entitled to reclaim VAT?

VAT records

Normally, HMRC expects you to have the right paperwork, or digital equivalent, to back up every purchase transaction for which you reclaim the VAT paid (HMRC calls it input tax). However, even HMRC concedes that it’s not always possible to obtain the proper paper or digital documents if any at all.

No evidence - For certain purchases HMRC allows you to reclaim VAT without either a digital or paper receipt or invoice. These must be for £25 or less - this limit is for each item. The concession applies to the following types of purchase:

• via coin-operated machines
• off-road car parking
• toll charges for tunnels, bridges, etc.; and
• phone calls from private or public phones.

Alternative evidence - In addition, HMRC is authorised by law to use its discretion to allow claims for input tax in other circumstances where you don’t have the proper documents. It can accept alternative evidence of input tax. This can consist of a combination of information and documents. For example, a delivery note for goods plus proof of payment. HMRC has a statement of practice for these situations.

Less detailed documents - In addition to the exceptions already mentioned HMRC also allows input tax claims without a full invoice for purchases of up to £250 if you have a receipt or invoice showing the key details, i.e. the name and address of the supplier, nature of the goods supplied, the rate of VAT and the seller’s VAT number. Typically, these types of receipt are issued by retail businesses.

If the receipt doesn’t show a figure for VAT, but the seller is VAT registered, the amount of input tax you’re entitled to reclaim is one sixth of the total paid. But don’t forget that some goods are zero-rated or exempt, e.g. printed matter or the digital equivalent.

Workers’ expenses - Whilst normally HMRC expects invoices etc. from which you reclaim input tax to be in the name of your company, it accepts those in the name of an employee or contracted worker where they have made a purchase on behalf of the business and you have reimbursed them the expense. This includes input tax relating to the fuel element of any mileage allowance you pay a worker for their business travel in a vehicle. To reclaim the VAT, your workers must provide you with fuel receipts at least equal to the value of the mileage claim.

Make sure that the expenses claim forms you ask your employees and other workers to complete include a space in which they can enter the amount of VAT. You should itemise purchases and show VAT where applicable so that your bookkeeper can identify this and reclaim it.

You don’t need physical or digital records to reclaim VAT on off-road parking, road tolls and telephone calls if the cost doesn’t exceed £25. For purchases up to £250 a receipt showing the supplier, the goods supplied and the VAT rate is OK. In other situations HMRC accepts alternative evidence, e.g. delivery notes plus proof of payment.

To help taxpayers and advisers affected by the surge in Covid-19 cases as a result of the Omicron variant, HMRC have announced that penalty waivers will apply for a limited time where the 2021/22 tax return is filed late or where tax due on 31 January 2022 is paid late.

Late filing penalty

The 2020/21 tax return was due to be filed online by midnight on 31 January 2022. Where this deadline is missed, normally HMRC would charge a late filing penalty of £100 automatically. The exception to this rule is where the notice to file a 2020/21 tax return was issued after 31 October 2021, in which case a later filing deadline of three months from the date of the notice to file applies. Where a late filing penalty is issued, the taxpayer can appeal the penalty if they have a ‘reasonable excuse’ for missing the deadline.

However, in recognition of impact of Covid-19 on the ability of taxpayers and their agents to meet the 31 January 2022 deadline, HMRC have announced that they will not charge a late filing penalty as long as the 2021/22 tax return is filed by midnight on 28 February 2022. This will give taxpayers an extra month in which to file their return. The move is perhaps not entirely altruistic on HMRC’s part as it is likely to save them from dealing with a large number of penalty appeals where the late filing is attributable to the reasonable excuse of Covid-19.

Late payment penalty

A tax payment deadline also fell on 31 January 2022. This is the date by which any tax and National Insurance still due for 2020/21 must be paid, along with the first payment on account for the 2021/22 tax year.

Normally, a late payment penalty of 5% of the outstanding tax would be charged where tax due by 31 January 2022 remained unpaid by 31 March 2022. However, HMRC have announced that they will not charge a late payment penalty as long as the taxpayer has paid their tax in full or agreed a Time to Pay arrangement with HMRC by midnight on 1 April 2022.

If you know already that you will struggle to pay your tax bill in full by 1 April 2022, you should act now to set up a Time to Pay arrangement, which will allow you to pay what you owe in instalments.

Interest

Interest payments have not been waived. Where tax is not paid by 31 January 2022, interest will run from 1 February 2022 until the date of payment.

The normal rules for tax relief on expenses don’t apply if they are incurred before your business commences trading. This can affect the timing and the amount of tax deductions. What do you need to know?

Start-up costs - It can take a fair amount of time, effort and expense before a new business is ready to start trading let alone generate enough income to pay the director shareholders a decent income. Depending on the nature of your business, there could be premises to find, plus stock and equipment to pay for. Naturally, you would assume that such expenses are tax deducible, but the general tax rules don’t allow for this. Instead there are special rules for so-called pre-trading expenses .

Tax and pre-trading expenses - While the legislation involved is different there are similar rules for companies and unincorporated businesses. Broadly, pre-tradingexpenses are treated as if were incurred on the first day of trade. The usual tax rules then apply and they must be wholly and exclusively for the purpose of the business to permit a tax deduction. Day-to-day expenses such as those incurred for business travel and building overheads are directly deductible from income, while for expenditure, capital allowances (HMRC’s equivalent to a depreciation charge) are given for equipment such as machinery and vehicles.

If the business never starts there’s no tax relief for losses resulting from pre-trading expenses.

Pre-trading salary. If you spend your time finding suppliers, hiring staff and so on, your company can pay you a salary and provided it’s reasonable for the time and effort involved it’s a tax deductible pre-trading expense. This doesn’t apply if your business is unincorporated because what you personally take from it doesn’t affect taxable profit.

The pre-trading expenses rule applies to expenses paid up to seven years before trade commences.

Not a pre-trading expense - The special rules for pre-trading expenses don’t apply to some types of expense. While they may be incurred before trade commences, by their nature they relate to a time when the trade exists, e.g. stock and materials. Therefore, tax deductions are allowed for them without the need to resort to the pre-trading expenses rules.

The cost of finance - If you borrow to finance your new business and incur interest or other finance charges before trade begins, these too count as pre-trading costs and are treated in the same way as other expenses, but not where the business is run as a company.

Pre-trading interest etc. incurred by companies falls under the loan relationship rules. These say that for corporation tax purposes your company can only deduct interest paid on loans from non-trade credits (income) it receives, e.g. interest on savings. It might be years before it can generate the right type of non-trade credits, if ever, to obtain tax relief for its pre-trade debts.

Your company can elect for pre-trading loan relationship debits, e.g. interest paid, to be treated in the same way as other expenses. Naturally, there are conditions; a two-year time limit for the election plus, like other pre-trading expenses, the debits must meet the wholly and exclusively test.

For tax purposes setup expenses are treated as if you incurred them on the first day of trading. An effect of this is that if the business never trades you won’t get any tax relief. If your business will be run through a company, a tax deduction under the pre-trading expenses rules for a reasonable salary is allowed.

In a personal or family company the director will often borrow money from the company. This can be an easy source of finance, and also one that can be tax efficient as, if you time it correctly, it is possible to borrow up to £10,000 for up to 21 months tax-free. However, there are tax consequences if the loan remains outstanding nine months and one day after the end of the accounting period in which it was made. This is the date on which corporation tax for the period is due and, in addition to any corporation tax due for the period, the company must pay ‘Section 455’ tax on the outstanding director’s loan balance.

Rate of ‘Section 455’ tax - Section 455 tax is aligned with the dividend upper rate. From 6 April 2016 to 5 April 2022 the rate is 32.5%.

