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If you incur expenses in doing your job, you may be able to claim tax relief. While the rules governing the availability of relief are strict, the process for claiming relief where it is available is relatively straightforward.

Availability of tax relief

Expenses that may qualify for tax relief include travel expenses incurred in relation to business travel, mileage allowances if you use your own car for business journeys, the cost of professional fees or subscriptions and the additional costs of working at home. However, it should be noted that the rules are strict and where a deduction is not granted by a specific provision, the general rule only permits a deduction for expenses incurred wholly, exclusively and necessarily in the performance of the duties of your employment.

Claiming relief

If you are eligible to claim tax relief for employment expenses, there are various ways in which this can be done.

Route 1: Claim online

You may be able to claim online.

Before making a claim, you can check whether you can use the online service by using the tool which can be found at www.tax.service.gov.uk/claim-tax-relief-expenses. You cannot make a claim online if:

you are making the claim on behalf of someone else;

you complete a self-assessment tax return;

you are claiming tax relief for expenses of more than £2,500; or

you are making a claim for more than five different jobs.

If you are eligible to use the online claim service, you will need to include all the expenses that you want to claim for the relevant tax year. The total shown on the summary page will be used to work out the tax relief to which you are entitled.

The online service is available on the Gov.uk website at www.gov.uk/guidance/claim-income-tax-relief-for-your-employment-expenses-p87.

Route 2: Postal claim

You must make a claim by post if you are claiming on behalf of someone else or you are claiming relief for expenses for more than five jobs. Postal claims are only accepted on form P87, which is available to download on the Gov.uk website at www.gov.uk/government/publications/claim-income-tax-relief-for-your-employment-expenses-by-post.

It should be noted that the following information is mandatory, and the form will be rejected if it is not included:

all section 1 information with the exception of title and contact phone number;

the employer’s PAYE reference in section 2; and

the type of industry in respect of which expenses are being claimed in section 2.

Route 3: Telephone claims

A claim can be made by phone (0300 200 3300) if a claim has been made in previous years for the same expense type and your total expenses are either less than £1,000 or less than £2,500 for professional fees and subscriptions.

Claims cannot be made by phone for expenses incurred as a result of working from home.

Route 4: Self-assessment tax return

If you complete a self-assessment tax return, you should claim relief for employment expenses in the employment pages of your tax return.

Most taxpayers know that they must adhere to a rigid timetable for the submission of tax returns and claims, otherwise either penalties are levied or the claim is refused. Taxpayers are also restricted as to the number of years they may go back to seek relief from an overpayment after making an error or mistake in a return. What is not so well known is that HMRC are also restricted as to the date by which they can open an enquiry into someone's tax returns.

For any return submitted on or before the normal deadline, HMRC have up to twelve months from the submission date to start an enquiry. After the normal deadline, the enquiry window runs until the next quarter day (30 April, 31 July, etc) following the first anniversary of when the return was submitted, e.g., for a 2021/22 return submitted on 1 March 2023 (a month and a day late), the enquiry window ends on 30 April 2024.

However, should HMRC miss the deadline, all is not lost as they have other powers by which they can recover unpaid tax outside of the enquiry window by the issue of an assessment, known as a 'discovery' assessment. A discovery assessment is a valuable tool in HMRC’s arsenal, as the time limit is considerably longer than for raising enquiries.

HMRC commonly use their discovery powers if they have good reason to believe that a tax liability has been understated because of an error in the tax return, the underpayment being the result of the taxpayer (or someone acting on their behalf) being careless or as a result of a deliberate action. Many discovery assessments are issued because HMRC receive information from a third party that suggests an error has been made on the return but it is too late for an enquiry to be opened. However, there are restrictions on HMRC's ability to make a discovery assessment when a taxpayer has delivered a tax return for a tax year. The rules say that no discovery assessment may be made for that period unless:

the loss of tax was brought about carelessly or deliberately by or on behalf of the taxpayer; or

the HMRC officer could not reasonably have been expected to be aware of the loss of tax, based on information available at the time.

