Helpsheets ... continued 30 from homepage

As part of HMRC's Making Tax Digital initiative, the existing method of calculating profits on an accounting year basis is to be abolished for the self-employed and partnerships. From April 2024, all such businesses will be taxed on profits for the tax year. To facilitate this move, the current 2023/24 tax year is deemed a transitional year such that some adjustments may be needed when declaring the assessable profit figure on the 2023/24 tax return.

Who will be affected?

Only specific unincorporated businesses will be affected, being those who do not have a 31 March or 5 April year end. If the accounting date is between 31 March and 5 April this change as such businesses are already on the tax year basis.

Impact on the transitional year

Those business owners affected will declare profits arising in the period from their last accounting date to 5 April 2024. For example, a business with a year end of 30 April will need to include profits realised between 1 May 2022 to 5 April 2024 (23 months) all pushed into the tax return for 2023/24.. This could affect cash flow and working capital and any extra profit will affect the amount of tax payable for 2023/24, including payments on account on 31 January 2024 and 31 July 2024.

This change will inevitably result in higher tax bills for many. The way by which this potentially increased profit (and potentially increased tax bill) can be reduced is via use of any overlap relief available.

Overlap relief

When self-assessment came into being in 1996/97, those unincorporated businesses without a 5 April year end were taxed twice in one tax year. That amount of 'double payment' was carried forward as overlap relief supposedly to be used either when a business changed its accounting date where the basis period for the tax year was longer than 12 months or (if not thereby exhausted) when the business ceased (or deemed to cease). Overlap relief can also currently be available on the commencement of a self-employed business where the usual 31 March or 5 April year end is not used.

Transitional profits and losses

The good news is that this transition year 2023/2024 presents an opportunity for all unincorporated businesses currently trading, regardless of accounting date, to use any remaining overlap relief. The problem is that many traders will need to have kept a record of the overlap profits which may not be readily available particularly where  such profits were created when the changeover to self-assessment occurred. Any overlap profits must be offset against the 2023/24 'transitional' year profits first. However, by default, any additional profit can be spread over the five years from 2023/24 to 2027/28 (although the taxpayer can opt out of this automatic spreading and accelerate the amount of transition profits assessed to tax). If the calculations result in an overall loss, that loss is treated as a terminal loss as if the trade ceases on 5 April 2024.

HMRC intends to help by introducing a new service providing the overlap relief figures to be used in the tax calculations (assuming these figures have been recorded on HMRC's systems). Where the overlap profit has not been recorded, HMRC will provide data allowing the taxpayer to calculate overlap relief (e.g., the self-employment data from the relevant tax returns where available) on completion of an online form.

Practical point

There is now no facility to allow the business owner to defer the use of overlap relief and save it up to use at a later date (e.g., on cessation). Therefore, consideration should be made by even those taxpayers who have a 5 April year end to change to 31 March to ensure that overlap relief is not lost.

A business will have a visit from a VAT inspector for one of two reasons; a routine visit after selection by the HMRC computer based on the type of business and the level of turnover, or if the business has an unexpectedly large VAT repayment.

Inspections generated by a repayment return are, in turn, dealt with in one of two ways; either a ‘pre-payment credibility visit’ in which the inspection takes place before the repayment is made, or a ‘post-payment’ visit where the repayment is made and then an inspection is arranged where HMRC perceives the risk to be less.

Risk factors

In either case of a routine visit or a ‘credibility visit’, the frequency and length of the visit are determined by how much risk HMRC considers the business poses to the revenue.

Some factors are outside the business’s control; for example, is it a cash business, or does it have complex liability issues such as being partly exempt? But other factors are within the business’s control and can reduce the perceived risk and the likelihood of a VAT inspection.

If a business has a good compliance record and sends in its VAT returns and payments on time, then it can reduce the chances of having a VAT inspection.

Arranging a visit

HMRC will normally contact a business by phone to arrange a visit to its business premises and will then follow this up with a letter confirming the appointment. The letter will also list what records HMRC will want to inspect and give an indication of how long the visit will last.

This is a standard letter, so not all businesses will have all the records HMRC requests to see, but it should make sure that it has all the records it has available and have them set out neatly to help the inspector. If the business has had any written rulings from HMRC, make the letter available so the inspector can understand why it has applied a particular VAT treatment.

The easier a business makes it for HMRC, the quicker it will complete the inspection and leave it to get on with running its business.

Finding an error

If a business discovers an error after a visit has been arranged, even if it is disclosed immediately, it will not count as ‘unprompted’ and will get a penalty at the rate of 15-30%. However, the more a business cooperates in identifying and quantifying the error, the lower the penalty should be. If a business can show that it has changed its systems so that the error will not be repeated, it can get the penalty suspended.

If HMRC finds an error, it will write to the business with details of the errors and ask for any reasonable explanations. If the matter cannot be resolved, HMRC will issue an assessment and separate penalty notice to show what mitigating factors have been allowed in calculating the penalty.

During the visit

The VAT inspector will want to discuss the business and its accounting system with a responsible person who has a full understanding of what’s going on. The inspector may want to inspect the premises to confirm the business does what it says it does.

If the inspector gives any verbal rulings, ask for them to be confirmed in writing.

Following the visit

Once the visit has finished, HMRC should write to the business with any rulings and to confirm that the inspection has concluded.

Practical tip

If a business has a VAT inspection, it is best to cooperate fully with HMRC in order to make the inspection go smoothly and minimise any penalties if it has made an error.

The number of businesses closing down is steadily increasing. Many of those businesses will have staff, therefore the legal and tax position of any termination payment must be considered.

Many assume that any amount up to £30,000 is tax free. However, this may not apply to all redundancy payments not least because termination payments will often comprise several elements. For example, any employee with more than two years’ service will be entitled to statutory redundancy payments (not taxable) and where the notice period is not required to be worked in full, payment in lieu of notice (PILON) may be due (taxable). The employee may feel they are entitled to damages, be it due to a breach of their contract or perceived discrimination against them (conditions apply).

When calculating whether any or part of the payment is tax free, the first consideration needs to be whether any of the payment is contractual (e.g., a contractual bonus) – if so then that amount will be taxed under PAYE as usual. If any restrictive covenants are in place (i.e., payments made for agreeing to restrict that individual's future conduct or activities usually for a specific period or area of work), any payment is also taxed under PAYE. If the payment is in lieu of notice that too is subject to PAYE. Any remaining parts of the termination payment potentially fall under the £30,000 exemption.

Payments in lieu of notice (PILON)

On the termination of employment, an employee is usually entitled to notice. Where this is worked, any income earned for the period will be subject to PAYE as usual. However, where the notice period is not worked, any element of the termination payment relating to a PILON is subject to PAYE as general earnings – any balance remaining comes within the £30,000 exemption.

Calculation

To calculate the taxable amount, the amount of 'post-employment notice pay' (PENP) needs to be calculated and compared with the 'relevant termination award' (RTA). The PENP is the pay the employee would have received had they worked their notice period (excluding any salary sacrifice arrangements). The RTA is the total termination payment excluding statutory redundancy payments.

The formula used to calculate the PENP is ((BP x D)/P) – T where:

BP is the employee’s basic pay for the last pay period ending before the 'trigger date', i.e., the day of notice or the last day of employment, if no notice was given;

D is the number of calendar days between the employment ending and the end of the notice period;

P is the number of calendar days in the employee’s last pay period; and

T is the amount paid taxable as general earnings (not including any accrued holiday pay).

If the PENP is higher than the total RTA, then the PENP is 'capped' at the total amount of the RTA, the balance being  treated as employment income, tax, and NI due under PAYE. If the PENP is lower, the amount is taxed as employment income subject to tax and NI with any remainder falling within the £30,000 exemption.

Tax on any resulting chargeable amount is treated as the top slice of earnings above any dividend or savings income.

The PENP calculation is required whether or not the employee or former employee receives a contractual or non-contractual payment. Some employers do not include the right to a PILON in their employment contracts, paying damages for breach of contract instead. Damages qualify as a relevant termination award, are tax free up to £30,000 and are completely NI free.

HMRC might resist claims of an activity amounting to trading, particularly if losses have been incurred.

It is relatively common for an individual to have a ‘sideline’ activity to their main occupation. The question arises whether that activity amounts to a trade. HM Revenue and Customs (HMRC) often argue that the individual’s activity is a taxable trade.

Wearing the badge(s)

However, sometimes individuals (as opposed to HMRC) contend that their activity is a taxable trade (rather than an investment activity or hobby). For example, the activity may be loss-making, and the individual might claim that the activity amounts to a trade, with a view to obtaining ‘sideways’ loss relief against their other income. Unsurprisingly, HMRC examines many such sideways loss relief claims, with a view to challenging the existence of a trade (i.e., no trade = no trading loss). Unfortunately, there is very little statutory guidance on the meaning of ‘trade’. The ‘badges of trade’ can sometimes be helpful. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade. Subsequently, a total of nine badges were identified (Marson v Morton Ch D 1986, 59 TC 381). HMRC’s Business Income Manual (at BIM20205) lists the ‘badges’ as follows:

• 1. Profit-seeking motive.
• 2. The number of transactions.
• 3. The nature of the asset.
• 4. Existence of similar trading transactions or interests.
• 5. Changes to the asset.
• 6. The way the sale was carried out.
• 7. The source of finance.
• 8. Interval of time between purchase and sale.
• 9. Method of acquisition.

However, case law indicates that the badges of trade should not be used as a checklist. HMRC’s guidance states: “The weight to be attached to each badge will depend on the precise circumstances”.

Trading or investing?

The nature of activities such as share transactions by individuals raises the issue of whether they constitute trading or investment; the latter normally falls within the capital gains tax regime, so income tax relief as trading losses is unavailable. For example, in Henderson v Revenue and Customs [2023] UKFTT 00281 (TC), the taxpayer, a partner in a professional firm, bought and sold shares in his personal capacity for a number of years from early 2006. In mid-2014, he inherited a substantial amount of money and retired from the partnership in January 2016. The taxpayer placed most of his inheritance in an investment account, where investment decisions were made by fund managers. He also resumed making share transactions and claimed trading loss relief in respect of them. However, HMRC contended that the activities did not amount to a trade or that if they did, the trade was not conducted on a commercial basis. The First-tier Tribunal noted that the average trades for the periods under review numbered just over one per week, with a maximum of nine trades in a single week and several weeks with no trades. Additionally, the time spent by the taxpayer (1-2 hours per day) did not support the contention of trading. His appeal was dismissed.