As part of a package of measures to raise funds for health and adult social care, the dividend tax rates are increased by 1.25% from 6 April 2022. As a result, the rate of Section 455 tax will rise to 33.75% from that date.

Prior to 6 April 2016, the rate of Section 455 tax was 25%.

Which loan to repay? - Unlike other forms of tax, Section 455 tax is a temporary tax, which is repaid after the outstanding loan has been cleared. A repayment can be claimed from nine months and one day after the end of the accounting period in which the loan balance was cleared. This may be done in various ways, for example, by introducing funds from outside the company, declaring a dividend or by setting a bonus or salary payment against the loan.

If the director has several loans which are outstanding, it makes sense to clear those loans which attract a higher rate of Section 455 tax first.

The optimal repayment order is as follows:

Loans made on or after 6 April 2022 (for which the rate of tax is 33.75%).

Loans made between 6 April 2016 and 5 April 2022.

Loans made before 6 April 2016.

Example - Andy is a director of his family company A Ltd. He prepares accounts to 30 April each year.

In July 2015 he took a loan £20,000 from A Ltd. The company paid Section 455 tax of £5,000 (25% of £20,000) on 1 February 2016.

He took a further loan of £15,000 in May 2018 on which the company paid section 455 tax of £4,875 (£15,000 @ 32.5%) on 1 February 2020.

Andy is having building work done in April 2022 and plans to take a further loan of £25,000 on 20 April 2022. If he does not clear the loan by 1 February 2023, the company will have to pay Section 455 tax of £8,437.50 (£25,000 @ 33.75%).

He has an endowment policy that will mature in August 2022, the proceeds of which are £50,000. He plans to use this to clear the loans. To make the best use of this money to secure the maximum tax savings/repayments, he should clear the loans as follows:

Loan of £25,000 made in April 2022. This will save the company tax of £8,437.50.

Loan of £15,000 made in May 2018 This will generate a repayment of £4,875 on 1 February 2023.

£10,000 of the £20,000 loan made in July 2015. This will generate a repayment of £2,500 on 1 February 2023.

Using the £50,000 in this way will save tax/generate repayments of £15,812.50.

Had he cleared the loans in chronological order, he would have received a repayment of £5,000 in respect of the 2015 loan and a repayment of £4,875 in respect of the 2018 loan. He would only have been able to clear £15,000 of the 2022 loan (saving Section 455 tax of £5,062.50). The total tax savings/repayment would be £14,937.50. He would also need to pay Section 455 tax of £3,375 on 1 February 2023 (against which the repayment due to him of £9,475 could be set).

It is prudent to plan ahead for retirement and tax breaks are available to encourage savings into a registered pension scheme.

Contributions into a registered pension scheme attract tax relief as long as the contributions are covered by the available annual allowance and are not more than 100% of earnings (or £3,600 if higher).

Tax-relieved lifetime pension savings are capped by the lifetime allowance, set at £1,073,100.

Annual allowance - The annual allowance places a ceiling on the amount of tax-relieved contributions that can be made to a registered pension scheme each year. Contributions made by an employer count towards the annual allowance.

The annual allowance is set at £40,000. However, it is reduced where both adjusted net income is more than £240,000 (broadly income including pension contributions) and the threshold income (broadly income excluding pension contributions). Where this is the case, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £240,000 until the minimum amount of the annual allowance is reached. For 2021/22 this is £4,000. Consequently, where a person has adjusted net income of at least £312,000 and threshold income of at least £200,000, they only receive the minimum annual allowance of £4,000.

A lower annual allowance – the money purchase annual allowance (MPAA) – applies where a person has flexibly accessed their pension pot having reached age 55.

If contributions are made in excess of the annual allowance, a tax charge applies (the annual allowance charge) which effectively claws back the relief that was not due.

If the annual allowance is not used in full in the tax year, the unused amount can be carried forward for up to three years. However, the current year’s allowance must be used up before using allowances from earlier years. Where brought forward allowances are utilised, those from an earlier year are used before those of a later year.

Year-end planning - Any annual allowance brought forward from 2018/19 will be lost if not used before 6 April 2022. However, the annual allowance for 2021/22 must be used in full before the allowances brought forward from 2018/19 can be utilised.

Example - Richard has earnings of £150,000 for 2021/22. He has an annual allowance of £40,000. He has historically made pension contributions of £25,000 a year and has unused allowances of £15,000 a year for each of the years 2018/19, 2019/20 and 2020/21.

He received an inheritance in January 2022 and is considering making additional contributions.

To prevent his unused allowances from 2018/19 from being wasted, he can make contributions of £55,000 before 6 April 2022. This will fully utilise the annual allowance for 2021/22 and £15,000 unused allowance from 2018/19. He could also make further contributions of up to £30,000 if he wished to use the available allowances for 2019/20 and 2020/21.

He could instead carry these forward. He will have until 5 April 2023 to use the allowances from 2019/20 and until 5 April 2024 to use the allowances from 2020/21. However, to access these allowances he would need to use up his current year annual allowance first.

If he makes contributions of £55,000 on or before 5 April 2022, he will prevent the unused 2018/19 allowances from being wasted. Assuming he is a higher rate taxpayer, the contributions of £55,000 will ‘cost’ him £33,000 as he will benefit from tax relief at 40%.

He will also need to check that making the contributions does not take the value of his pension pot above the lifetime limit.

For 2022/23 only, the rates of Class 1 (employer and employee) National Insurance contributions are increased by 1.25 percentage points, along with the rates of Class 1A, Class 1B and Class 4 contributions. The NIC increases are a temporary increase pending the introduction of the Health and Social Care Levy from 6 April 2023. The levy will raise ring-fenced funds for health and adult social care; the 2022/23 temporary increases in National Insurance contributions will do likewise. The rates are due to revert to their 2021/22 levels from 6 April 2023 when the new levy comes into effect.

Employer and employee rates for 2022/23

As a result of the temporary NIC increases, for 2022/23, the main rate of primary contribution (payable on earnings that fall between the primary threshold (£190 per week; £823 per month; £9,880 per year) and the upper secondary threshold (£967 per week; £4,189 per month; £50,270 per year)) is set at 13.25% and the additional primary rate (payable on earnings in excess of the upper earnings limit) is set at 3.25%.

Employers will pay secondary contributions at the rate of 15.05% on earnings in excess of the secondary threshold (set at £175 per week; £758 per month; £9,100 per year). Where an upper secondary threshold applies, employers will pay secondary contributions on contributions at 15.05% above the relevant secondary threshold (£967 per week; £4,189 per month; £50,270 per year where the employee is under the age of 21, an apprentice under the age of 25 or an armed forces veteran in the first year of their first civilian employment since leaving the armed forces and £481 per week; £2,083 per month; £25,000 per year where the employee is a new Freeport employee). The 1.25% increase does not apply to earnings charged at the zero rate.

Employers will also pay Class 1A and Class 1B National Insurance contributions at 15.05% for 2022/23.

Identifying increases on the payslip

In the December 2021 issue of their Employer Bulletin HMRC asked employers to include a message for employees on all payslips between 6 April 2022 and 5 April 2023 to explain that their increased National Insurance contributions are being used to meet health and social care costs. They instructed that the payslip message should read ‘1.25% uplift in NIC funds NHS, health & social care’.

HMRC reiterated this request in the February 2022 issue of Employer Bulletin. The article notes that while HMRC have been in contact with payroll software providers to request that they include it in their software packages, they realise that some employers will need to amend payslips directly in order to include this message.

HMRC will also be sending out emails to employers to remind them to include this message.