HMRC must prove they have satisfied the conditions for issuing a valid discovery assessment.

The default time limit for HMRC to make a discovery assessment is four years from the end of the tax year to which it relates. However, the time limit is extended to six years for a careless error or 20 years if deliberate. Importantly, for the issue under discovery assessment, the onus is on HMRC to prove careless or deliberate conduct, e.g., the taxpayer did not declare income known to them at the time.

The distinction between an enquiry and a discovery assessment is important because while HMRC do not need a reason to open an enquiry into a return, they must meet conditions before a discovery assessment can be issued.

Recently HMRC have been issuing discovery assessments to individuals who they believe should have submitted a 2018/19 tax return containing disguised remuneration loans in connection with an employment and who either did not include the loan or did not include the total amount. However, there is a view that a discovery assessment would be invalid if a taxpayer commented about the potential exposure to the loan charge in the 'white space' of the return. HMRC should have issued an enquiry as they could reasonably have been expected to be aware of the loss of tax on the basis of information available at the time.

The difficulty in dealing with partnership taxation is that there are no separate rules and those present are not located in one place. What rules there are have not been updated for over 40 years, making it difficult to get an overview of the tax position.

Partnerships are governed by the Partnership Act 1890, which defines a partnership as being 'the relation which subsists between persons carrying on a business in common with a view of profit', meaning that a formal partnership agreement is not required (though advisable) to be taxed as a partnership. Each partner is taxed on their share of the trade or business and treated as carrying on a 'notional business'. The tax rules apply after the allocation of the profit or loss between the partners has been calculated regardless of whether the profits have been withdrawn from the business. Therefore, the usual rules apply upon the cessation of a partnership as with a sole trader.

However, partnerships are rarely static creatures and may merge, demerge or cease altogether. Provided that there is at least one partner common to the business before and after the change then the partnership will automatically continue.

Change in partners

A partnership's membership may change with the admission, death or retirement of a partner. Such a situation causes no particular tax problems – the new partner will be deemed to commence a new trade and the leaving partner is subject to the normal cessation of trade rules. The partnership will continue provided there is at least one partner common to the business before and after the change.

Problems may arise on merger or demerger of the partnership or when the business closes.

Demergers

In most demerger cases, where a business is split into two separate parts, the old partnership ceases and the cessation rules apply to the partners. As a general rule, a succession will only be deemed to have taken place when one of the new partnerships is so large in relation to the other(s) that it is recognisably still the same business (e.g., where one business has retained large numbers of customers and assets). In such a case, that partnership will be deemed to continue. The partners in the other new partnership(s) will be subject to the normal cessation and commencement rules.

Mergers

Where two partnerships merge which are different in nature then a merger may create a larger business. In this situation, the old partnerships cease and a new partnership starts; the normal commencement and cessation rules apply.

Where two businesses under different ownership merge but carry on the same or similar activities, the total activities of both partnerships are deemed to continue but as a separate partnership. As the business is deemed to continue, the tax treatment of any trading losses brought forward is unaffected.

Where the owners of one partnership acquire only the assets of another partnership there is no change of ownership. Therefore the 'merged' partnership is merely an enlarged version of the first partnership.

Capital allowances

Should a partnership cease and assets qualifying for capital allowances are taken over by one or more of the partners, these assets are deemed to be disposed of and immediately reacquired at market value. Balancing allowances may be claimed if the written down value exceeds the market value. It is possible to make an election to transfer the assets at written down value if there is a succession to the partnership business and a connection between the two.

If you run your property business from home, you may wish to use simplified expenses to claim relief for associated household costs. You can also use simplified expenses to disallow the private element if you live in your business premises, as may be the case if you run a B&B.

You can only use simplified expenses if you are a sole trader or run your property business as a partnership. If you operate your property business through a limited company, this option is not available to you.

Working from home

Working out the additional household costs incurred as a result of working from home can be complicated and time-consuming. Using simplified expenses is quicker and easier.