 As indicated in Henderson, even if it is accepted that there is a trade, if the trade is not undertaken on a commercial basis with a view to the realisation of profits, sideways loss relief will not be available.

According to the RAC, average fuel prices peaked a year ago at £1.91 per litre, since levelling off at the same price as ten years ago. However, HMRC's approved mileage rates have remained static, not increasing since April 2011, when petrol was around £1.42 per litre. In the ten years since the last increase, fuel prices have increased by more than 30%.

As the price of petrol has hit new highs, employers are finding more employees asking for increases above the approved rates for journeys undertaken on business. In June HMRC published new approved rates but only for fuel rates for company car drivers reclaiming business mileage fuel costs from their employer. If the employee uses their own car, then the approved  mileage rates for business journeys remain the same. These new fuel rates for company cars apply from 1 June, the most notable change reflecting that diesel prices are decreasing, reducing the gap between petrol and diesel. The electric car rate ('advisory electric rate') is reviewed quarterly and remains at 9p a mile, having increased during the last quarterly review, as energy prices start to stabilise. Hybrid cars are treated as either petrol or diesel cars for these purposes.

As the name suggests, this is not a mandatory rate for employers reimbursing employees; they can pay more but there are tax implications.

Employee's car

Employees who use their own private car for business journeys are entitled to claim a tax deduction, at the HMRC-approved amount, according to the number of business miles travelled. Alternatively, employers can pay their employees an equivalent tax-exempt mileage allowance.  Approved mileage allowance rates for cars are 45p per mile for the first 10,000 miles in a tax year and 25p for any additional miles. Different rates for motorcycles and bicycles are 24p and 20p respectively. These rates can be used by both the self-employed and employees/directors and are also available to unincorporated property businesses.

If an employer pays less than these rates, the employee can claim tax relief for the unused balance. Where an employer pays less than these rates and pays a car allowance, Class 1 NICs are charged on the car allowance less the value of the business mileage reimbursement. Should an employer pay more, the excess is reported as a benefit in kind, taxable at the employee's marginal tax rate and charged to Class 1 NI as salary.

Company car

Should an employee be provided with fuel for private use with a company car then there is a set car fuel  charge fixed at £25,300 for 2023/24 multiplied by the 'appropriate percentage', which depends on the level of the car’s CO2 emissions. To escape the fuel charge, an employee must either reimburse the whole cost of private fuel or pay for all fuel in the first place.

If the employee reimburses or pays for all the fuel themselves, they can escape the fuel charge and instead claim the cost of business mileage – these are the rates that changed in June. These rates are significantly lower than the private car figures of 45p/25p because those rates take into account the maintenance cost the employee incurs. As a company car remains the property of the business, the company car rates only reflect the fuel cost being based on an average price of £1.44.7p per litre for petrol; £1.55 for diesel.

Alternative calculation

HMRC's approved rates are not compulsory. If it can be proved that a car is more fuel efficient or the cost of business travel is higher than the guideline rates, then an employee can use their own rates if more tax effective. Use the car's expected fuel efficiency rate (which can be obtained online) and substitute the current petrol price instead of historic averages. Such a calculation will be potentially more beneficial for employees with low private mileage.

An explanation of how certain periods of absence may be treated as periods of residence for the purposes of capital gains tax principal private residence relief. Principal private residence (PPR) relief is a well-known capital gains tax (CGT) relief that prevents a tax charge from arising when a gain is made on the disposal which has been the owner’s only or main residence throughout their period of ownership.

If the property has not been occupied as the individual’s only or main residence throughout, PPR relief applies to the period for which it was occupied as such, plus the final nine months of ownership (this is increased to 36 months when the owner goes into care).

Less well-known is that certain periods of absence are treated as periods of residence for the purposes of the relief. This article looks at what counts as a qualifying absence.

Away from home

An absence is defined in the tax legislation as a period during which the dwelling house was not occupied by the individual as a residence. A period of up to three years (or two or more periods of absence which together do not exceed three years) may be treated as a period of residence. However, to qualify for this treatment, there must be a period before the period of absence when the property was the individual’s only or main residence and a period after the period of absence when the property was the individual’s only or main residence.

Duties performed outside the UK

Where an individual is required to work abroad, any period for which all the duties of the employment are performed abroad is treated as a period of residence for the purposes of PPR relief. However, for the absence to qualify, the property must have previously been occupied as an only or main residence. Further, following the individual’s return to the UK, the property must be occupied again as an only or main residence unless the individual is prevented from doing so because of the location of his or her place of work, or because of a condition imposed by the terms of the individual’s employment requiring the individual to reside elsewhere to secure the effective performance of the duties of the employment. There is no limit to the length of the period that can be treated as a period of residence where the duties of the employment are performed outside the UK. A period of absence is also treated as a period of residence by a person who accompanies their spouse or civil partner while they are working abroad, as long as their spouse or civil partner meets the conditions set out above. Any return visits to the UK for holidays are ignored. However, periods when duties are performed in the UK, even if these are incidental to the duties performed abroad, do not count as periods of residence under this test, although they may qualify under another test (for example, the three￾year absence for any reason test outlined above).

Working elsewhere

A period of absence not exceeding four years (or two or more periods not exceeding four years in total) in which an individual is prevented from living in the property in consequence of the location of their place of work, or because of conditions imposed by their employer requiring the individual to live elsewhere where this is reasonable to secure the effective performance of the duties, is treated as a period of residence. The individual must have previously lived in the property as an only or main residence. After the period of absence, the individual must either return to the property or be prevented from doing so because of the location of their place of work or conditions imposed by their employer requiring the individual to work elsewhere to perform the duties of the employment effectively.

Absence due to a spouse or civil partner’s employment

A period not exceeding four years (or two or more periods not exceeding four years in total) when a person is absent from a property because they lived with a spouse or civil partner who was required to work elsewhere and who meets the conditions outlined above for their period of absence to be treated as a period of residence, is treated as a period of residence.

Other properties

The position is more complicated if an individual has another residence. While a qualifying absence is treated as a period of residence, it does not treat the property as if it were the individual’s only or main residence during the absent period.

Consequently, if the individual has other residences, they will need to consider which property is best nominated as their main residence.

Practical tip

When claiming PPR relief, check whether any periods of absence are eligible to be treated as periods of residence.

The options available to family companies whose owners are looking to wind the company up tax-efficiently. This article considers various routes to extracting the residual wealth in a largely profitable (i.e., solvent) company – both the opportunities and some risks and traps to look out for.

We shall assume that the company is an owner managed business (OMB) or company that is ‘close’ – meaning, broadly, that it is controlled by its shareholder-directors. Also, the company and its individual shareholder-directors are resident in the UK for tax purposes.

Finally, we are focusing on the taxation of the individual shareholder-directors, as the company has already paid corporation tax on its profits.

Selling on instead of winding up?

In a winding-up, the company will first typically liquidate its assets into cash – call in its trade debts, sell fixed assets such as equipment, customer lists or premises, and settle its liabilities (e.g., HP agreements, loans, taxes, etc.). This can be time consuming, and it may trigger corporation tax on capital gains within the company on the disposal of its fixed assets. There may also be problems with claiming losses once the trade has ceased or significantly reduced; deciding precisely when a trade has ceased is important.

If the shareholders can instead agree to sell their shares to new would-be owners, potentially without disturbing the underlying business, their interest in the company ends (although the company does, of course, persist). In many cases, selling the shares is the easier option. But there are not always ready buyers.

A company sale by shares will practically always be treated as a capital disposal by the original shareholders and potentially eligible for business asset disposal relief (but see ‘Traps’ below).

A brief word on business asset disposal relief It has also become progressively harder (and less rewarding) to qualify for capital gains tax (CGT) business asset disposal relief (BADR). However, it is still worth as much as £100,000 in tax saved – the cumulative lifetime allowance of £1 million at 10%, being the difference between the standard rate of 20% (above the higher-rate threshold for income tax) and the special BADR rate of just 10%.

For claims involving company shares, etc., most people will need to have, for at least two years:

• Held at least a 5% stake in the ordinary/voting share capital of the unquoted company; and
• Have been employed by the company or been a director or other officer of the company.

But also:

• It is available only where the company has qualified as trading – so not for investment businesses such as property rental;
•  And, only when making a capital disposal of shares, etc., in the company (or certain associated disposals alongside, of assets owned personally but used by the company).

 But having qualified, the shares do not have to be disposed of immediately on cessation of trade – there is basically a three-year ‘window’ following cessation.

When is a winding-up not a capital disposal?

A company’s distribution (i.e., effectively paying out those residual funds) is, by default, a distribution of income, thanks to CTA 2010, Pt 23 (largely, CTA 2010, s 1000). There are exceptions to this rule, but it is only brought within the scope of CGT if it is not caught first as an income distribution (TCGA 1992, s 122).

To emphasise, there is always a risk that a distribution on winding up a company will be taxed as if it were dividend income, unless there is a clear path to CGT treatment.

 So, unless the shareholder can secure CGT treatment, they cannot claim BADR. This can prove expensive, with a tax rate as high as 39.35% instead of 20% under CGT (or as little as 10% while benefitting from BADR).

‘Small’ distributions: Dissolution by striking-off

CGT treatment is available for ‘orderly’ dissolutions under the striking-off process; ‘orderly’ meaning the company will settle all its liabilities and recover all debts to it. This is the enactment of Extra Statutory Concession (ESC) C16, applicable from 2012. However, the new statutory tax approach is available only where the total distributions do not exceed £25,000 (CTA 2010, s 1030A). This is a limit for the company overall and not ‘per shareholder’, as some might assume. Another potential trap is that the limit does not simply apply to the last distributions made on winding up. If the company ceases to trade and does little more than follow the winding-up process after that, making distributions as it goes along, HMRC may well apply the £25,000 limit against all distributions made appreciably since cessation of trade, so those distributions will then be taxed as if they were dividend income, and not under CGT.