To encourage employers to employ armed forces veterans, a new relief was introduced with effect from 6 April 2021 where an employer took on an armed forces veteran in the first year of their first civilian employment since leaving the armed forces.

Nature of the relief

Under the relief, an employer only pays secondary Class 1 National Insurance contributions on earnings to the extent that they exceed the veteran’s upper secondary threshold where the veteran is in the first year of their first civilian employment since leaving the armed forces. The secondary rate is 13.8% for 2021/22 and 15.05% for 2022/23. Contributions are payable at a zero rate on earnings that fall between the secondary threshold and the veteran’s upper secondary threshold.

To qualify for the relief, the employee must have served at least one day on the regular armed forces (a single day undertaking basic training counts). The employee must also be in their first civilian job since leaving the armed forces – it does not matter when they left.

The relief is available from 6 April 2021 onwards for the first year of the veteran’s first post-forces civilian employment. Where the employment commenced after 6 April 2020, the relief period runs from 6 April 2021 to the first anniversary of the employment start date. If the veteran has more than one job in this period, all employers can benefit. Likewise, if the veteran changes jobs before the end of the relief period, the new employer is eligible for the relief until the end of the relief period.

The relief only applies to employer’s contributions; the armed forces veteran pays employee contributions on earnings above the primary threshold as for other employees.

Giving effect to the relief

Although the relief applies from 6 April 2021, employers were required to pay secondary contributions as normal on the veteran’s earnings for 2021/22 where these exceeded the secondary threshold. They can claim the relief retrospectively from 6 April 2022 through the payroll via Real Time Information.

To claim the relief for 2021/22 through the payroll, the employer will need to submit a revised FPS after 6 April 2022 using the category letter V where the employee would otherwise have category letter A (standard contributions). From 2022/23 the relief is given through the payroll. Category letter V should be used where A would otherwise apply. At the end of the relief period, the veteran’s category letter should revert to A.

If the veteran would otherwise have a category letter other than V (for example, if they have reached state pension age), employers will need to write to HMRC to claim the relief due for 2021/22.

Plastic packaging tax is a new tax that comes into effect from 1 April 2021. The tax has a green agenda – its aim is to reduce the amount of plastic packaging that does not contain at least 30% recycled plastic.

Liability - The tax applies to packaging that it predominantly plastic by weight and which does not contain at least 30% recycled plastic by weight. It is levied on those who manufacture or import plastic packaging. The tax arises when the packaging component is finished, or where it is imported, when it is imported.

However, to ensure that the administrative burden is not disproportionate, it only applies to those who manufacture or import at least 10 tonnes of plastic packaging within the scope of the tax each year. Guidance on what constitutes plastic packaging for the purposes of the tax can be found on the Gov.uk website (see https://www.gov.uk/guidance/work-out-which-packaging-is-subject-to-plastic-packaging-tax).

Where the tax applies, it is charged at the rate of £200 per tonne.

Registering - Manufacturers and importers who are liable for the tax will need to register with HMRC from 1 April 2022. This can be done online. A business must register when they have manufactured or imported 10 or more tonnes of plastic packaging within the scope of the tax, or if they plan to do so in the next 30 days. Therefore, when determining whether a liability to register arises, it is necessary to look both backwards and forwards. As the tax only applies from 1 April 2022, in the first year of the tax, there is no need to look back before 1 April 2022.

Where the threshold of 10 tonnes in the previous 12 months is reached, the liability to register arises from the first day of the month following that in which the threshold was reached. Registration must be done within 30 days.

Example - A business manufactures 4 tonnes of plastic packaging containing less than 30% recycled plastic each month. By 30 June 2022, they have manufactured 12 tonnes of packaging since 1 April 2022. As the 10 tonne threshold has been exceeded on 30 June 2022, the liability to register arises on 1 July 2022. The business must register by 30 July 2022.

Where a business expects to exceed the 10 tonne threshold in the next 30 days, the requirement to register arises from the date that the business expects to be liable to register. Again, the business must register within 30 days.

Example - A business normally manufactures 2 tonnes of plastic packaging a month. On 4 May 2022 it receives an order for 15 tonnes of plastic packaging that contains less than 30% recycled plastic. The liability to register arises on 4 May 2022 and the business must register by 2 June 2022.

Planning tips - The tax is payable by the manufacturer or importer, not by the end user. However, depending on price sensitivity, they may be able to pass the cost on. As the tax only applies where the plastic packaging does not contain at least 30% recycled plastic, increasing the recycled element to at least 30% will remove liability of the tax. Likewise, moving away from plastic packaging so that the 10 tonne threshold is not breached will also take a business outside the tax, increasing its green credentials in the process.

To help meet the costs of health and adult social care, a new levy, the Health and Social Care Levy, is introduced from 6 April 2023. Payment of the levy, which is set at the rate of 1.25% of qualifying earnings, is linked to the payment of National Insurance contributions.

Prior to the introduction of the levy and in order to start raising ring-fenced funds for health and adult social care from 6 April 2022 onwards, the rates of ‘qualifying’ National Insurance contributions are to increase by 1.25% for 2022/23 only. Qualifying National Insurance contributions are Class 1, Class 1A, Class 1B and Class 4. Thus, employees, employers and the self-employed will be hit by the rises for 2022/23, and by the levy from 6 April 2023.

The National Insurance rates are due to revert to their 2021/22 levels from 6 April 2023 when the Health and Social Care Levy comes into effect.

Impact on employees - For 2022/23, employees will pay primary National Insurance contributions at the main rate of 13.25% on earnings between the primary threshold (set at £190 per week for 2022/23) and the upper earnings limit (set at £967 per week for 2022/23), and at the additional rate of 3.25% on earnings in excess of the upper earnings limit.

For 2021/22, the main rate is 12% (payable on earnings between £184 per week and £967 per week) and the additional rate is 2% (payable on earnings in excess of £967 per week).

The following case studies demonstrate the impact of the rate rises, which will depend to the extent to which they are offset by the increase in the primary threshold.

Case study 1 - Karen is paid £185 per week. For 2021/22, she pays primary contributions of 12p per week. However, for 2022/23, she will not pay any contributions (but will be treated for state pension purposes as having made notional contributions) as her earnings are below the primary threshold of £190 per week.

She is unaffected by the rate rises, and benefits from the increase in the primary threshold.

Case study 2 - Clive is paid a salary of £24,000, paid monthly at the rate of £2,000 per month. His pay remains the same in 2022/23 as in 2021/22.

The monthly primary threshold is £833 for 2022/23 and the monthly upper earnings limit is £4,189. For 2021/22, the monthly primary threshold is £797 and the monthly upper earnings limit is £4,189.

For 2021/22, Clive pays primary National Insurance contributions of £144.36 (12% (£2,000 - £797)).

For 2022/23, Clive pays primary National Insurance contributions of £154.63 ((13.25% (£2,000 - £833).

The combined impact of the rate rise and the increase in the primary threshold will mean that Clive will pay an additional £10.27 each month in National Insurance contributions.

Case study 3 - Rebecca is a company director with a salary of £150,000 a year.

The annual primary threshold is £9,880 for 2022/23 and £9,568 for 2021/22. The annual upper earnings limit is £50,270 for both years.

For 2021/22, Rebecca pays primary Class 1 National Insurance of £6,878.84 ((12% (£50,270 - £9,568)) + 2% (£150,000 - £50,270))).

For 2022/23, Rebecca pays primary Class 1 National Insurance of £8,592.91 ((13.25% (£50,270 - £9,880)) + (3.25% (£150,000 - £50,270))).

As a result of the rate increases, Rebecca will pay £1,713.07 more in National Insurance contributions in 2022/23 than in 2021/22.