Simplified expenses work by allowing you to claim a deduction when working out the profits of your property business by reference to the number of hours you have spent working at home on the business. The deduction aims to cover the additional cost of utilities and cleaning incurred as a result of working from home. It does not cover the use of the telephone or the internet and a separate deduction can be claimed for these based on the proportion of business use.

To benefit from simplified expenses, you must work at least 25 hours a month from home. The total includes everyone who works from your home on your business. So, if you employ your spouse in your business, you can include the hours that they work from home as well as your own.

The amounts that can be claimed each month are shown in the table below.

Business use of home –   Hours per month       Monthly flat rate deduction

                                            25 to 50                               £10

                                            51 to 100                             £18

                                           101 or more                         £26

For example, if you spend 90 hours working from home in each month of the tax year, using simplified expenses, you can claim a deduction of £216 (12 x £18) when working out your taxable profit.

Beware rising costs

The rates have not been increased since their introduction and, in a climate of high energy prices and high inflation, may not accurately represent the actual costs incurred as a result of working from home. It may be advisable to review actual costs and compare the business element (determined on a just and reasonable basis) to the flat rate reduction available under simplified expenses. Where actual costs are higher, it will be a question of deciding whether the higher deduction justifies the additional work.

Living in your business premises

If you operate a business such as a small hotel or a B&B, your business premises may also be your home. While you can claim a deduction for your business expenses, you are not able to claim a deduction for your personal living costs. Rather than having to apportion the costs, you can instead use simplified expenses to determine the amount to disallow in respect of private use. The disallowance depends on the number of people living in the premises and is shown in the table below.

Number of people living in the business premises         Monthly flat rate disallowance

1                                                                                             £350

2                                                                                             £500

3 or more                                                                                £650

For example, if you live in your business premises with your spouse and your monthly bills are £2,500 in total, using simplified expenses, you will treat £500 as relating to personal expenses and claim a deduction for the remaining £2,000 a month (an annual deduction of £24,000).

The pandemic changed the way in which many people worked, forcing them to work from home if they could. Post-pandemic, many employees have continued to work from home some or all of the time.

Under hybrid working arrangements, an employee will work from home some of the time and from the employer’s premises some of the time. As a general rule, tax relief is not available for the cost of travel from home to work. Consequently, where an employee has hybrid working arrangements, HMRC will only allow tax relief for travel between the employee’s home and the employer’s premises if they accept that the employee’s home is a workplace.

Home as a workplace

The tests that need to be met for HMRC to accept an employee’s home is a workplace are strict and outdated and do not reflect the current reality.

For HMRC to accept that an employee’s home is a workplace, all of the following conditions must be met:

The duties that the employee performs at home are substantive duties of the employment. These are duties that the employee has to carry out and which represent all or part of the central duties of the employment.

The duties cannot be performed without the use of appropriate facilities.

No such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect them to travel to those premises on a daily basis).

At no time, either before or after the employment contract is drawn, is the employee able to choose between working at the employer’s premises or elsewhere.

The reality of modern working is that many employees can work anywhere as long as they have a laptop and an internet connection. While in the past, the nature of the duties may have dictated where they could be carried out, for many employments this is no longer the case. The travel expenses rules have yet to catch up with this and the conditions that need to be met for home to be regarded as a workplace mean that in practice it is difficult for hybrid workers to secure tax relief for the costs of travel between their home and their employer’s premises.

Flexibility v tax relief

Hybrid working is attractive because of the flexibility that it offers, but it is this flexibility that can jeopardise the availability of tax relief for the costs of travel between the employee’s home and the employer’s premises (and render any reimbursement of these costs by the employer taxable).

As is often the case, there is a compromise to be had by adopting a more structured arrangement under which the employee works at home on set days and at the employer’s premises on other days, rather than being able to choose each day whether to work at home or in the office.

For example, if an employee works at home on Tuesday, Wednesday and Friday but in the office on Monday and Thursday, as long as it is not possible to work in the office on a homeworking day, tax relief should be forthcoming if the employee has to travel to the office on one of those days – the travel would be travel between two workplaces rather than home to work travel. However, no relief would be available for travel to the office on the office-based days.

