Which IHT form should I use?
When someone dies, there is a lot of paperwork to attend to. The list of jobs that needs to be done may include filing an inheritance tax return. There are various forms in the IHT stable – the form you need will depend on the value of the estate and whether any IHT is payable.
Grant of representation
In many cases, a grant of representation will be required in order to access most of the assets in the deceased’s estate. This will generally be a grant of probate if the deceased has left a will or a grant of letters of administration where the deceased did not leave a will.
If a grant of representation is not required (for example, because the deceased’s estate is simple), it is not necessary to complete form IHT205.
IHT 205: Estate unlikely to pay IHT
Before a grant of representation can be made, it is necessary either to show that no IHT is due or pay any IHT that is due.
For the majority of estates, no IHT is due, and form IHT205 will only be required to provide brief details of the estate. If there is tax to pay or the deceased’s estate does not meet certain conditions, a formal account of the estate (on form IHT400) is required.
Form IHT205 is used where the deceased was domiciled in the UK and there is no tax to pay because the gross value of the estate is less than or equal to:
The gross value of the estate is the total value of all assets making up the deceased’s estate before any debts are taken off, plus certain gifts.
For 2017/18, the nil rate band is £325,000 and the residence nil rate band (RNRB) is £100,000.
IHT is a good starting point and working through IHT205 will indicate if form IHT400 is required if this is not clear from the outset.
Form IHT217 is used to claim the unused nil rate band of a spouse or civil partner who died before the deceased.
However, if part of the nil rate band was unused on the earlier death, such that the full amount is not available on the second death, forms IHT402 should be used instead (and form IHT400 completed instead of form IHT205).
A claim for the unused RNRB of a spouse or civil partner is made on form IHT436.
Form IHT400 is the full IHT account. This must be completed where there is IHT to pay or the deceased’s estate does not qualify as an excepted estate. The account is quite meaty and comprises form IHT400 and several schedules.
Some forward planning is necessary because an Inheritance Tax Reference Number is needed before form IHT400 can be submitted to HMRC. An application for a reference number is made on form IHT422. The application should be made at least three weeks before the planned submission date of IHT400 – so allow plenty of time.
Other IHT forms may be needed in certain situations, for example, when IHT is payable on a trust. The full list of forms is available on the Gov.uk website.
Mileage rates for landlords
In preparation for the introduction of digital recording and reporting, landlords with unincorporated property businesses have been able to benefit from a number of simplifications, including cash basis accounting. A further simplification was announced at the time of the Autumn 2017 Budget, which will allow landlords to use mileage rates to calculate a deduction for motoring expenses.
Who can benefit?
The option to use mileage rate is only open to individuals and partnerships comprised only of individuals running property businesses who use cars, goods vehicles, or motorcycles for business purposes. Corporate landlords and partnerships with corporate partnerships cannot claim deductions based on mileage rate.
The use of mileage rates is an alternative to claiming capital allowances and a deduction for actual costs.
The opportunity for landlords to use mileage rates is not new – until 2013, landlords were able to use mileage rates by concession. However, since that date, unincorporated property businesses have only been able to deduct actual motoring expenses and claim capital allowances for the cost of the vehicle.
The mileage rates for landlords will be the same as those for traders claiming a fixed rate deduction. 45p for the first 10,000 business miles, 25p thereafter.
In most cases, the option of using mileage rates will not be available in respect of a vehicle for which capital allowances have been claimed – it may therefore be a case of waiting until a new vehicle is acquired before switching over to using mileage rates rather than deducting actual costs.
However, transitional arrangements will apply where a qualifying landlord claimed capital allowances for a vehicle in the period 2013/14 to 2016/17 and wishes to start using mileage allowances from 2017/18 for the same vehicle. The transitional arrangements will enable mileage rates to be used, but will prevent further claims for capital allowances.
James is a landlord with an unincorporated property business. He uses a car for 11,670 business miles in 2017/18. Capital allowances have not been claimed in respect of the vehicle and he decides to use mileage rates rather than actual expenses to claim a deduction when working out his taxable profit.
The permitted deduction is £4,917.50 ((10,000 miles @ 45p) + (1,670 miles @ 25p)).
If capital allowances plus a deduction for actual expenses give a greater deduction, the landlord will need to assess whether the time saving from using mileage rates is worthwhile.
Jointly-owned property – how is income taxed?
Where property is owned jointly by two or more people, the way in which any income is taxed will depend on the relationship between the owners.