The Employment Allowance is a National Insurance allowance that eligible employers can claim and set against their secondary Class 1 National Insurance liability.

The allowance is set at £4,000 for 2021/22 (capped at the employer’s secondary National Insurance liability for the year where this is lower).

Can you claim it? - Not all employers are able to claim it. At the lower end of the scale, it is not available to companies where the sole employee is also a director. This means that most personal companies cannot benefit. However, a company with more than one employee or one where the sole employee is not a director can benefit from the allowance.

It should be noted here that HMRC guidance stipulates that the allowance is not available if there is only one employee ‘paid above the National Insurance secondary threshold’ and that employee is also a director. However, there is no requirement in the legislation for employees to be paid above the secondary threshold to be counted, and the allowance is (in accordance with the legislation) available unless all the payments of earnings in the year are made to the same person and that person is a director. Thus, companies with at least two employees at some point in the tax year should be eligible for the allowance.

At the other end of the spectrum, companies whose Class 1 National Insurance liability for the previous tax year is £100,000 or more do not qualify for the allowance.

Impact of claim on optimal salary - The availability or otherwise of the employment allowance determines the optimal salary level in a family company scenario. Assuming that the personal allowance is not used elsewhere, for 2021/22, the optimal salary where the employment allowance is not available is one equal to the primary threshold of £9,568. However, where the employment allowance is available, the optimal salary for 2021/22 is equal to the personal allowance of £12,570.

Not too late to claim - The employment allowance has to be claimed through the payroll. If a claim has not yet been made for 2021/22 it is not too late.

In a family company scenario where the alternative arrangements are used for National Insurance (such that NIC is assessed each pay period as for other employees, rather than on an annual basis), it may be easier to pay the director a salary equal to the secondary threshold of £737 per month for the first 11 months of the tax year. This prevents the need to pay any National Insurance over to HMRC. If the company is eligible to claim the employment allowance, they can claim it in March and make a final payment for the tax year of £4,463 to take pay up to £12,570, the level of the personal allowance for 2021/22 (£12,570 – (11 x £737) = £4,463). There will be some primary Class 1 National Insurance on earnings for the year above the primary threshold of £9,568 The primary NIC bill is £360.24 ((£12,570 - £9,568) @12%). However, this is offset by the corporation tax savings on the higher salary at 19%.

The allowance can be claimed after the end of the year if a claim is overlooked. In this situation, you can ask HMRC to use it to pay other tax that the company may owe, including VAT and corporation tax if you do not owe any PAYE and National Insurance. If you have no tax to pay, you can ask for a refund.

You cannot carry forward any unused amount of the allowance to later tax years. If your secondary NIC bill is less than £4,000, the employment allowance is capped at this level.

With fuel prices hitting new highs, your employees are saying that HMRC’s mileage rates for business use of their cars are no longer enough. You’re willing to pay more but what tax and NI costs might this trigger and can you mitigate them?

Business use of private vehicles

Employees who use their private vehicles for business journeys are entitled to claim a tax deduction, at an HMRC-approved amount, according to the number of miles travelled. Alternatively, employers can pay their employees an equivalent tax-exempt mileage allowance.

There’s an advantage to the employer-paid allowance. It’s free of NI contributions whereas the tax deduction does not reduce the NI liability for employee or employer.

Rising pump prices

HMRC’s approved mileage rates haven’t changed in over a decade. (Car or van 45p per mile for the first 10,000 business miles, then 25p per mile) To be fair, motoring costs haven’t increased hugely in that time, but they have increased. Now, fuel prices are surging and employers are under pressure from their workers to pay higher mileage rates.

Tax and NI consequences

As an employer if you pay more than the tax-free amount, the excess must be reported on Form P11D as a benefit in kind. For NI purposes you must add the excess to the employee’s salary and charge it to Class 1 NI as you would salary.

Mitigating tax and NI

You might be able to mitigate the tax and NI cost on excess mileage payments with other tax and NI-free travel-related payments.

The following allowances are tax and NI exempt:

benchmark subsistence payments

incidental overnight expenses

working rule agreement allowances

If your policy is not to pay employees’ subsistence when they travel on business (apart from overnight stops) or reimburse at a rate less than HMRC’s tax and NI exempt allowances, you could pay these to top up the tax and NI-free mileage allowance to partly compensate your employee for any shortfall.

Example. Ravi, a higher rate taxpayer, is employed by Acom Associates at their head office. On average he makes six journeys and drives 500 business miles per month in his own car. On average each trip lasts ten hours. Acom agrees that 60p per mile is reasonable but in a year that would cost Ravi £389 in tax and NI and Acom £135 in NI. When on a business journey Ravi usually buys a sandwich and a drink at lunchtime for £5 which Acom reimburses tax and NI free. However, it could pay him HMRC’s £10 benchmark subsistence rate. This would give Ravi an extra £360 per year tax and NI free. That’s equivalent of paying Ravi an extra 15p per mile for 2,400 of the 6,000 miles he travels.

The excess over HMRC’s approved mileage allowance is taxable as a benefit in kind and liable to Class 1 NI contributions as extra salary. Where currently you do not pay your employees a subsistence or other travel-related allowance, paying one at HMRC approved rates can provide employees with extra tax and NI-free cash as a top up to the mileage allowance.

The annual capital gains exemption has barely increased in recent years. But in the right circumstances and with some planning you can manufacture your own increase. How’s it done?

CGT annual exemption - Every person is entitled to the annual exempt amount for capital gains tax (CGT). For 2021/22 and 2022/23, £12,300 of any chargeable capital gains you make are tax free. If the gain is greater than this, the excess is liable to CGT at between 10% and 28%. However, there are legitimate ways to increase the exempt amount.

Spouse or civil partner exemption - If your gains for a year (after knocking off any losses of the same year or unused ones for previous years) already exceed your CGT annual exemption and you wish to make another transaction which would result in a gain, it’s possible to make use of your spouse or civil partner.

Transfer the assets you want to sell to your spouse/partner so they can make the sale. Special rules treat the transaction as resulting in neither a gain nor a loss. In effect, your spouse receives them at the same price you paid for them. This means when they sell the assets they’ll make the same gain that you would have. The important difference is they can use their annual exemption to reduce their CGT bill.

The Tip is only for married couples and civil partners as transferring assets to unmarried partners triggers an anti-avoidance rule. This treats the transaction as if you had sold the assets to them at their full value, meaning you’ll be taxed on the gain you were trying to mitigate.

CGT planning - It is possible to make use of your unmarried partner’s CGT exemption with long-term planning. It involves transferring assets you hope will increase in value and when they do your partner sells and uses their exemption to reduce the CGT. They can if they wish give some of the proceeds to you without breaching anti-avoidance rules.

A similar tax-saving strategy can be used more easily and possibly to greater effect if you have children.

Tax planning for youngsters - Surprisingly, children are entitled to their own CGT annual exemption from birth. While there are many anti-avoidance rules to stop you diverting assets and income to your youngsters to avoid tax, these don’t apply to the CGT exemption.

Give assets, e.g. shares, to your children at a young an age as possible and certainly before they reach 18 as the tax-saving scheme ceases to work after that. While you’ll have to pay tax on any income, dividends, etc., from these, any capital gain made when the assets are sold is taxed on them but only if it exceeds their annual exemption at the time.

Spending the proceeds. It’s important to remember that any gift of assets to children must be genuine and not a sham merely to dodge tax. This doesn’t prevent you from selling assets to use your children’s CGT exemptions and then spending the proceeds on their welfare or education, e.g. school fees.