Cryptocurrency is a complicated concept and the following text gives HMRC's view on the basic rules.

Modern cryptocurrencies were first described in 1998 but the concept fully emerged in 2008 with the release of a white paper explaining their foundations. The first cryptocurrency was Bitcoin but since 2008 the market has expanded to include other transferable tokens, including Ether, Litecoin and Ripple. Given the trade volumes now seen in the UK, it is no wonder that HMRC are taking a more active interest in cryptocurrency.

What is cryptocurrency?

A cryptocurrency has been defined as a 'digital virtual currency that uses encryption technology to ensure the security of transactions involving its use' and can be transferred, stored or traded electronically. Each 'coin' is a computer file stored in a 'digital wallet' app on a smartphone or computer, every transaction being recorded in a public list called the 'blockchain'. Computers use complex programmes to validate a 'block' before being added to a 'blockchain'.

Tax position

Although no taxes apply specifically to cryptocurrency assets, HMRC have confirmed that, in the majority of circumstances, anyone holding them as a personal investment is subject to capital gains tax (CGT) on any profit; this is because HMRC see cryptocurrency as an exchange of tokens rather than a form of money. However, following the usual tax rules for the definition of a trade, there are some instances where transactions are either not taxable or subject to income tax (or corporation tax for a company).

HMRC state that the disposal of cryptocurrency falls within one of three classifications:

• short-term speculation – similar to betting and not taxable. However, loss relief is not available. Note that HMRC does not generally accept transactions in cryptoassets as being gambling.
• buying and selling to make a profit – as with the usual rules under the definition of a trade being liable to income tax (or corporation tax) usually where there is a high volume of transactions in a short space of time.
• occasional investments – any gains and losses made from buying and selling are within the scope of CGT under the usual rules.

'Disposal' has been defined by HMRC as:

• selling crypto assets for money;
• exchanging cryptocurrency assets for a different type of crypto asset;
• using cryptocurrency assets to pay for goods or services;
• gifting crypto assets to another person.
• donating tokens to charity

Income tax

As well as the situation whereby, an employee is paid via cryptocurrency, HMRC detail the following scenarios as being liable for income tax (or corporation tax for companies):

'Mining'

'Mining' is how new cryptocurrency units ('coins') are created. The reward is a coin which may be taxed as a trade receipt depending on the level of activity. Alternatively, if the activity does not amount to a trade, the coins will be taxed as miscellaneous income. HMRC consider Bitcoin mining as outside the scope of VAT.

'Staking'

'Staking' is also the creation of a 'coin' but this time being determined by a user’s wealth in the crypto asset rather than via a computer. Transactions are verified and rewarded with fees rather than new tokens; such activities are generally taxed as miscellaneous income.

'Airdrops'

An 'airdrop' is when an individual receives an allocation of tokens typically in exchange for carrying out a service, e.g., as part of a marketing or advertising campaign. Providing there is no trade or business involving cryptoassets, such tokens are taxed as miscellaneous income unless received without carrying out a service (in which case income tax does not apply).

'Trading'

The level and sophistication required for the activity to be deemed a trade is high and profits could be taxed as income if trading is of regular large amounts.

Capital gains tax

CGT is relevant when investors pay for new coins or tokens in a cryptocurrency or company as yet unreleased using existing cryptocurrencies. The sale proceeds are the existing cryptocurrency's market value on the date the exchange took place. This same market value is used as the cost basis for the new tokens received when calculating pooled costs, CGT being liable on any profit. CGT may also be due on any profits made on the purchase of goods and services and when one cryptocurrency token is swapped for another.

Partner note:

Policy paper – Tax on crypto assets

https://www.gov.uk/government/publications/cryptoassets-taskforce

HMRC – new cryptocurrencies guidance

https://www.gov.uk/government/collections/cryptoassets

https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual

Landlords who have benefited from rising property prices in recent years may wish to consider releasing equity now in case prices drop. This may be to free up a deposit to expand the portfolio to take advantage of lower prices, to help children get on the property ladder or simply to release some cash to help with rising living costs. However, while extracting equity from your property portfolio may be an attractive proposition, there are some tax considerations to factor into the equation.