Formal liquidation or winding-up

Where the company has more than £25,000 to distribute, it will usually be better to formally appoint a liquidator as CTA 2010, s 1030 respects CA 2006, s 829, which states that a distribution of assets to shareholders on a formal winding-up does not count as a distribution of income (so will fall to be taxed under CGT). This may incur further professional fees, but the potential tax saving can be substantial. This is a ‘winding-up’, rather than the relatively informal ‘striking-off’ process above.

One might assume that the cost of appointing a liquidator is a guarantee of CGT treatment, but there are further possible issues.

(a) Anti-phoenixing legislation – Even if the company and its shareholders met all criteria at the time the company was wound up and rightly claimed CGT treatment and even BADR, there is then the risk of retrospective reclassification as income (i.e., dividend) instead of capital. The trigger for this is if the individual subsequently becomes involved in a similar business activity within two years of those distributions on a winding-up. Note that the ‘new’ business does not have to be in a company. However, HMRC does have to find that avoiding (or reducing) income tax was one of the main purposes of the winding-up (ITTOIA 2005, s 396B).

This is to prevent individuals from rolling up profits in a company and extracting them cheaply as capital on a winding-up instead of as dividends during the life of the company, on a ‘rinse and repeat’ basis. HMRC’s ‘Anti-Avoidance Spotlight 47’ published in 2019 suggested that HMRC even thinks it can use these provisions to combat company sales that it dislikes, as distinct from company dissolutions, although there is some doubt as to whether the legislation supports this.

(b) Joint liability notices – This is aimed at director￾shareholders who have repeatedly been involved with companies that have been dissolved owing taxes to HMRC. In other words, insolvent liquidations (‘repeatedly’ here broadly means at least two such companies within the last five years). HMRC now has the power to make the director or shareholder personally liable for the company’s tax debts (FA 2020, s 100, Sch 13).

Not all phoenixes are bad phoenixes!

There are long-standing provisions that permit an OMB-type company to transfer trading losses and largely-favourable capital allowances treatment to a successor company that is under similar control (common shareholders) as its predecessor – subject to various criteria.

This is sometimes overlooked by the insolvency practitioner advising the company in distress, and I have saved one successor company over £300,000 in tax (the relief was more than £1 million) quite easily (CTA 2010, Pt 22).

Conclusion

The tax treatment of ending a company can become quite involved, and it is always better to take advice comfortably beforehand. Sometimes, it is possible to extract treasured assets instead of simple cash, and it may be better in some cases to keep the company ‘ticking over’ as a kind of pension, drawing dividends over several years instead of dissolving the company.

If you let out a property, you can deduct the business expenses that you incur when working out your taxable rental profit. The rules governing the expenses that you can deduct depend on whether you prepare accounts using the cash basis or the accruals basis.

If you use the cash basis (which is the default basis), you can deduct revenue expenses which are incurred wholly and exclusively for the purposes of renting out the property. You can also deduct capital expenses permitted under the cash basis capital expenditure rules. This would, for example, include the cost of a van, but not the cost of a car or the property itself.

Under the accruals basis, you can deduct revenue expenses wholly and exclusively incurred for the purposes of the property rental business.

Here we look at ten popular expenses that you may be able to deduct.

Letting agency fees

If you let your property through an agency, you will be able to deduct the fees charged by the letting agency. These are typically a percentage of the rental income.

Advertising costs

You may advertise your property in order to find new tenants. The advertising costs are allowable business expenses and can be deducted.

Accountancy costs

You may use the services of an accountant or bookkeeper. These costs are allowable costs which can be deducted.

Cleaning costs

If you use the services of a cleaner, either for in tenancy cleans or end of tenancy cleans, or to clean your office premises, you can deduct the associated costs when working out your taxable rental profits.

Gardening costs

If your property has a garden and you incur gardening costs, you can deduct these in calculating your taxable profits.

Travel expenses

Any costs that you incur in relation to your property rental business are deductible. This will include costs of visiting the property to check the property, visit the tenants or undertake maintenance, and any other travel costs incurred wholly and exclusively for the purposes of the rental business.

Repairs

You can also deduct the cost of repairs that you need to do to the property or the cost of any fixtures and fittings.

Replacement domestic items

If you let a residential property furnished (other than as a furnished holiday let), you can deduct the cost of replacement domestic items, but not the cost of the original items. The deduction is capped at the cost of a like-for-like replacement.

Utilities and council tax

In a residential let, the tenant will normally meet the cost of the utilities and the council tax. In a holiday let, the utility bills and council tax/business rates (where applicable) are usually met by the landlord. Costs of this nature met by the landlord are allowable business expenses.

Interest and finance costs

Although residential landlords cannot deduct interest and finance costs when calculating their taxable profit, relief is available for 20% of those costs as a tax reduction. Non-residential landlords and those letting furnished holiday lets can deduct interest and finance costs in calculating their taxable profit, as can corporate landlords.

HMRC have sent out nudge ‘One to Many’ letters to taxpayers who they believe may have claimed Business Asset Disposal Relief (BADR) in excess of the £1 million lifetime limit.

Nature of the relief

Formerly known as Entrepreneurs’ Relief, BADR reduces the amount of capital gains tax that is payable where a person sells all or part of their business. Where the relief applies, capital gains tax is charged at the rate of 10% on all gains on qualifying assets up to the level of the lifetime allowance, currently set at £1 million.

To be eligible for the relief, you must meet the qualifying conditions for a period of two years up to the date on which you sell your business or, where the business is operated as a limited company, your shares in the company.

The letters

The letters have been sent to taxpayers who made claims for BADR relief in their 2021/22 Self-Assessment returns and who HMRC believes have claimed BADR in excess of the £1 million lifetime limit, either because the limit had already been reached prior to 2021/22 or because the claim made in the 2021/22 tax return took the value of lifetime claims over the limit.

Taxpayers who received a letter and who had claimed BADR to which they were not entitled had 30 days in which to amend their tax return. As a result of the amendment, it is likely more tax will be due – in the absence of the relief a higher rate taxpayer would pay capital gains tax at 20% on the gains rather than 10%.

Taxpayers who think that their claim is within the £1 million limit should contact HMRC and explain why they think this is the case.

Anyone who receives a nudge letter should address it – HMRC may instigate a compliance check if the taxpayer has not amended their return or contacted HMRC. If a response remains outstanding, this should be addressed as a matter of urgency.

Keep records

If you have claimed BADR, it is important than you keep a record of claims made. It is prudent to check future claims against the remaining limit to ensure that lifetime claims are within the lifetime limit.

The property allowance is a useful allowance that allows you to earn property income of up to £1,000 tax-free each tax year. If your income from property is more than this, you can deduct the allowance instead of actual costs where it is beneficial to do so. Claiming the allowance is optional and will not always be beneficial; whether it is or not will depend on your circumstances.

Annual property income of £1,000 or less

If your gross annual property income is £1,000 or less in a tax year, it will fall within the property allowance. This means that you do not need to tell HMRC about it or declare the income on your tax return if you need to complete one for other reasons. It should be noted that the relevant figure is your gross property income (i.e. before deductions for expenses), and this, rather than your profit, must be £1,000 or less to benefit from the relief in full.

If your expenses are more than your rental income so that you have made a loss, claiming the relief will not be beneficial if your income is likely to exceed £1,000 in the future and you expect to make a profit. Instead, it is better to declare the income on your tax return to preserve the loss so that it can be set against any future profits that you make that would otherwise be taxed. You will need to elect for the allowance not to apply by the first anniversary of the normal self-assessment filing date of 31 January following the end of the tax year to which it relates (so by 31 January 2026 for 2023/24). The election can be made in your tax return.

Annual property income of more than £1,000

You can still benefit from the allowance if your gross annual property income is more than £1,000 by opting to deduct the allowance rather than your actual expenses. This will be beneficial where your deductible expenses are less than £1,000 as this will reduce your taxable profit. Claiming the relief will mean that you cannot deduct your expenses or claim an income tax reduction in respect of any interest and finance costs.

In this instance, you will need to tell HMRC. The mechanism for doing this will depend on the amount of your income and whether you need to complete a tax return for other reasons. If you have to complete a tax return anyway or your gross property income for the tax year is more than £2,500, you should declare it on the property pages of your Self Assessment tax return. However, if your income is between £1,000 and £2,500, you should contact HMRC on 0300 200 3300 to discuss your situation.

If your wish to claim the allowance (partial relief) you will need to elect for this treatment to apply. Again, this must be done by the first anniversary of the normal self assessment filing date of 31 January following the end of the tax year to which the election relates.

Interaction with rent-a-room relief

Rent-a-room relief allows you to earn up to £7,500 a year tax-free (or £3,750 per person when more than two people share the income) if you rent one or more furnished rooms in your own home. You cannot claim both rent-a-room relief and the property allowance. However, if you qualify for rent-a-room relief, this is more beneficial than the property allowance and should be claimed instead.

Exclusions

The property allowance cannot be set against rent paid by an employer, or by the employer of an individual’s spouse or civil partner. Where the recipient is a partner in a partnership, the property allowance is similarly not available for rent paid by the firm. Likewise, the allowance cannot be used against rent paid by a close company to a participator or to an associate of a participator, precluding, for example, the use of the allowance against rental income from a close company for use of a home office.

If you make a chargeable gain on the sale of a UK residential property, you will need to report the gain to HMRC within 60 days of the completion date and pay tax on the gain within the same time frame. A chargeable gain may arise if the property that you sell has not been your only or main residence throughout the period that you owned it, or if it is a let property, for example a buy-to-let or a holiday let, or a second home. Where the property is jointly-owned, each co-owner is responsible for reporting their share of the gain and paying the tax that they owe.

Reporting the gain

You will need to use a Capital Gains Tax on UK property account to report the gain to HMRC online. You can access your account or set one up by signing into your Government Gateway account. If you are unable to report online, you can download a paper form (see www.gov.uk/government/publications/report-capital-gains-tax-on-uk-property). You can also obtain a paper form from HMRC. You should use the paper form rather than the online service if you have already submitted your tax return for the tax year in which the disposal occurred.