Summary - Use the old trick of giving assets to your spouse/civil partner so they can use their annual exemption. For a longer term plan gift assets to your children while they are under 18 as they have their own exemption. Sell assets when they have gained in value and use the proceeds for your children’s welfare. This won’t trigger any anti-avoidance rules.

You’re downsizing your business premises and will now mainly work from home and “hot desk” when you go into the office. If the company meets the cost of creating your home office, will it count as a taxable benefit?

As a director or employee, if the business you work for pays for equipment, e.g. a computer, office furniture, and allows you personal use of it, or transfers ownership to you, you’ll be taxed on a benefit in kind. There are different rules for working out the taxable amount depending on whether you or the business owns the items in question.

A temporary exemption (originally for 2020/21 but extended to 2021/22) from benefit in kind tax applies where a director or employee paid for equipment so they could work at home during the pandemic. They are reimbursed by their employer but can retain ownership of the equipment.

Ownership is the key to tax liability

Where the temporary concession we mentioned doesn’t apply, tax liability can arise for employer-paid-for fitting out of home offices. For example, this applies to expenditure on decorating and structural work on your home because it forms part of your property and so can’t be owned by the employer (unless the employer also owns your home). Such costs are therefore taxable benefits.

No charge. If you use goods paid for by your company for business purposes and there’s only an insignificant amount of personal use, the rules say there’s no taxable benefit. However, this doesn’t apply to the cost of an “extension, conversion or alteration of living accommodation” . You might get away tax free with light redecoration of your home office but nothing more significant.

Before starting any building work grant your company a lease allowing it exclusive use of the part of your home for, say, ten years. This means the creation of the office relates to the lease and not the freehold. As a result, the benefit in kind charge is deferred until the lease expires. There’s also another tax advantage to this.

Diminished value

The taxable amount of a benefit on goods transferred to an employee is the lower of their cost or their market value (MV) at the time of transfer. The MV is taken when the lease expires. One method of arriving at the MV is to value the whole property with the conversion and again assuming the conversion didn’t exist. The difference would be the taxable amount. So, if the conversion cost £25,000, but it only increased the value of the property by £10,000, you’ll only be taxed on the lower figure.

This only works if you create a formal lease. A licence to use or rental agreement won’t do because it doesn’t give your company a legal interest in the property.

NI savings

As well as reducing the benefit in kind on which NI is payable, you can escape the benefit in kind tax. There’s a further but less obvious NI saving derived. It relates to the rent your company pays under the terms of the lease. While this is taxable as income it’s not liable to NI. This makes the rent a tax/NI efficient way of extracting money from your company.

The creation of a home office paid for by your company can be a taxable benefit. To mitigate this lease the part of your home used as an office to your company before the work commences. This will defer the tax charge until the lease expires. By then the value of the conversion will probably have depreciated, which will result in a lower tax bill.

The decision to sell land or property will, in most cases, be made by the taxpayer. However, in the case of a compulsory purchase the decision is taken out of the taxpayer’s hands. Where land is compulsorily acquired by an authority (such as a local authority), the owner has a legal entitlement to compensation. How is the compensation treated for tax purposes and what impact does this have on calculating the capital gain, if any, on the disposal?

Nature of the compensation

The starting point is to ascertain what the compensation relates to. Compensation as a result of a compulsory purchase can be split into three categories:

an amount for the land itself;

an amount for disturbance; and

am amount for severance.

Compensation for the land

The compensation for the land itself is used in computing the gain, if any, that arises on the disposal (or part disposal) of the land.

Compensation for disturbance

The treatment of compensation paid for disturbance is more complicated as the tax treatment depends on the nature of the disturbance to which the compensation relates. HMRC list the following as the most common elements found in a disturbance payment and their associated tax treatment:

loss of stock – taxable as trading income;

temporary loss of profits – taxable as trading income;

loss of goodwill – chargeable to capital gains tax for individuals or under the corporate intangibles regime for companies;

incidental expenses that are revenue in nature – set against relevant revenue expenditure;

incidental expenses that are capital in nature – set against relevant capital expenditure.

Compensation for severance

The severance element of the compensation relates to the fall in the value of the land which is compulsorily acquired (also referred to as ‘injurious affection’). Where a severance payment is made, this gives rise to a part-disposal of the retained land. Any gain on that part disposal is computed in the usual way.

Gain on disposal of land and roll-over relief

A chargeable gain may arise where land is compulsorily required. However, this will not necessarily be the case as if the land is the only or main residence, main residence relief will be available in the usual way.

However, where a gain does arise, for example, if the acquisition is of business premises or an investment property, it may be possible to claim roll-over relief to prevent the immediate crystallisation of the chargeable gain. The claim reduces the base cost of the new land by the rolled-over gain.

The relief may be claimed where there is a disposal of land to an authority exercising or having compulsory powers by the landowner (which may be an individual, a trustee or a company). However, the landowner must not have taken any action to make his willingness to dispose of the land known to the authority.

The relief is available where all or part of the consideration for the disposal of the land is applied in acquiring new land. The consideration includes any element of compensation for surrender. The relief does not apply where the landowner reinvests the proceeds in a dwelling house which, or which becomes within six years of acquisition, the landowner’s main residence.

If there is a change in use in the new land within six years of acquisition, the claim may need to be revised.

Owner manager companies are usually 'close companies' that is ‘under the control of:

(a) five or fewer participators, or

(b) participators who are directors’.

For most small, limited companies, 'participators' means 'shareholders'. However, the legal definition is broader in that a 'participator' can be anyone (or their associate) with a financial interest in the company (excluding a bank operating in the ordinary course of its business or typical trade creditors of the company). 'Associate' includes a spouse, parent, grandparent, child, grandchild, brother or sister as well as trusts settled by the participator or a relative of the participator.

An example of a 'participator' who is not a shareholder would be a holder of debentures issued by the company. The definition also extends to include those creditors who will have such rights in the future.

Tax charge

The importance of the definition of a 'participator' relates to situations where a close company (or Limited Liability Company) makes a loan to an individual who is a participator or an associate of a participator. Should the loan remain unpaid within nine months and one day after the end of the accounting period, then the company is subject to a tax charge on the outstanding amount of 32.5% pre 6 April 2020,increasing to 33.75%. . This tax charge mirrors the situation that would exist should a director/shareholder not repay an overdrawn Directors loan account by the same date. Strictly, the tax charge should be considered each time a loan is made however, in practice, it is only necessary to consider loans/advances that are outstanding at the end of the accounting period.

Therefore the charge applies to loans to directors who are also participators, to participators who are not directors, but it does not apply to loans to directors who are not also participators.

However, the tax charge can also apply in situations where a participator receives a tax advantage due to the loan being made. An example would be where a company makes a loan to another company to benefit a participator from the lending company. As a result that participator receives a payment or property, or has a debt satisfied.

Repayment

Where the tax is payable it is, in fact, only temporary because once repayment has been made a claim for refund of the tax can be made. Such refund claims can only be made nine months after the year end in which the repayment of the loan is made. There can, therefore, be a considerable delay from repayment of a loan to refund of the associated tax.

Writing off the loan

The company can formally write off the loan. In this situation the company will be able to reclaim the tax paid nine months after the year end; the personal tax position for the individual will depend on whether they are a participator and/or an officer/employee of the company. Where a loan has been made to a participator who is not a director, there will be an income tax charge for the individual participator when the loan is subsequently written off.

A loan written off for a director is treated as a distribution for income tax purposes, grossed-up at 100/90 taxed at the marginal rate applicable to dividends.

If the director is also an employee then HMRC may contend that the loan write off is actually earnings, treat as salary, taxable at marginal tax rates on the employee.

A recent health scare has prompted you to consider how to reduce the inheritance tax bill your beneficiaries might face if the worst happened to you. What gifts or transfers can you make to immediately reduce IHT on your estate?