Scenario 1: Joint owners are not married or in a civil partnership
If the property is owned jointly and the joint owners are not married or in a civil partnership, any income arising from the property is usually taxed in accordance with their actual shares.
Rose, Lily, and Poppy are sisters. They own a house in equal shares, which they let out. The rental profit for the tax year in question is £12,000. Each sister is taxed on her third of the income, i.e. £4,000.
However, the joint-owners do not have to share the income in proportion to their share in the property – they may agree a different split. Where this is the case, each joint owner is taxed on the income they actually receive.
The facts are as in example 1, except that the sisters agree to share the income in the ratio 1:2:3.
For the tax year in question, Rose receives income of £2,000, Lily receives income of £4,000 and Poppy receives income of £6,000. Each is taxed on the amount they actually receive.
Trap - The share for tax purposes must be the agreed share – they cannot be taxed on a different split simply because this yields the lowest tax bill if this does not reflect the actual split. So, for example, if Poppy has no other income and Rose and Lily are both higher rate taxpayers, it is not possible for Poppy to be treated for tax purposes as is she receives all the profit, but for the profit actually to be shared in the agreed split or in accordance with their actual shares.
Scenario 2: Spouses and civil partners
Tighter rules apply where the property is owned jointly by spouses or civil partners. Where this is the case, the income is treated as arising to them in equal shares, regardless of their actual entitlement and beneficial ownership.
However, if they own the property in unequal shares, they can elect (on form 17) for their share of the income for tax purposes to match their actual shares in the property. Whether such an election is beneficial will depend on the rate at which each spouse/civil partner pays tax.
Polly and Percy are a married couple. They have a rental property in which Polly has a 20% stake and Percy has an 80% stake. The rental income for the tax year in question is £10,000. Polly is a higher rate taxpayer and Percy is a basic rate taxpayer.
In the absence of an election, each spouse is taxed on income of £5,000.
If they were to make an election on form 17, Polly would be taxed on income of £2,000 and Percy on income of £8,000. The election would have the effect of moving income of £3,000 from the higher rate to the basic rate, saving the couple £600 (£3,000 @ 20%). The election is, therefore, beneficial.
However, if Polly had been a basic rate taxpayer and Percy a higher rate taxpayer, the election would not be worthwhile, as the transfer would be from basic to higher rate, costing the couple £600.
Tip - It is possible to change the underlying ownership to get the best tax result as for capital gains tax purposes a property can be transferred between spouses on a no gain/no loss basis. This can be changed prior to sale as a different split is preferable for capital gains tax purposes.
Reporting benefits in kind for 2017/18
Taxable expenses and benefits provided to employees during the 2017/18 tax year need to be reported to HMRC on form P11D unless:
The form must be filed by 6 July 2018, along with a form P11D(b), which is also the Class 1A return. A P11D(b) is needed even if all taxable benefits have been payrolled and, as a result, there are no P11Ds to submit.
What to report?
The amount that is reported is the cash equivalent value. This will be either the amount calculated in accordance with the rules for that particular type of benefit (such as those for company cars and fuel, employment-related loans and suchlike), or where no special rule exists, by reference to the general rule of cost to employer, less any amount made good by the employee.
Salary sacrifice arrangement – special valuation rules
From 6 April 2017 onwards, new valuation rules apply to most benefits if they are made available under an optional remuneration arrangement, such as a salary sacrifice arrangement, or where a cash alternative is offered instead. Where the rules bite, the value to be reported is the salary foregone or cash alternative offered, if this is higher than the cash equivalent calculated under normal rules. Any amount made good is deducted as usual. The P11D has been amended to allow for these new rules; the boxes now refer to `cost/market value or amount foregone’.
The rules do not apply where the benefit is one of the following:
Instead, normal rules apply.
For 2017/18, the rules can also be ignored where the arrangement was in place at 5 April 2017 and has not been renewed or modified prior to 6 April 2018. Transitional rules delay the start date until 6 April 2021 for arrangements in relation to a car (other than an ultra-low emissions car), living accommodation or school fees, and 6 April 2018 in all other cases where the arrangement was in place at 5 April 2017, or the date that the arrangement is renewed or varied, if this is earlier.
Submitting the forms
There are various submission options available and while most employers find it easy to file online, this is not compulsory. HMRC offer a number of online options – their online end of year expenses and benefits service (see www.gov.uk/government/publications/paye-end-of-year-expenses-and-benefits-online-form) and PAYE Online for employers (see www.gov.uk/paye-online). You can also use your commercial payroll software. Paper forms may also be submitted.