When reporting the gain, you will need to provide the following details:

• the address and postcode of the property;
• the date that you acquired it;
• the date you exchanged contracts for the disposal;
• the completion date of the disposal;
• disposal proceeds;
• the purchase price (or market value at acquisition where appropriate);
• the cost of any improvements;
• the buying and selling costs; and
• any tax reliefs that apply (for example, main residence relief or lettings relief).

If you are non-UK-resident, you must report all sales of UK property or land even if there is no tax to pay.

Paying the associated capital gains tax

After you have reported the gain to HMRC, you will be sent a letter containing a payment reference that starts with an ‘X’. You can also find the reference in your online Capital Gains Tax on UK property account. This should be used when paying the tax through the online tax payment service, or via online banking or by cheque. The tax must be paid within 60 days of completion.

The tax you will need to pay is the best estimate of the capital gains tax payable on the gain at that time. You will need to take account of other disposals in the tax year to date. You can make use of your annual exempt amount if this has not already been used, and also any losses for the current tax year and those brought forward from previous tax years.

When you file your tax return for the year, you will need to calculate your capital gains tax liability for the year as a whole. You may have further tax to pay if you have made gains on other assets. Alternatively, you may be due a refund if you have realised losses since paying the tax on your residential property gain.

If you make VATable supplies, you will need to register for VAT if your taxable turnover reaches the VAT registration threshold. The VAT registration threshold is set at £85,000.

The need to register for VAT is triggered if your VAT taxable turnover for the last 12 months exceeded £85,000 or if you expect your VAT taxable turnover to go over £85,000 in the next 30 days.

Taxable supplies

Taxable supplies for VAT purposes are supplies that are made in the UK and which are not exempt from VAT. This includes supplies liable at the zero rate of VAT, as well as those charged at the standard and reduced rates. You do not need to take account of exempt supplies when checking whether you need to register for VAT.

Voluntary registration

Registration is compulsory if your VAT taxable turnover meets either of the tests set out above.

However, if you make taxable supplies but your taxable turnover is below the VAT registration threshold, you can choose to register for VAT voluntarily. This will be beneficial if the value of your input VAT exceeds the value of your output VAT, allowing you to reclaim the difference from HMRC. This may be the case where the supplies that you make are predominantly zero-rated (for example, if you sell zero-rated food items or children’s clothes).

When to register

If your VAT taxable turnover in the last 12 months exceeded the VAT registration threshold of £85,000, you must register for VAT within 30 days of the end of the month in which your turnover for the previous 12 months went over £85,000. Your effective date of registration is the first day of the second month after the threshold has been breached.

Example

Molly’s VAT taxable turnover for the previous 12 months exceeded £85,000 on 2 August 2023. This is the first time that she has exceeded the VAT registration threshold. Molly must register for VAT by 30 September 2023 (30 days from the end of August 2023 – the month in which her turnover exceeded the threshold). Her VAT registration is effective from 1 October 2023.

If your VAT taxable turnover will exceed £85,000 in the next 30 days, you must register by the end of the 30-day period. Your effective date of registration is the date that you realised that this would be the case, not the end of the 30-day period.

Example

On 6 August 2023, Paul agreed a contract for £120,000 to provide services in August 2023. He will be paid on 30 August 2023. He realised on 6 August that his turnover will go over £85,000 in the next 30 days. He must register by 5 September 2023. His registration is effective from 6 August 2023.

How to register

You can register for VAT online via the gov.uk website. You can also ask your agent to register on your behalf.

Despite dividend tax rates being charged at 33.75% (higher rate taxpayers) or 39.35% (additional rate taxpayers), generally dividends remain the most tax-efficient method of taking profits from a company. On incorporation it is usual for all shares issued to be designated ordinary shares. However, where a company only has one class of share, the right to receive a dividend, to vote and to any proceeds of sale should the company be sold are usually pro-rata which might not be tax efficient overall.

'Alphabet shares' enable flexibility, being different classes of shares denominated by a letter (e.g., ‘A’ ordinary, ’B’ ordinary, ‘C’ ordinary shares, etc.). Under such an arrangement, each shareholder could still hold ordinary shares and even the same number of shares but of a different class, enabling the company to authorise dividend payments at different rates to each class of shareholder. Such arrangements are of particular use should one or more of the shareholders be taxed at 'higher rates' and the other shareholders are either 'basic rate' taxpayers or do not pay tax.

Alphabet shares can also be used to operate employee schemes whereby employees are partly paid in dividends and partly salary. Such schemes can encourage employee engagement in a business whilst also being tax efficient. The classes of shares awarded to employees will vary depending on how the scheme is set up, but typically the shares will be non-voting and allow the shares to be returned to the company should the employee leave.

Another area of business where alphabet shares can be beneficial is where a company is set up as a joint operation between two or more independent companies or two or more families.

Be aware!

When amending the share set-up of an existing company, care must be taken to prevent HMRC querying the scheme's validity and invoking the settlements rules, especially if the share mix is changed post-incorporation. The settlements legislation is intended to prevent an individual from gaining a tax advantage by making arrangements which divert their income to another person who is liable at a lower tax rate or is not liable to income tax.  However, the courts have established that for a settlement to exist there must be an element of ‘bounty', i.e., the provision of some value, without expecting something equivalent in return.

Therefore, the shares must be gifted outright, having capital rights and it would be preferable for there to be sufficient profits available such that any dividends could be paid on all share classes. A gift of shares to family members does not need to be reported to HMRC unless issued at less than market value or 'by reason of employment'. If such a situation exists, it may result in an income tax charge liable to be reported to HMRC through the Employment Related Securities (ERS) online service. Any chargeable gain on the gift can be held over assuming the company is a trading company rather than an investment company. However, be aware that such an arrangement could result in the control of the company being altered which may have an adverse effect in the future when the company is disposed of (at least a 5% share in the company is needed – the right of control being a qualifying condition for Business Asset Disposal Relief).

The likelihood of a challenge from HMRC is reduced where there is a commercial reason for having more than one class of share, where the shares have equal rights and where there is no link between the dividends received and salary foregone.

If you need to file a Self Assessment tax return for 2022/23, you have until midnight on 31 January 2024 in which to do this, as long as you file online. However, HMRC have been encouraging taxpayers to file their tax return early. Is this worthwhile and what are the benefits?

Due a tax refund?

If you think you might have paid too much tax in 2022/23, filing your tax return early will enable you to claim a refund sooner – you do not need to wait until January 2024. The money is arguably better in your bank account than in HMRC’s.

Better budgeting

Filing your tax return early will help you budget, and if you have tax to pay, give you more time to put funds aside to meet your tax bill. If your tax and Class 4 National Insurance bill for 2022/23 is more than £1,000, unless 80% of it is deducted at source, for example under PAYE, you will need to make payments on account for 2023/24. The first payment on account for 2023/24 is due by 31 January 2024, along with any balance remaining due for 2022/23 and any Class 2 National Insurance for that year. The second payment on account for 2023/24 is due by 31 July 2024. Each payment is 50% of your 2022/23 tax and Class 4 National Insurance liability.

Struggling to pay?

By filing your tax return early, you will know in advance what you owe. If you know you will struggle to meet your tax bills, you can set up a Time to Pay agreement to allow you to pay your bill in manageable instalments. You may be able to do this online.

Easier access to help

Although HMRC closed their Self Assessment helpline during the summer, it reopened on 4 September. HMRC helplines become very busy during January as the deadline approaches. Filing your return early will make it easier to access help from HMRC if you need it.

Peace of mind

Filing your tax return early will give you the peace of mind that comes from knowing that the job has been done. It also means that you won’t risk a late filing fee of £100 for missing the filing deadline.

For some time, taxpayers within Self Assessment have been able to set up a Time to Pay arrangement online, allowing them to pay their tax bill in instalments if they cannot pay it in full and on time. The facility to set up their own Time to Pay arrangement has now been extended to VAT-registered businesses.

Setting up a VAT payment plan online

If you operate a VAT-registered business and you are struggling to pay the VAT that you owe, rather than having to contact HMRC to set up a Time to Pay agreement, you may now be able to do it yourself online. A Time to Pay agreement will enable you to pay the VAT that you owe in instalments. Payments are collected via direct debit.

You will be able to use the online self-serve facility if the following conditions are met:

• you have filed your last VAT return;
• the amount that you owe is £20,000 or less;
• you are within 28 days of the payment deadline;
• you do not have any other payment plans or debts with HMRC; and
• you plan to pay what you owe within six months.

However, you cannot use the online service if you use the VAT cash accounting scheme or if you use the VAT annual accounting scheme. You are also unable to use the online service if you make VAT payments on account.

To set up a payment plan online, you will need to sign into your Government Gateway account. As you need to set up a direct debit to collect the payments, this is something you must do yourself. While an adviser can guide you, they cannot do it on your behalf.

Unable to self-serve

If you are not eligible to use the online service and are struggling to pay your VAT bill, you may still be able to agree an instalment plan with HMRC. However, to do so you will need to contact HMRC by calling the VAT payment service on 0300 200 3831.

When setting up in business, most people weigh up the pros and cons of operating as an unincorporated business or a limited company. However, there is another option where more than two persons are involved – to operate as a limited liability partnership (LLP).

One of the main reasons for the government creating the LLP format was that many partnerships, particularly those in the professional sector (accountants, solicitors, etc), have grown considerably, with some firms having hundreds of partners in different countries. In ordinary partnerships, each partner is generally personally liable for the firm’s liabilities meaning that a partner can become liable for the negligent acts of another, possibly someone they have never met. LLPs allow a partnership structure where each partner’s liabilities are limited to the amount they invest in the business. Under an LLP, if the partnership fails, the creditors cannot go after a partner’s personal assets or income.

Advantages of LLP v company

An LLP and limited company are similar in that they are both corporate bodies with the same features of separate legal personality, and limited liability protection. However, one of the main advantages of an LLP over a company is the flexibility to share profits and losses in a tax-efficient manner, reducing the overall tax payable by the LLP members. The partners are taxed at their individual marginal tax rates and, by specifying the profit-sharing ratio as they wish for each accounting period (even changing one year to another), can agree the allocation of profits in a tax-efficient manner. In contrast, a company's profit allocation is constrained by the fixed shareholding percentages held by the shareholder owners (although alphabet share arrangements or dividend waivers can overcome this problem).