IHT and lifetime gifts

You’re probably aware that if you make gifts to family, friends or other individuals and die within seven years your estate may have to pay inheritance tax (IHT) on their value unless the gifts are exempt. While most exemptions aren’t very generous, there’s one for which there is no limit.

Gifts from your income

Gifts you make from your surplus income are exempt from IHT no matter how much they are or who they are made to. Naturally, there are conditions but before you consider these you need to determine what your surplus income is.

Surplus income

A gift only counts as exempt where it’s from income left over after you’ve paid your normal living costs, e.g. food bills, domestic costs, etc. Artificially creating surplus income by living off your savings instead of your income so that you can afford to give it away isn’t within the exemption. The law says it only applies if after making a gift you have enough income to maintain your “usual standard of living”.

The normal expenditure condition

A further condition means that one-off gifts out of your income won’t qualify. The exemption requires there to be a pattern of gifts such that they become part of your “normal expenditure”. The rules don’t say how many gifts out of income have to be made before this condition is met but HMRC will accept that a series of gifts over three years is sufficient.

Timing

The gifts-out-of-income exemption isn’t tied to the tax year. The rules say that HMRC must look at “one year with another” .

Unspent income that you accumulate, say in your bank account, becomes capital after a couple of years. If you give it away HMRC won’t accept the gifts-out-of-income exemption applies. It’s best to make the gifts in cash and not assets such as shares. It’s vital to keep records of your gifts; the date, amount and recipient, where your executors can find them. Without this there’s a good chance regular gifts out of income could be missed and the exemption lost.

Getting the exemption sooner

While normally a pattern of gifts must exist before the exemption applies you can shortcut this simply by showing that it’s your intention to make regular gifts.  Send a letter to those you will make gifts to saying that you intend to give them some or all of your excess income each year. Alternatively, agree to pay a regular expense of theirs, for example their child’s school fees or take out a saving plan that requires regular investment, such as an insurance bond.

Aside from the general exemptions, which are relatively small, you can make unlimited gifts from your income and they will be exempt. To qualify for the exemption the gifts must become part of your normal pattern of income and not negatively affect your standard of living

As you’ll be aware, the government has committed to an across-the-board addition of 1.25% to NI rates from 6 April 2022. Based on the average UK wage of £31,000 per annum (according to the Office for National Statistics), the NI rate rise will cost employees and employers a total of almost an extra £600 per year.

Playing the percentages

In practice higher earners will be hit proportionately harder by the NI hike than the lower paid. For example, on an annual salary of £24,000 employees’ and employers’ NI bills will be 8% and 7.19% greater respectively. Whereas, for someone earning £80,000 per year the NI increases are 15.3% and 8.66%. While it seems fair that those who earn more should pay more, any increase in taxes is unwelcome no matter how much you earn.

Dividends partial escape

To prevent director shareholders of companies escaping the NI rise by taking a greater part of their income as dividends (which are not liable to NI) in place of salary, the dividend tax rates have also been increased by 1.25%.

The dividend rate rise affects director shareholders but not their companies. This means that despite the government’s efforts there’s a saving to be made by reducing your salary (where it would be liable to NI) and increasing dividends by a corresponding amount. For example, swapping £10,000 of salary for £10,000 of dividends means the company avoids NI of £1,505 which far outweighs the increase in NI.

Savings for employers

While companies can pay dividends to their director shareholders instead of salary to escape part of the rise, that option isn’t open to their employees who don’t own shares in the company. The good news is that there’s an alternative which can allow many employees and their employers to mitigate the NI increase.

Salary sacrifice (HMRC calls them optional remuneration arrangements (OpRAs)) can reduce NI costs for employees and employers. An OpRA involves an employee giving up some of their salary in exchange for a benefit in kind. While the scope for these was severely curtailed in 2017, there’s still room for a successful OpRA.

Limited scope for OpRAs

Anti-avoidance rules block most tax and NI advantages of OpRAs but several remain, e.g. cycle to work schemes and pension contributions. The latter is especially useful as auto-enrolment means that many employees contribute to their employer’s workplace pension scheme.

Using your firm’s workplace pension scheme, an OpRA can be tailored to reduce or in some cases eliminate the extra NI costs for employees and employers. In broad terms, it involves your employees reducing the salaries they use to pay their workplace pension contributions which you then pay instead.

Companies can reduce NI costs by paying director shareholders a dividend instead of part of their salary. For other employees, a salary sacrifice arrangement relating to workplace or personal pension plans can reduce or possibly eliminate the effect of the NI increase for both employers and employees.

HMRC’s latest Business Brief says that if you have used the Lennartz method to account for VAT on the private use of assets you may need to review your calculations. Could this be you?

New HMRC guidance. HMRC’s Business Brief 6 (2022) is about accounting for VAT on the private use of business assets, for example, a van, if you used the “Lennartz” method. However, it only relates to purchases before 22 January 2010 or in some cases, as explained in HMRC’s guidance, 4 January 2011.

Lennartz method. In essence, the Lennartz method allows you to reclaim all the VAT paid on the purchase price of an asset if you expect to use it for private purposes. In that case, you’re required to work out the value of the private use and treat it as a supply on which VAT is due. This process comes to an end if the asset ceases to be used in the business or the value of the supply on which you’ve accounted for VAT on private use equals the purchase price of the asset. The latter condition is the reason for HMRC’s latest Business Brief.

What’s the problem? Because the VAT rate increased on 4 January 2011 businesses using the Lennartz method were required to account for VAT on private use at the new rate of 20% instead of the pre-January 2011 rate of 17.5%. As a result VAT might have been overpaid.

Example. Acom Ltd bought three vans in January 2010 at a total of £60,000 plus VAT at 17.5% (£10,500). It subsequently accounted for VAT (17.5% until January 2011 and 20% thereafter) on 15% private use of the vans. By the time the value of private use reached £60,000 Acom had accounted for VAT on £9,000 at 17.5% and £51,000 at 20%; a total of £11,775. This is greater than the VAT it reclaimed on the purchase.

If you’ve used the Lennartz method for assets purchased before 4 January 2011, check that you have not accounted for VAT in excess of the amount you reclaimed. If so you can claim a refund subject to the usual time limits.

You only need to review your workings if you used the Lennartz method for assets bought before and used after 4 January 2011. Because of the VAT rate change on that date, you may have overpaid VAT which you can reclaim.

Under Making Tax Digital (MTD) for VAT, VAT-registered traders must keep electronic records and file their VAT returns electronically using software that is compatible with MTD for VAT. Prior to 1 April 2022, MTD for VAT was only mandatory for VAT-registered traders whose turnover for VAT purposes was above the VAT registration threshold of £85,000. VAT-registered traders whose turnover was below the VAT registration threshold could choose whether to join or not.

Extension to all VAT-registered traders

MTD for VAT is extended from 1 April 2022 to all registered traders. VAT-registered traders whose turnover is below the VAT registration threshold of £85,000 and who have not already joined MTD for VAT must do so from the start of their first VAT accounting period beginning on or after 1 April 2022.

Example

John is a VAT-registered trader with turnover for VAT purposes of £50,000. His VAT quarters run to 31 January, 30 April, 31 July and 31 October. He has not yet joined MTD for VAT.

John must start complying with MTD for VAT from 1 May 2022. This is the first day of the VAT quarter to 31 July 2022 and the first day of his first VAT accounting period that begins on or after 1 April 2022.

He must file the return for the period by 7 September 2022 using MTD-compatible software.