Relief for loan interest

The general rule is that tax relief for borrowings is available up to the value of the property when it was first let. If you have owned the property for some time, it may now be worth considerably more than it was when you first let it out, and in releasing equity, your borrowings may exceed the tax relief ceiling. Consequently, you may not be able to claim tax relief for the full amount of your interest and finance costs. With rising interest rates, the amount not eligible for relief may be significant, eating into your profits.

The way in which relief is given depends on the type of let and also on whether you operate an unincorporated business or run a limited company.

If your business is an unincorporated property business letting residential properties (other than as furnished holiday lettings), tax relief for interest and finance costs is given as a reduction in your tax bill, reducing the amount of tax that you pay on the profits of your rental business by 20% of your interest and finance costs. If you are a higher or additional rate taxpayer, the rate of relief is less than the rate at which you pay tax. However, if you run a furnished holiday lettings business or let commercial property, you can deduct your interest and finance costs in full when working out your rental profit. This is also the case if you run your business as a company, and you can deduct your interest and finance costs in full in working out the company’s profit, regardless of the type of let.

Example

Ali purchased a flat as an investment in 2005. At the time, the flat cost £100,000. He let it out following the purchase and it has been let out ever since. The property was purchased with a mortgage of £80,000.

In early 2023, the property was worth £250,000. To take advantage of this, he increased the mortgage to £200,000 to provide his daughter with a deposit to buy her first home. However, he can only claim tax relief, as a tax reduction of 20%, in respect of the interest on £100,000 of the loan (the value of the property when first let). No relief is available for the interest on the remainder of the loan.

Looking ahead

Releasing equity may cause problems further down the line if the property is sold realising a chargeable gain. If the property is highly mortgaged when sold, there may not be sufficient funds left after clearing the mortgage to pay the associated capital gains tax bill. Where the property in question is a residential property, the tax must be paid within 60 days.

A self-invested personal pension (SIPP) can be an attractive option for saving for retirement and is one that is popular with company directors. Under a SIPP, you can choose and manage your investments yourself, or you appoint a financial adviser to manage a SIPP on your behalf. The range of investments that can be held in a SIPP is wide and includes commercial (but not residential) property.

Financial advice should be sought before setting up a SIPP.

SIPPs and commercial property

If you operate your business from commercial premises, it can be beneficial to purchase the premises through a SIPP and rent them to the company. While the SIPP must charge the company rent at a commercial rate, the rent paid goes into your pension pot rather than being lost to a third party. The company is still able to deduct the rent when working out its taxable profit.

The rent paid into the SIPP does not count towards the annual allowance, leaving this available to shelter individual and employer contributions to the SIPP. This is also a significant advantage if you have chosen to flexibly access your pension pot on reaching age 55.

Flexible access and the MPAA

The pension tax rules allow an individual to access pension savings in a money purchase pension on reaching age 55. You may choose to take your tax-free lump sum at this point. The amount that can be taken tax-free is equal to 25% of the pension pot at that time, capped at £268,275 from 6 April 2023. Once the tax-free lump sum has been taken, further withdrawals are taxed at your marginal rate of tax. If rather than taking the full tax-free lump sum, you make smaller withdrawals, 25% is tax-free and the balance taxed at your marginal rate of tax.

To prevent recycling of contributions, the annual allowance is reduced once a pension pot has been flexibly accessed and instead of the full annual allowance, tax-relieved contributions are capped by the money purchase annual allowance (MPAA), which is set at £10,000 for 2023/24.

It is here that rental payments to the SIPP once again come into their own as they do not count towards the MPAA, providing the opportunity to rebuild the pot at a rate of more than £10,000 a year (subject to the rent being set at a commercial level).

Beware missed rental payments

The SIPP is not a sympathetic landlord and care should be taken not to miss rental payments as if rent remains unpaid, the unpaid rent is treated as an unauthorised payment, triggering the unauthorised payments tax charge. This can be as much as 55% of the payment.