Disadvantages of LLP v company

Pre-2023 the main disadvantage in forming an LLP compared with a company was that a company could take advantage of the 19% corporation tax rate on retained profits compared with the 40%/45% marginal rate (plus NIC) applying to the members' share of profits. Post-2023 the increase in the corporation tax rate up to 25% for some businesses may mean that the numbers no longer stack up in favour of incorporation.

Another potential disadvantage is that profit cannot be retained in the same way as a company limited by shares as members are assessed on their share of the LLP profits regardless of the actual amount withdrawn. Therefore, this means that all earned profit is effectively distributed with no flexibility to hold over profit to a future tax year when the tax rates may be lower.

An LLP must have at least two members whereas a company can have a sole shareholder. If one member leaves the partnership, the LLP may have to be dissolved.

Practical points

As with a company, the limited liability protection afforded by an LLP can be restricted in specific ways, e.g., if an individual LLP member gives a personal guarantee to any creditor, that individual member will be liable should the LLP not repay the loan.

There are tax incentives that only apply to limited companies, not afforded to partnerships, e.g., R & D tax credits, Enterprise Investment Scheme relief.

The tax advantages of the enterprise investment and seed enterprise investment schemes.

Most governments are keen to promote business activity.  Government support includes the enterprise investment scheme (EIS) and its sibling, the seed enterprise investment scheme (SEIS) – venture capital schemes designed to encourage, by means of attractive tax reliefs, shareholding investment in growing companies.

This brief article focuses on the individual investors, but companies must first ensure that they are eligible for relief because they have to confirm that the shares issued in return for the investment qualify for relief.

Among other things, the conditions for companies relate to it, its trade and the use of the investment. There are also conditions that must be met by the investors relating to their connection with the company issuing the shares, loans between the parties, and existing shareholdings. Naturally, relief will not be available if the investment is part of a tax avoidance scheme.

EIS investors

An individual can invest up to £1m a year in qualifying EIS shares, or £2m if at least half of this is in companies carrying out research, development or innovation when the shares are issued – known as ‘knowledge-intensive’ companies. The investor can claim the following reliefs:

• Income tax: A tax deduction of 30% of the investment is given in that or the previous year. Note that unused relief cannot be carried forward.
• Capital gains tax: If the qualifying shares have been held for at least three years before disposal, and if income tax relief has not been withdrawn, the proceeds are not subject to capital gains tax. Investors can also defer capital gains on other assets if the proceeds are invested in EIS-qualifying shares. The gain is charged when the EIS shares are disposed of or a chargeable event relating to them takes place.
• Loss relief: As with other shares, a loss on the disposal of EIS shares can be set against gains in the same or subsequent years. However, subject to conditions and as a possibly more attractive alternative given the higher rates involved, the investor may alternatively claim the loss as a deduction from total income in the tax year of the loss, the previous year, or both.

SEIS investors

Although introduced after the EIS, the SEIS was envisaged as attracting investors at an earlier stage in a company’s life, with EIS investment following.

For example, the qualifying SEIS company must be less than three years old (two years before April 2023) and have not previously traded, whereas EIS investments can be made into companies up to seven years old (ten years for knowledge-intensive companies). This is also reflected in the lower maximum investment limit of £200,000 (£100,000 before April 2023) for investors.

The tax reliefs available to SEIS investors are similar to EIS, but with some differences as follows:

• Income tax: The tax deduction is at 50%.
• Capital gains tax: The three-year holding threshold also applies to SEIS. However, rather than deferral relief, if disposal proceeds of other assets are reinvested in SEIS shares, 50% of the gain is exempted.
• Loss relief: Applies as for EIS shares.

With four days' notice, a trial to redirect Self Assessment (SA) queries from HMRC's phone helpline to its digital services started on 12 June, running for three months to 4 September 2023. Ostensibly, the idea is to trial the department’s digital services, including its online guidance, digital assistant and webchat. In reality, HMRC is behind in answering its post and finalising problems including investigations, some of which have been waiting a year to be settled.

However, under HMRC's 'Making Tax Digital' initiative, HMRC plans to move to a fully digital tax system and, by directing 'customers' away from the phone lines to its website, it is hoping to make its tax administration 'more effective, efficient, and easier for taxpayers to fulfil their obligations whilst reducing HMRC’s overheads for managing the tax system'- (HMRC policy paper 'Overview of Making Tax Digital'). HMRC wants a 30% reduction in contact by phone and post by 2025 (compared with 2021/2022) and this trial of 'seasonal closure' of phone lines will help HMRC direct the redeployment of staff to areas most in need at particular times of the tax year.

Why is this happening?

HMRC's annual performance report for 2022/23 reveals the severity of the department’s problems. HMRC failed to meet all its key customer service measures in that year, with phone answering performance continuing to decline. Although correspondence cleared within 15 to 40 working days showed improvement, it still fell short of targets.

HMRC says that the closure of the SA phone lines over the summer period will free up 350 advisers (full-time equivalent), enabling them to take urgent calls on the lines of other tax areas (e.g., corporation tax and NIC) and answer outstanding correspondence. If focused on these calls, HMRC estimates that these advisers will answer around 6,600 daily. The SA helpline receives far fewer calls over the summer, with calls around 50% higher between January and April compared with between June and August.

HMRC also states that the majority of its 'customers' use online services in any event (with 97% filing online), such that it is estimated that around two-thirds of all SA calls can be resolved by customers looking online. With the phone helpline closed, customers will be directed to webchat, the Online Service Helpline and the Extra Support Team Helpline where the number of advisers available will be increased.

What alternative assistance is there?

HMRC says that the majority of its time on phone calls is taken up with questions, the answers to which can be found online. Apart from the online guidance, there is HMRC's digital assistant. If the digital assistant cannot help, then the customer will be directed to an HMRC webchat adviser – if one is available.

HMRC has also created the HMRC app which, inter alia, can be used to check a customer's UTR number, tax code and NIC number, income from work in the previous five years, claim a tax refund, obtain an estimate of the tax due and, importantly, track the progress of forms and letters sent to HMRC.

However, there is a more personal method of communication in the form of HMRC's online forums. These forums have been in operation for six years, allowing questions to be answered on a wide range of topics under 14 separate headings as diverse as starting a business, selling abroad, tax credits, VAT, self-employment, Self Assessment or being an employer. Importantly, as well as responses from other forum members, HMRC’s technical staff may also post replies. The registration process is straightforward; the only requirement being for a valid email address and username. The proviso is that the forum does not deal with questions about a taxpayer’s individual circumstances and any comments including personal information will be deleted.

The rules to be aware of when a company makes a loan to a close company participator or their associate.

Subject to certain exceptions, where a ‘close’ company (see below) has made a loan, advance, or conferred a benefit on a participator or an associate of a participator, the company may be liable to an additional tax charge when paying their corporation tax (commonly referred to as ‘section 455 tax’).

Tax charge on the company

For most close companies, section 455 tax becomes payable if a loan or advance is not settled within nine months and one day following the end of the chargeable accounting period in which it is made.

The rate of extra tax payable is equal to the higher-rate dividend tax on the outstanding loan at the due date for corporation tax. For loans made on or after 6 April 2022, the rate of tax payable on the outstanding amount is 33.75%.

A ’close’ company is broadly defined as a company that is controlled by five or fewer participators or any number of participators if the participators are also directors. A ‘participator’ is any person who has a share or interest in the capital of a company.

An ‘associate’ of a participator includes their relatives, partners in a partnership, the trustees of a trust a participator is involved with, and the personal representatives of a deceased estate where the participator holds an interest. A participator may also be an employee or director of the company, but this is not always the case.

HMRC’s Company Taxation Manual (at CTM61510) confirms that although the strict position of each and every advance, such as monthly drawings, could theoretically result in a section 455 tax charge, in practice HMRC usually only considers the year end position. However, in exceptional cases, HMRC can enforce the strict position.

The types of loans which are excluded from the section 455 tax charge are outside the scope of this article, and the commentary provided assumes that none of the exemptions apply to any of the scenarios given.

Beneficial loan rules

The rules relating to loans by companies are in place to prevent participators and their associates extracting money from the company and avoiding paying income tax on the payment, whilst maintaining the benefit of the money extracted. Where the loan is settled with the company within the time limits, no additional tax is payable by the company.

However, for the participator on whom the benefit is conferred, where interest is either not charged or is charged below the official rate by the company, a benefit-in-kind will need to be calculated, reported and taxed accordingly.

How the beneficial loan interest is treated and subsequently taxed depends on whether the participator is also an employee or director of the company. If they are, the benefit will be calculated and reported on form P11D, with the earnings being taxed as employment income. The company will also pay Class 1A National Insurance contributions (NICs) on the benefit provided.

When the participator is not a director or employee, the benefit is calculated in the same way; however, the value of the benefit is taxed as if it were a dividend. These rules exist to ensure that participators or their associates who are not employed or directors of the company do not avoid being taxed on the benefits provided.

Settlement of the loan

Where the outstanding loan is settled within nine months and one day from the end of the chargeable accounting period, no section 455 tax is payable by the company. Settlement can be made either by the loan being repaid or by being released or written off by the company.

Where the loan is repaid, there are restrictions which prevent repayment from being made and then money being loaned back again within a short period to avoid a section 455 tax charge. This process is known as ‘bed and breakfasting’. There are two provisions to be aware of in relation to the bed and breakfasting of loans, which may deem a repayment ineffective in reducing or eliminating a section 455 tax charge.

30-day rule

The mechanics of this rule apply when within any 30-day period:

• repayments totalling £5,000 or more are made either before or after the end of a chargeable accounting period; and
• new loans totalling £5,000 or more are made after the end of that chargeable accounting period.

Arrangements rule

The arrangements rule applies where a subsequent withdrawal occurs outside the 30-day window as described previously. The arrangements rules apply when:

• prior to repayment, there is an outstanding loan of £15,000 or more;
• at the time of repayment, there are arrangements in place to borrow a further £5,000 or more from the company.

The effects of these rules are to match the loan repayment with the subsequent withdrawal, such that the original loan is deemed not to have been repaid at all. If both rules are satisfied in relation to loan repayments, the 30-day rule takes priority.