Need to register

Traders who are joining MTD for VAT from 1 April 2022 will need to sign up. They can do this via their Government Gateway Account. Alternatively, if they want to use an agent to submit their returns on their behalf, their agent can sign them up, but will need authorisation from the trader  to do so.

Traders who pay by direct debit should avoid signing up too close to the return deadline as they may end up paying their VAT twice. The window to avoid is the period from seven days before the return is due until five days after the return is due.

Electronic records

Under MTD for VAT, the trader must keep their VAT records electronically. This can be done via a software package. Alternatively, spreadsheets can be used. However, where spreadsheets are used, these must be linked to the return – figures should not be entered manually.

Return software

VAT returns must be filed using software that is compatible for MTD for VAT. HMRC publish details of software packages that can be used (see www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat). However, it should be noted that HMRC do not recommend particular products. Traders should find a product that they are happy with in advance of the deadline

Worth de-registering?

Traders whose turnover is under the VAT registration threshold may wish to review whether, in light of the need to comply with MTD for VAT, it remains beneficial to be VAT-registered.

Time is running out if you want to register with HMRC to payroll benefits and taxable expenses for your employees. If you’re still unsure whether to go ahead, what are the key pros and cons to consider?

The idea behind payrolling of benefits was on HMRC’s agenda as far back as the late 1980s but was considered too impractical. It was the mandatory use of payroll software and online reporting from 2013 that finally allowed HMRC to introduce it in 2016 on a voluntary basis. The uptake was slow and still many employers continue to deal with reporting benefits the old fashioned way.

Before considering the pros and cons of payrolling, note that you must register with HMRC before the start of a tax year if you want it to apply for that year. HMRC may agree to late registration but you won’t get all the advantages that go with on-time registration.

Goodbye P11D

From an employer’s point of view, the most obvious advantage to payrolling is the end of the annual hassle of completing and submitting P11Ds, with a few exceptions. You’ll still need to submit a P11D with details of benefits which HMRC doesn’t allow to be payrolled, namely, living accommodation provided to employees and cheap rate or interest-free loans of more than £10,000.

If a benefit in kind is liable to Class 1A NI this still needs to be reported to HMRC by 6 July after the end of the tax year using the P11D(b) procedure and then paid with your usual PAYE bill in July. On the plus side, the calculation of Class 1A NI is simplified because the benefit figures you need can be taken direct from your payroll records.

Fewer unexpected tax bills

Your employees are likely to prefer payrolling to the P11D procedure. The advantage for them is that if taxable benefits and expenses vary from year to year, which they generally do, the correct tax will be collected as soon as the benefit or expenses change, whereas if an increased benefit is only apparent to HMRC when the P11D is submitted, it will demand the extra tax all at once. Also, if a benefit has reduced, the employee will probably have paid too much tax through their salary.

Multiple calculations

One drawback of payrolling is that each time a benefit changes the taxable amount has to be worked out and the next payroll adjusted. In other words, it’s no longer possible to put off the calculations and do the job all at once for the P11D, which is a job you can give to your accountant. The counter argument is that it’s more difficult to make the calculations all at once which increases the risk of getting it wrong and thus attracting unwanted attention from HMRC.

Better the devil you know?

Anecdotal evidence from employers indicates that the main reason for not switching to payrolling is that it seems complicated. However, payroll experts and employers who use payrolling say that HMRC’s guidance and help with the process is very good. So, the message seems to be a little pain now is worth it for the longer-term advantages.

Payrolling means you’ll no longer no need to prepare annual P11D forms except where you provide living accommodation or low interest loans of more than £10,000. However, it does mean you must calculate changes to the taxable amount of a benefit as soon as it happens. The advantage for employees is more accurate PAYE tax deductions.

The Annual Tax on Enveloped Dwellings (ATED) is a tax on high-value residential properties that are held within ‘an envelope’, such as company or a partnership with at least one corporate partner. The charge does not apply to properties held by individuals.

The charge may potentially apply where a property in the UK which is valued at more than £500,000 is owned completely or partly by a company, a partnership with at least one corporate partner or a collective investment scheme (such as a unit trust or an open-ended investment company).

The charge is payable annually in advance. Where a property is within the scope of the ATED on 1 April, an ATED return must be made online by 30 April and the tax for the period from 1 April to the following 31 March must be paid by the same date. The table below shows the rates of ATED that applies for the period from 1 April 2022 to 31 March 2023.

Value of property

ATED (2022/23)

More than £500,000 to up to £1 million - £3,800

More than £1 million up to £2 million - £7,700

More than £2 million up to £5 million - £26,050

More than £5 million up to £10 million - £60,900

More than £10 million up to £20 million - £122,250

More than £20 million - £244,750

Letting exemption

There are a number of exemptions from the ATED charge. One of these is the letting exemption.

The ATED charge does not apply if the property is let on a commercial basis and is not, at any time, occupied (or available for occupation) by anyone connected with the owner.

Provided that this test is met, relief will be available. The relief must be claimed through HMRC’s ATED online service. If the claim reduces the ATED charge to nil (which will be the case if all high-value residential properties owned by the company are let on a commercial basis), a Relief Declaration Return needs to be completed.

Private residence relief prevents a tax charge from arising if there is a capital gain when a person sells a property that has been their only or main home throughout the period that they have owned it. Where the property has been the only or main home for some but not all of the period of ownership, the relief shelters the gain pertaining to the period that the property was occupied as the only or main home, and also the final nine months of ownership (36 months when owner moves into care).

In most cases, the garden will fall within the scope of the relief, and separate consideration is not needed. However, where the grounds are particularly extensive problems may arise and it is certainly not a given that they will be covered by the relief.

Permitted garden - Under the terms of the legislation, land or a garden that has been ‘enjoyed with the property’ will fall with the scope of the relief where the size of the garden does not exceed the ‘permitted area’.

The legislation defines the ‘permitted area’ as an area of 0.5 of a hectare (1.23 acres) including the land occupied by the dwelling house. Thus where the garden and grounds are not more than 0.5 of a hectare, as long as the conditions for the relief are met, the whole area automatically qualifies for relief.

However, the land must comprise the gardens and grounds of the residence – land which does not form the garden and grounds does not qualify for the relief, even of the total amount of land disposed of with the residence is not more than half a hectare. The test is house and garden up to 0.5 hectares, not the first 0.5 hectares of land.

More land? - If the grounds are more than 0.5 hectares, all is not necessarily lost. A larger area may be allowed within the scope of the relief where this is considered necessary ‘for the reasonable enjoyment of the property’. In determining whether this test is met, HMRC will take account of:

• the size and character of the dwelling house;
• the part of the dwelling house that has been used as the owner’s residence; and
• the amount of land that is required for the reasonable enjoyment of the residence.

Urban gardens are smaller than those of homes in rural areas and what might be reasonable for a rural property may be regarded large for a property of the same size in an urban setting.

Multiple disposals - Problems can also arise if some of the garden is sold separately from the house.

Care should be taken when selling some of the land separately and retaining the dwelling as HMRC may argue that the land that was sold was not required for the reasonable enjoyment of the property. This argument could be countered where the sale was for financial reasons or where the disposal was within the family.

Land sold after the disposal of the residence will not qualify for main residence relief as at the date of disposal the land is not held with the residence as its garden or grounds – the test applies at the date of disposal rather than over the period of ownership as a whole.

Despite the increase in National Insurance Contributions (NIC) in the April 2022 Spring Statement (the increase being replaced by the Health and Social Care Levy in July 2022) there remains a significant financial advantage for individuals working as self-employed rather than as employees. However, complications can arise where an individual is both employed and self-employed as they may find themselves paying too much NIC for no extra benefit. With different rates for the 2022/23 year, individuals who are both employed and self-employed could easily find themselves in this situation unless aware of the rules.