Exception: Taxable credits

Where a repayment is made via a credit to the loan account, and the credit is itself taxable on the participator or associate, the bed and breakfasting rules do not apply. This would be the case if a credit is made via dividend or payment of salary, for example. A payment of rent would not satisfy this rule as the credit is not directly taxable and forms part of the recipients’ overall rental profits.

If a physical payment of the dividend or salary is made to the recipient, and the money is subsequently repaid to the company in satisfaction of the loan or advance, this does not satisfy the exemption criteria and the bed and breakfasting rules would still need to be applied.

Release or write off

Where the company either writes off or releases the participator or associate from their obligation to repay the loan, this will satisfy the conditions for either section 455 not becoming due (if done within the statutory time limits) or if already paid, enabling the company to obtain a refund.

In such circumstances, the participator or associate is treated as having received a dividend (or more accurately, a distribution), which will be taxed as income accordingly. This treatment is the same whether the participator or their associate is employed by the company or not.

However, if they are also an employee, the loan release is treated as earnings for NICs purposes for both the company and the employee.

As a deemed distribution, the company will not be able to claim corporation tax relief on the release. If the loan had been repaid via a credit to the loan account of a bonus or salary through PAYE, this would be deductible for corporation tax purposes. However, the company can claim a corporation tax deduction for any Class 1 NICs it makes.

Obtaining a repayment

Where a loan has been repaid, released or written off, a company must make a claim for repayment of section 455 tax within four years from the end of the accounting period in which the loan was satisfied. A claim for relief from section 455 tax can be made either via the company tax return or by filing form LP2 with HMRC.

Where a company is due a repayment of section 455 tax and form LP2 is filed with HMRC, this should be done after the normal due date for payment of corporation tax for the accounting period in which the loan was repaid or released. In most cases, this will be nine months and one day after the end of the period.

Practical tip

When dealing with loans to participators, there are rules across several taxes which need to be considered and can easily be overlooked. An error in dealing with the appropriate returns due to HMRC can result in fines and interest for missed and incorrect returns. Care must be taken in dealing with the corporation tax, personal tax and employment tax issues associated with loans and advances.

An occasion when establishing if a dwelling is an individual’s main residence is important for stamp duty land tax purposes.

Stamp duty land tax (SDLT) rates (or equivalent in Scotland and Wales, which are not considered here) on residential property can be a significant cost for homeowners; moreso if higher SDLT rates apply to additional dwellings.

Replacement dwelling?

However, the purchase of a qualifying replacement dwelling is not liable to the higher SDLT rates. One of the conditions for the higher SDLT rates is that the purchased dwelling is not a replacement for the purchaser’s only or main residence (FA 2003, Sch 4ZA, para 3(6)). The purchased dwelling is a ‘replacement’ if (among other things), on the effective date of the transaction, the purchaser intends the dwelling to be their only or main residence. It will generally be straightforward to establish that this condition is satisfied if the individual resides at only one dwelling. However, difficulties sometimes arise when an individual resides at more than one dwelling. Unlike for capital gains tax (CGT) private residence relief purposes, the SDLT rules do not allow individuals to nominate which welling is their main residence.

Main residence factors

HM Revenue and Customs (HMRC) considers that the following (non-exhaustive) list of factors may be useful in establishing which residence is an individual’s only or main residence (see HMRC’s Stamp Duty Land Tax Manual at SDLTM09812):

• If married (or in a civil partnership), where does the family spend its time?
• Where do the children go to school (if applicable)?
• At which residence is the individual registered to vote?
• Where is the individual’s place of work?
• How is each residence furnished?
• Which address is used for correspondence?
• Where is the individual registered with a doctor or dentist?
• At which address is the individual’s car registered and insured?
• Which address is the main residence for council tax?

Looking ahead

For the new dwelling, the test is whether the purchaser intends the dwelling to be their only or main residence (i.e., why did the purchaser acquire the property?). For example, in Cohen v Revenue and Customs [2023] UKFTT 90 (TC), on 23 July 2018, the appellant purchased a residential property (SR) in London. Renovation works took place between 23 July 2018 and 28 August 2018. The appellant moved into SR on 29 August 2018 for ten days; he slept there, moved his clothes in, and entertained friends there. However, the appellant wished to live elsewhere. He decided before moving into SR to sell it and buy a new flat (LC) in Loughton. The appellant sold SR on 25 October 2018. He completed the purchase of LC on 30 October 2018. HMRC sought to charge higher-rate SDLT on the appellant’s purchase of LC. The FTT held that the very short period the appellant lived at SR was indicative that his occupation was temporary. In addition, the appellant did not intend to live at SR permanently. Finally, the appellant only lived at SR for ten days from 29 August 2018, whereas the purchase of LC completed on 30 October 2018.

Practical tip

Like CGT private residence relief (and as illustrated in Cohen), merely occupying a property will not in itself make it a main residence. HMRC considers that there needs to be a permanence and expectation of continuity to the occupation to establish it as a main residence.

The sale or rental of a property is normally exempt from VAT, the main exceptions being the sale of new residential property (zero-rated) or the sale of new (less than three years old) freehold commercial property (standard-rated). Exempt transactions mean no VAT is chargeable, but it also means that the person making the supply cannot usually recover any VAT incurred on their expenses.

However, a business can 'opt to tax', choosing to charge VAT on the sale or rental of commercial property only, i.e., make a taxable supply out of what otherwise would be an exempt supply, thereby allowing VAT recovery.

Tax implications of 'opting'

The typical situation where 'opt to tax' could be used is where a commercial property is purchased for renting. As a new commercial property, VAT would usually be charged on the purchase price and, if rented out, this VAT paid cannot be reclaimed as rental income is exempt from VAT. Although opting to tax will require VAT to be charged on the rents paid by the tenant, the owner will recover all VAT paid on purchase, the associated professional costs and any ongoing expenses (e.g., repairs). However, on sale VAT would be charged. Another reason for 'opting to tax' is to avoid VAT being charged where a property is acquired as part of an ongoing business (transfer of a going concern) and the previous owner has opted to tax.

When deciding whether to opt, consideration should be made as to whether the property will be subject to the Capital Goods Scheme (CGS). The CGS is a method of adjusting the amount of input tax claimed on the purchase of a capital asset in line with its taxable use over five or ten years. In this situation, not opting to tax could render the business liable to repay some or all of the VAT recovered on property costs. In addition, the VAT situation of the tenant may be relevant, e.g., will the lease be tenant repairing or will the tenant or future purchaser likely be in a position to recover any or all VAT charged on any rental or sale?

When to claim

Once applied, the option to tax stays in place for 20 years and can only be revoked in limited circumstances, namely:

• within a six-month cooling off period providing no input tax has been claimed or output tax charged; or
• if the opter has no interest in the property after six years (e.g., if an opt to tax claim is made during the purchase process but the deal falls through).

Although at first glance 'opting to VAT' may seem advantageous, through the following 20 years the reasons for the original option may no longer exist (e.g., repair costs may be minimal).

New reporting changes

For an option to tax to be valid, it must be notified to HMRC within 30 days, and before the ‘relevant date’ (usually before the creation of a tax point) if an acquisition would otherwise be subject to VAT, and the intention is for the acquisition be a VAT-free transfer of a going concern (TOGC). Pre-1 February 2023, HMRC would have formally ‘acknowledged’ the claim and, after carrying out checks, would confirm the existence of any options to tax notified to it previously, if requested. From 1 February 2023, no acknowledgements will be issued and HMRC will only check its records for previously made options in limited circumstances However, as long as a claim is sent by email to optiontotaxnationalunit@hmrc.gov.uk, the sender should receive an automated email response showing the date of receipt.

Private residence relief means that you do not have to pay capital gains tax on any gain that you make when your sell your home to the extent that the gain relates to the period that you lived in the property as your only or main residence or the last nine months of ownership (36 months if you are disabled or sell your home and go into care). For capital gains tax purposes, you can only have one main residence at a time. Married couples and civil partners can only have one main residence between them. If you have more than one home, you will need to decide which property is your main residence for capital gains tax purposes.

Nominating a main residence

A taxpayer can choose which of his or her residences is their main residence for capital gains tax purposes. However, only those properties which are lived in as a residence can be considered for main residence status – properties which are let out are not occupied as a residence and consequently cannot be nominated as the taxpayer’s main residence.

The nomination must be made in writing to HMRC. The letter must state the address of the property which is to be the main residence and must be signed by all the owners of the property. An election must be made within two years of the date on which the mix of residences changes. A new election must be made each time your combination of homes changes if, after the change, you still have at least two homes. Once again, you have two years from the date on which the combination of residences changes to make your election.

In the absence of an election, the issue of which property is the taxpayer’s main residence for capital gains tax purposes is a question of fact – i.e., which property is actually occupied as the ‘main’ residence.

Example

Laura and John have a house in Shrewsbury. In July 2019 Laura started a new job which required her to work in Newcastle four days a week. Laura and John purchased a flat in Newcastle for Laura to live in during the week. Both properties count as ‘residences’ and the couple had until July 2021 to elect which property is their main residence for capital gains tax purposes. An election was made in January 2020 nominating their Shrewsbury house as their main residence.

In June 2022, they moved from Shrewsbury to Bath. They make a new election to nominate the Bath house as their main residence.

Varying the nomination

Once a property has been nominated as a main residence, the nomination can be varied at any time. This allows taxpayers to ‘flip’ their main residence to ensure that they maximise the benefit of private residence relief. The notice of variation can be backdated up to two years from the date on which it was made.

A notice of variation can be effective when a disposal is to be made, or has been made, to access the final period exemption. Having flipped the properties, the nomination can be flipped back to secure the final period exemption without much loss of relief in relation to the other property.

Example

The facts are as in the example above. Laura secures a new job in Bath and plans to sell the Newcastle flat when her current job comes to an end on 31 December 2023. In July 2023 they vary the election to nominate the Newcastle flat as their main residence, backdating the variation to 1 October 2022. They make a further variation in September 2023 to change their main residence back to the Bath house, backdating this to 1 March 2023. This has the effect of making the Newcastle flat the main residence from 1 October 2022 to 28 February 2023. As it has been a main residence at some point, the last nine months of ownership qualifies for main residence relief.

Main residence relief for the Bath house is lost for the period from 1 October 202to 28 February 2023 (unless any of that period falls within the last nine months of ownership). However, any gain pertaining to that period may be covered by Laura and John’s annual exempt amounts.