Following changes to the employees primary threshold (PT) the lower profits limit for Class 4 contributions was increased to £11,908 for 2022/23, maintaining alignment with the annual PT. However, the rate of Class 4 NICs for the self-employed remains lower than the rate paid by employees (10.25% v 13.25%), and the self-employed face no equivalent to employer NICs (15.05%). The Class 2 Small Profits Threshold remains unchanged for 2022/23 at £6,725.

Calculation difficulties can arise where there is a mix of earnings such that the Class 1 limit is not exceeded separately but by paying NIC based on total earnings (whether that be for an additional second job or self-employment) the maximum amount is exceeded and a refund due. The annual maximum is equal to 53 primary Class 1 contributions at the upper earnings limit (£967 per week x 53 weeks = £50,270 per tax year).

To ensure that such overpayments were not made in the past, an application had to be made to HMRC for deferment. Currently HMRC state that they will automatically carry out this calculation on receipt of the self-assessment tax return. However, this assumes that the individual’s NIC record is complete and correct. Deferment will be accepted by 14 February for a 2022/23 year claim with any application after that date being considered but only with agreement with the respective employers.

Deferment

Neither Class 2 nor Class 4 NIC can be deferred; deferment only applies for Class 1 NIC and only if any of the following are relevant:

• Class 1 NIC with more than one employer;
• earn £967 or more per week from one job over the tax year;
• earn £1,157 or more per week from 2 jobs (combined income) over the tax year.

The formula for the calculation is:

Upper earnings limit = (X-1) x PT

where X is number of jobs

In practice a reduced rate of 3.25% on weekly earnings between £190 and £967 in one job (not both) instead of the standard rate of 13.25 % for the tax year 2022/23.

Practical Point

Each individual employed in more than one employment or employed and self-employed will have an individualised maximum liability for either Class 1 contributions or Class 1 and Class 2 contributions based on the earnings received. HMRC's National Insurance Manual provides examples for calculating the Class 1 and 2 annual maximum for various earners with differing employment patterns.

When it comes to letting property, not all are equal when it comes to tax – lettings that qualify as ‘furnished holiday lettings’ (FHLs) benefit from special tax rules. The operation of a FHL is deemed to be a business rather than a property income investment and therefore the usual business income and expenditure accounts are prepared. This treatment creates a number of tax benefits for the FHL owner including tax relief for pension contributions, relief for loans to traders and of various capital gains tax reliefs (e.g. Rollover relief, Gift relief, Business Asset Disposal Relief).

Conditions

There are specific conditions required for a let to qualify as a FHL, not least that the property must be fully furnished such that anyone moving into the property must be able to live there without having to buy any additional furniture/furnishings.

In addition, the accommodation must be 'available' for short-term letting for 210 days in any one tax year and be let for 105 days of the year. Long-term lets should not exceed 155 days ('occupation' condition) in any one tax year and the property should not normally be let for a continuous period of 31 days in any period of 155 days.

'Averaging'

As a result of the various lockdown measures implemented by the government due to the pandemic, some holiday let businesses may not have met the various occupancy levels required to qualify as a FHL. If that was the case then there is the option to make an averaging election where a landlord has more than one holiday let and the letting condition is met by some but not all of the properties in the portfolio. The test is applied by reference to the average occupancy rate for all properties, rather than individually for each.

'Period of grace'

If the landlord has one holiday let only or an averaging election does not help there is a potential solution in the form of a 'Period of Grace' election. Under this election should a property qualify for FHL in one accounting period or tax year out of every three but does not qualify in the next or next two years then the election treats the year that does not qualify as being included in the calculation.

Making an election

Either or both of the FHL income tax elections are made on the property income pages of the self-assessment tax return (or separately in writing) up to one year after 31 January following the end of the tax year. That gives the landlord until 31 January 2024 to claim for the 2021/22 year.

Conditions not met

If the conditions are not satisfied, the property is taxed under the normal rental accounting rules rather than the more beneficial FHL business rules. A landlord will not be able to benefit from pension contribution reliefs (apart from the £3,600 net of tax relief permitted to all taxpayers), certain capital gains tax reliefs or be able to claim capital allowances for such items as furniture, fixtures and equipment.

Should a landlord find him or herself in a situation where there is a danger of the FHL conditions not being satisfied then there is always the possibility of asking another member of the family to stay for the prerequisite number of days but they will have to pay market rent for the occupancy rules to apply. Stays by the owner do not count towards the occupancy limit.

Losses

FHL losses cannot be offset in any year against any other type of income, instead such losses are carried forward to be offset against any future profit.

As a final point - Neither Class 2 nor Class 4 NIC's are due on profits from FHL's as the property business is treated as an investment and not a trade.

When letting property, the aim is to make a profit. However, as recent years have shown, life is unpredictable and things do not always work out as planned. Where losses are made, it may be possible to obtain tax relief for those losses.

General rule - The general rule for losses incurred in a property rental business is that they can only be carried forward and set against future profits from the same property rental business.

Loss relief is only available if the business is run on a commercial basis.

Calculating the loss - As with profits, the loss for a property rental business or for a furnished holiday business is calculated for the business as a whole, rather for each individual property. The effect of this is that a loss on one property is automatically set against the profits from other properties within the same property rental business. A loss only arises if there is a loss for the property rental business as a whole.

Example 1 - Evan runs a property rental business comprising three properties. For the tax year in question he incurs the following income and expenses in relation to each of the properties, plus general expenses of £3,200.

Property                 Rental Income    Expenses     Profit/(loss)

       1                            £10,000             £1,000            £9,000

       2                              £2,000             £4,000           (£2,000)

       3                            £12,000             £2,100            £9,900

General expenses                                  £3,200           (£3,200)

Total                             £24,000            £10,300          £13,700

Although he makes a loss on property 2, this is automatically relieved in calculating the profits of the business as a whole, Evan is taxed on the overall profits of £13,700.

Same business - Property losses can only be relieved against profits from the same business.

It is important to note that a UK property business and an overseas property business are treated as different property businesses, and losses from one cannot be set against profits from another. Likewise, losses from furnished holiday lettings can only be set against profits of the same furnished holiday letting.

Example 2 - Freddie runs a furnished holiday letting business. He made a loss in 2020/21 of £12,000. In 2021/22, he made a profit of £30,000. The 2021/22 loss is carried forward and set against the profit of £30,000 for 2021/22, reducing the taxable profit to £18,000.

However, if one business ceases and a new one is commenced, any loss from the old business cannot be set against profits of the new business. If there is a gap it will be a question of fact whether the business has ceased. For example, where there was a gap in holiday lettings during the Covid-19 pandemic, a holiday letting business would not be treated as having ceased if the properties continued to be let as furnished holiday lettings once restrictions had been lifted. Any pre-pandemic losses could be set against post-pandemic profits.

Example 3 - Grace had a holiday let. She sold the property in June 2021. She had unused losses of £12,000. In October 2021 she purchased a buy to let property, making a profit of £4,000 in 2021/22. She cannot use the losses from the holiday let business against the profits from the buy-to-let.

Losses related to capital allowances - Special rules apply to losses that relate to capital allowances. Where these arise, these can be set against general income of the year in which the loss arises. Claims must be made by the first anniversary of 31 January following the end of the tax year in which the loss arose (so by 31 January 2024 for a 2021/22 loss).

Capital losses - A capital loss on the sale of the property is automatically set against any capital gains of the same tax year, of whatever type. Where the loss is not relieved in this way, it is carried forward under the capital gains tax rules for relief against future capital gains. Relief for capital losses in relation to properties is not restricted to property gains as for income tax losses.