There are two different ways in which accounts can be prepared – the cash basis and the accruals basis. The cash basis is the default basis of preparation for unincorporated landlords who are eligible to use it. However, they can elect to use the accruals basis if they prefer. Landlords who are not eligible to use the cash basis must prepare their accounts using the accruals basis.

Nature of the cash basis

The cash basis is a very simple basis of accounts preparation, taking account only of money in and money out in the accounting period. Rental income is taken into account in the period in which it is received by the landlord, regardless of the period to which the rent relates. Likewise, expenses are deductible in the period in which they are paid.

Nature of the accruals basis

The accruals basis is the traditional basis of accounts preparation. It matches income and expenditure to the period to which they relate. Consequently, rental income is recognised in the period to which the rent relates, regardless of when or whether it has been paid. Likewise, expenses are deductible in the period to which they relate. To achieve the matching, it is necessary to take account of debtors and creditors and prepayments and accruals, which is not needed under the cash basis.

Cash basis eligibility

The cash basis applies by default unless any of the following apply.

The business is run by a company, a limited liability partnership, trustees or a partnership with at least one corporate member

Receipts brought into account under the cash basis for the tax year exceed £150,000.

The property business is carried on jointly by spouses or civil partners and the other spouse/civil partner is taxed under the accruals basis and a Form 17 election has not been made.

Business premises renovation allowance has been claimed and there is a balancing charge in the tax year.

If none of the above apply, the landlord must prepare accounts using the cash basis, unless they elect to use the accruals basis instead. If any of the above apply, the landlord cannot use the cash basis and must use the accruals basis.

Advantages of the cash basis

The cash basis has a number of advantages over the accruals basis, the main one being simplicity.

There are also cash flow advantages. As income is not taken into account for tax purposes until it has been received, the landlord will have the cash before having to pay the associated tax. This also means that relief for bad debts is automatic.

The rules for dealing with capital expenditure are also more straightforward under the cash basis, as capital expenditure can be deducted in calculating profits unless it is of a type for which such a deduction is not permitted.

Although the tax system contains an exemption for employer-provided eye tests and the glasses or contact lenses for display screen use, its availability is dependent on the associated conditions being met. When seeking to take advantage of the exemption, the method of provision is key. The tax consequences of an employer providing eye tests for employees are very different to those where an employer reimburses an employee for the cost of an eye test which they initially paid for – despite the end result (in that the employer ultimately meets the cost of the test) being the same.

The exemption

The exemption prevents a tax liability arising where an employee is provided with an eye and eyesight test or special corrective appliances that an eye and eyesight test show to be necessary. The corrective appliances must be for display screen equipment use only – if the employee needs glasses for reading or everyday use, these fall outside the scope of the exemption. The availability of the exemption is contingent on two conditions – condition A and condition B – being met.

Condition A is that the provision of the test or appliances is required by regulations made under the Health and Safety at Work etc. Act 1974. The law requires employers to arrange eye tests for display equipment users and provide glasses where needed for display equipment work only.

Condition B is that the tests and corrective appliances must be made available generally to those employees for whom the regulations necessitate their provision.

To comply with the health and safety legislation, it does not matter if the employer arranges the test with the optician and pays for it, the employee arranges it and the employer pays the optician on the employee’s behalf or the employee arranges it and pays for it and the employer reimburses the employee. However, from a tax perspective, all routes are not equal.

Employer arranges and pays for the test

Assuming the conditions are met, the exemption will apply if the employer arranges the test with the optician and pays for it – here the employer is providing the employee with an eye test. If corrective appliances are provided, the exemption will similarly apply as long as the employer arranges their provision and pays for them.

Employee arranges the test and the employer pays

From a tax perspective, if the employee arranges the test and the employer pays for it on the employee’s behalf, the employer is settling an employee’s private bill rather than providing an eye test. The exemption only applies to the provision of an eye test or corrective appliances, not to the settling of a pecuniary liability. To avoid falling foul of this trap, the employer should arrange the test directly with the optician and pay the optician.

Employer reimburses the employee

In the event that the employee arranges and pays for an eye test and is reimbursed by the employer the exemption for eye tests is not in point as the employer is not providing an eye test. The exemption for paid and reimbursed expenses will only apply if the employee would be entitled to a tax deduction if they met the cost themselves. This is not the case here. Consequently, any reimbursement of the cost of an eye test or corrective appliances is taxable.

The property allowance is a useful allowance that allows you to earn property income of up to £1,000 tax-free each tax year. If your income from property is more than this, you can deduct the allowance instead of actual costs where it is beneficial to do so. Claiming the allowance is optional and will not always be beneficial; whether it is or not will depend on your circumstances.

Annual property income of £1,000 or less

If your gross annual property income is £1,000 or less in a tax year, it will fall within the property allowance. This means that you do not need to tell HMRC about it or declare the income on your tax return if you need to complete one for other reasons. It should be noted that the relevant figure is your gross property income (i.e. before deductions for expenses), and this, rather than your profit, must be £1,000 or less to benefit from the relief in full.

If your expenses are more than your rental income so that you have made a loss, claiming the relief will not be beneficial if your income is likely to exceed £1,000 in the future and you expect to make a profit. Instead, it is better to declare the income on your tax return to preserve the loss so that it can be set against any future profits that you make that would otherwise be taxed. You will need to elect for the allowance not to apply by the first anniversary of the normal self-assessment filing date of 31 January following the end of the tax year to which it relates (so by 31 January 2026 for 2023/24). The election can be made in your tax return.

Annual property income of more than £1,000

You can still benefit from the allowance if your gross annual property income is more than £1,000 by opting to deduct the allowance rather than your actual expenses. This will be beneficial where your deductible expenses are less than £1,000 as this will reduce your taxable profit. Claiming the relief will mean that you cannot deduct your expenses or claim an income tax reduction in respect of any interest and finance costs.

In this instance, you will need to tell HMRC. The mechanism for doing this will depend on the amount of your income and whether you need to complete a tax return for other reasons. If you have to complete a tax return anyway or your gross property income for the tax year is more than £2,500, you should declare it on the property pages of your Self Assessment tax return. However, if your income is between £1,000 and £2,500, you should contact HMRC on 0300 200 3300 to discuss your situation.

If your wish to claim the allowance (partial relief) you will need to elect for this treatment to apply. Again, this must be done by the first anniversary of the normal self assessment filing date of 31 January following the end of the tax year to which the election relates.

Interaction with rent-a-room relief

Rent-a-room relief allows you to earn up to £7,500 a year tax-free (or £3,750 per person when more than two people share the income) if you rent one or more furnished rooms in your own home. You cannot claim both rent-a-room relief and the property allowance. However, if you qualify for rent-a-room relief, this is more beneficial than the property allowance and should be claimed instead.

Exclusions

The property allowance cannot be set against rent paid by an employer, or by the employer of an individual’s spouse or civil partner. Where the recipient is a partner in a partnership, the property allowance is similarly not available for rent paid by the firm. Likewise, the allowance cannot be used against rent paid by a close company to a participator or to an associate of a participator, precluding, for example, the use of the allowance against rental income from a close company for use of a home office.

There are various reasons why HMRC may issue a tax penalty. You may receive a penalty if you file your tax return late, your tax return is inaccurate, you are late paying tax that you owe or you fail to keep accurate records.

If you do not agree with the penalty, you can appeal against it. The appeal route depends on whether the penalty relates to a direct tax, such as income tax, capital gains tax or corporation tax, or to an indirect tax, such as VAT.

Direct tax penalties

If you receive a penalty in relation to a direct tax by post, the appeal letter will contain instructions on how to appeal and also a form which can be used. An appeal must be made within 30 days of the date on the penalty notice. If you miss the deadline, you must explain the reason for doing so to HMRC so that it can decide whether to consider your appeal.

Self Assessment Penalties

If you have received an automatic £100 penalty for missing the deadline for filing your Self Assessment tax return, you can appeal online by signing into your Government Gateway account. Alternatively, you can appeal by post. If you did not need to send a return, HMRC should cancel the penalty. If you submitted your return late and have a ‘reasonable excuse’ for doing so, HMRC may allow your appeal.

You will need to tell them what your reasonable excuse is. However, you should bear in mind that HMRC’s idea of a reasonable excuse may be different to yours. It will only accept serious events such as the death of a partner or close relative, a serious or life threatening illness or an unexpected hospital stay, delays related to a disability or mental illness that you have, service issues with HMRC’s online services, a computer or software failure while filing your return, a fire, flood or theft that prevented you from filing your return on time as valid reasons for late filing. HMRC may also accept that you had a reasonable excuse if, despite taking reasonable care, you misunderstood or were not aware of your obligations or relied on someone else to file your return and they did not. HMRC will expect you to send your return as soon as you are able once the reason for not filing it on time has been resolved.

If you need to appeal other self-assessment penalties, you should do this by post or on form SA370.

PAYE penalties

If you are an employer and you receive a PAYE penalty, you can log into your PAYE Online for Employers account and appeal using the ‘Appeal a penalty’ option. You will receive an immediate acknowledgement of your appeal.

Indirect tax penalties

If you are charged a penalty in relation to an indirect tax, for example, a VAT penalty, the penalty letter will offer you a review, which you can choose to accept. Alternatively, you can appeal to the tax tribunal.

Review by HMRC

If you are not happy with the outcome of an appeal against a direct tax penalty or you are issued with an indirect tax penalty, you can take up the offer for HMRC to review the penalty decision. The decision will be reviewed by someone who was not involved in the original decision. The review will normally take 45 days (although HMRC should tell you if it will take longer than this). HMRC will tell you the outcome of the review.

Appeal to the tax tribunal

If you disagree with the review decision or do not want to accept a review, you can appeal to the tax tribunal. Again, you have 30 days to lodge your appeal.

Alternative dispute resolution

If you have appealed to the Tax Tribunal, you can opt to use the Alternative Dispute Resolution procedure to resolve the dispute rather than it being heard by the Tax Tribunal. Under this route, a mediator will work with you and HMRC to find a solution.

VAT registration is compulsory for any UK established persons who are in business and make or intend to make taxable supplies should either one of the following tests are satisfied:

Historical test

Under the 'historical test', if taxable sales have exceeded £85,000 in any rolling 12-month period, the business must register within the next month after exceeding the threshold, the effective date of registration being the first day of the second month after exceeding the threshold (e.g., if sales exceeded £85,000 for the first time in the twelve months to 31 August 2023, notification must be by 30 September, registration being effective as from 1 October 2023).

'Future' test

Under this test', if taxable sales are expected to exceed £85,000 within the next 30 days, registration is at the beginning of the 30-day period. Taxable sales include those subject to 0%, 5% or 20% VAT. An earlier date can be agreed between HMRC and the business.

Penalties

HMRC may spot a late registration when a business files its accounts or personal tax returns, but there is no guarantee; it is the trader’s responsibility to notify. Late registration now falls within the 'failure to notify penalty regime'. Penalties are based on the potential loss of tax increasing in steps according to the degree of culpability. However, HMRC has confirmed that no charge will be levied if all of the following apply:

• there is a reasonable excuse for the failure;
• the failure was not deliberate; and
• the taxpayer notified HMRC 'without unreasonable delay' after the reasonable excuse ended.

A 'reasonable excuse' is something that stopped the taxpayer from meeting the obligation to notify on time (e.g., bereavement). As ever, the actual percentage charged will depend on the particular circumstances and abilities of the taxpayer. The penalty charge for non-deliberate late registration is from 0% to 30%; deliberate is 20% to 70%, and deliberate and concealed 30% to 100%. Where the final penalty sits between the minimum and maximum percentages depends on the quality of the disclosure, judged by HMRC according to timing, extent and nature. 'Quality' has three elements: advising (30%), helping (40%) and giving access (30%) – the amounts in brackets are the percentages by which the maximum possible penalty is reduced within the statutory range. It should be noted that there is a 20-year time limit where there is a failure to notify a compulsory VAT registration.

Issuing VAT invoices

The supplier will be liable to account for VAT on supplies made since the effective date of registration. HMRC will treat the income as VAT inclusive although the supplier has the option of issuing VAT only invoices if the customer agrees to pay the extra, usually on the basis that they can recover it.

Importantly, until a VAT number is issued, VAT invoices cannot be issued and VAT cannot be shown as a separate line on any invoice. HMRC recommends that during the waiting period, the business increases its prices by the amount of VAT that would have been included on a proper VAT invoice and show the words 'including VAT'. It might also be helpful to a customer if the invoice also states that 'a VAT registration number is being applied for'. VAT invoices can then be issued when the VAT number is finally received.

Practical point

Applications for a VAT registration number, late or otherwise, are currently taking at least 40 days to be issued. Late registration may take longer as HMRC undertakes additional checks and may require further information from the business. Unfortunately, a business can no longer phone to chase for their new number as there is no VAT registration helpline. Instead, anyone chasing needs to email: vrs.newregistrations@hmrc.gov.uk

Many taxpayers taxed under self assessment may not be aware that HMRC self assessment phone service was closed for three months, opening on 4 September. HMRC has been piloting a new seasonal model for the self-assessment helpline by directing queries to the department’s digital services. The intention was to enable 350 of HMRC's staff to take urgent calls on other lines and answer outstanding customer correspondence. As such, the only method by which to make contact was via a letter.  Callers to that line being directed to use HMRC’s online services including digital assistant and webchat.

The Adjudicator (an independent tier of complaint handling for HMRC) states in its Office annual report 2023 that HMRC’s complaints handling 'has still not fully recovered from post pandemic disruption. Although recovered in areas there are still significant backlogs in others where high-volume complaints are not expected to recover until well into next year'– hence the closure.

HMRC has a complaints system that follows a tiered structure. To initiate a complaint an online form is completed detailing the reason for the complaint (HMRC confirms that around a third of complaints are made this way). Tier 1 is where HMRC will attempt to resolve the complaint by reviewing its records. HMRC allocates someone to deal with the complaint, advising the complainant of that person’s contact details and who will subsequently advise of the outcome of the complaint. Currently correspondence is in writing but the intention is to move to phoning or emailing the complainant.

HMRC states that the majority of complaints are resolved at Tier 1. However, if the complainant is not satisfied with the outcome, then the case is escalated to Tier 2.  Approximately 7% of complaints are escalated to this level, where a different individual will review the complaint.

If the taxpayer remains unsatisfied with the outcome after the Tier 2 review, the next level is to ask for the Adjudicator’s Office (AO) to review the complaint. Being independent, their work is restricted as they can only consider and rule on specific types of complaints detailed in the 2018 Guidance as being:

• "Mistakes
• Unreasonable delays
• Poor and misleading advice
• Inappropriate staff behaviour

The use of discretion"

When there is a referral to the AO, the head of HMRC is made aware of the complaint. The AO's 2022/23 report confirms that during 2022/2023 they resolved 630 complaints. The number of complaints partially or fully upheld was 293 – 41 more than the previous year.

In some cases, HMRC can offer financial redress for costs incurred, provided that they are proportionate e.g., postage, telephone costs and professional fees. Payments for 'worry or distress' may be applicable if someone has suffered particularly from the consequences of a mistake, although HMRC notes that these payments are typically modest and usually under £100.

Should a case reach the AO they too have powers to recommend compensation. The AO report states that during the year 2022/23 it recommended HMRC pay £303,799 as redress for 'worry and distress, poor complaints handling, costs and liability given up' (i.e., the amount not collected). The low amount of compensation awarded could explain why so few complaints are elevated to the AO. There is a final appeal level should the taxpayer remain dissatisfied – they can write to the Parliamentary and Health Service Ombudsman (PHSO) via their MP.

HMRC receives tens of thousands of complaints, yet the AO's annual report shows that only a tiny fraction reaches them. The complaints process usually takes six months or more to reach a decision; taking time, resources and money, made worse for the complainant because penalties and interest charges continue to accrue.

If you are self-employed, the way in which your profits are taxed is changing. As a result of this, you only have a limited window in which to claim relief for any profits which have been taxed twice.

Basis period reform

For 2022/23 and earlier tax years, self-employed individuals, whether sole traders or partners in a partnership, were taxed on a current year basis. This meant that you were taxed on the profits for the accounting period that ended in the tax year. However, from 2024/25, you will be taxed on the profits for the tax year. If you prepare your accounts to 31 March or 1 to 5 April, this is deemed to be equivalent to the tax year. However, if you prepare your accounts to another date, you will need to apportion the profits from two accounting periods to arrive at the profits for the tax year.

To move from the current year basis to the tax year basis, the 2023/24 tax year is a transition year. If your accounting date does not correspond to the tax year (or is not treated as corresponding to the tax year), you will be taxed on more than 12 months’ profits in 2023/24. The profits taxed are those for the 12 months from the end of your 2022/23 basis period, plus those for the remainder of the 2023/24 tax year, less any overlap relief. For example, if your prepare your accounts to 30 September, in 2023/24 you will be assessed on the profits for the year to 30 September 2023 plus the profits from 1 October 2023 to 5 April 2024, less any overlap relief. The profits from 1 October 2023 to 5 April 2024 are the transition profits. These profits, less any overlap relief, are spread over five tax years from 2023/24, unless you elect otherwise.

Overlap relief

Overlap profits are profits that are taxed twice. This may occur either in the early years of a business or on a change of accounting date. Under the current year basis, relief for overlap profits (overlap relief) was given on cessation or in a tax year in which there was a change of accounting dateand as a result more than 12 months’ profits were taxed in that year.

If you have overlap profits in respect of which relief has not been claimed, the last chance to do this is for the 2023/24 tax year. Relief will normally be claimed against the transition profits for that year.

Overlap relief must be claimed in your 2023/24 tax return, which must be filed by 31 January 2025.

Determining your overlap profits

To claim overlap relief, you will need to know what your overlap profits are. This may not be a number that you have easily to hand, particularly if you started your business many years ago.

HMRC are launching an online form which can be used to submit requests for details about overlap relief.  At the time of writing, it was expected that the service would be available from 11 September 2023. They will only be able to provide information on overlap relief if the figures are recorded in their systems, taken from tax returns that you submitted previously. If the information was not provided to HMRC in your tax returns, HMRC will be unable to provide it. When making a request for overlap relief information, you need to supply some details about your business to HMRC.

You can make a request for information on your overlap profits ahead of the launch of the online form. If you choose to do this, you will need to supply the following information:

• your name;
• your National Insurance number or your Unique Taxpayer Reference (UTR);
• a name or description of your business, or both;
• whether you operate as a sole trader or are in a partnership;
• the date that you commenced as a sole trader or the date of commencement of the partnership, as applicable;
• the start and end date of the most recent accounting period; and
• the year(s) in which the accounting date changed, if relevant.

Relief for overlap profits that is not claimed in 2023/24 will be lost.

The tax legislation contains a number of exemptions which allow benefits in kind to be provided to employees without a tax charge arising. Some of the exemptions are more useful than others. One of the more valuable ones is that for mobile telephones.

The exemption enables you to provide one mobile phone to an employee for their use. However, it only applies if there is no transfer of property – you must retain ownership of the phone. The exemption covers the provision of the phone for the employee’s use, plus the cost of private calls and data usage.

More than one phone

The exemption is limited to the provision of one phone per employee. If the employee is provided with second or further phones for private use, or if phones are provided to members of their family for private use, the additional phones represent a taxable benefit. The tax charge is calculated in accordance with the rules for making an asset available for an employee’s private use.

Business use exemption

If an employee is provided with a second phone for business use only, and the employee does not use that phone for private use, there will no tax charge in respect of that phone. Consequently, the employee can be provided with one phone for private use (or business and private use) and one phone for business use without a tax liability arising. However, if the employee is provided with two phones both of which can be used for business and private use, the exemption will only apply to one of them, whereas the other will be taxable. Thus, if the employee is to be given the use of two phones, it is beneficial from a tax perspective to restrict the use of one of them to business use only. Any incidental private use of a business-only phone is disregarded.

Beware salary sacrifice

Do not be tempted to use a salary sacrifice arrangement to provide an employee with the use of a mobile phone for private use as this will result in the exemption being lost. Instead, the employee will be taxed by reference to the amount of salary given up in exchange for the phone.