Telling HMRC about benefits in kind
Where taxable benefits and expenses have been provided to employees in 2017/18, these need to be notified to HMRC on form P11D by 6 July 2018, unless the benefit has been payrolled. Form P11D(b) – the Class 1A National Insurance return and employer’s declaration that all required P11Ds have been filed – must reach HMRC by the same date.
Form P11D is used to report taxable benefits and expenses provided to employees. The form is used, regardless of the amount that the employee earns – since 6 April 2016, the same rules apply to all employees and directors.
A P11D needs to be completed for each employee and director to whom taxable expenses and benefits have been provided in the 2017/18 tax year. Payrolled expenses should not be reported on the P11D, nor should any expenses and benefits included within a PAYE Settlement Agreement or those covered by an exemption.
Where benefits have been payrolled, they do not need to be included on the P11D. However, they must be taken into account in the Class 1A National Insurance calculation on form P11D(b).
Exempt benefits do not need to be included on the P11D – where an exemption applies, there is no tax to pay. This might be a specific exemption, such as that for mobile phones, or the general exemption for paid and reimbursed expenses, which replaced the old dispensation regime. This exemption covers business expenses, such a travel, business entertainment, business phone calls and suchlike, which would be tax-deductible if met by the employee.
What value to report
Unless the benefit has been made available via an optional remuneration arrangement (such as a salary sacrifice or flexible benefits arrangement or if a cash alternative has been offered instead), the value of the benefit is its cash equivalent value.
New valuation rules apply from 6 April 2017 (subject to transitional rules for arrangements in place on 5 April 2017) where benefits are provided under optional remuneration arrangements, unless the benefit is one of a limited range of benefits (employer supported childcare and childcare vouchers, pension contributions and pension advice, cycles and equipment provided under a cycle to work scheme or low emissions (75g/km or less). Where the valuation rules apply, the value of the benefit is the salary foregone or cash alternative offered where this is higher than the normal cash equivalent value.
Filing the returns
There are various submission options available and HMRC offer a number of online options, including their online end of year expenses and benefits service and PAYE Online for Employers. You can also use your commercial payroll software. Paper forms may also be submitted.
Returns must be submitted by 6 July 2018. Employees must be given a copy of their return by the same date. Class 1A National Insurance paid by 22 July 2018 where payment is made electronically, and by 19 July otherwise.
Loss of tax relief for EMI options
The Enterprise Management Investment (EMI) is a share option scheme for smaller companies, which is designed to help them attract and retain high calibre employees by enabling them to benefit from tax-advantaged share option schemes. However, state aid for EMI incentives lapsed on 6 April 2018 – and with it the associated tax advantages.
So, where does that leave EMI options?
Nature of the EMI scheme
Companies with assets of £30 million or less are able to offer Enterprise Management Incentives (EMIs). Under the scheme, it is possible to grant share options of up to £250,000 over a three-year period. The tax advantages associated with the EMI scheme mean that (normally) there is no tax or National Insurance to pay, as long as the amount paid for the shares (the exercise price) is at least equal to the market value of the shares at the time that the share option was granted.
Where shares are granted at a discount on the market value at the time of the grant, tax and National Insurance is payable on the discount element. However, if the market value of the shares has increased between the date on which the option was granted and the date on which the option is exercised, there is no tax to pay on the increase in value.
If the shares are sold, there is a capital gains tax liability if the proceeds are more than the market value of the shares on the date on which the option was granted.
Availability of the tax advantages is conditional on the associated conditions being met.
Loss of tax relief
The tax advantages available under the EMI scheme are only available to companies that are carrying out activities that fall within the definition of qualifying activities. As such, the granting of relief constitutes state aid and requires EU approval. Approval lapsed on 6 April 2018. The UK has applied for renewal of the approval, but at the time of writing, this had not been granted.
The effect of this is that any EMI options granted on or after 6 April 2018 and prior to any renewal of the approval will not benefit from the tax advantages, even if all the associated conditions are met. However, the loss of approval will not affect qualifying EMI options granted before 6 April 2018.
Any company that is thinking of granting EMI options should consider waiting until state aid approval has been renewed, to ensure the associated tax reliefs are available.
Paying voluntary Class 3 contributions
Voluntary National Insurance contributions can be paid to plug gaps in your contributions record.
To receive the full single-tier pension (which is payable to individuals who reach state pension age on or after 6 April 2016), an individual needs 35 qualifying years. Where a person does not have the requisite 35 qualifying years, they will receive a reduced state pension, as long as they have a minimum of 10 qualifying years. A person who has less than 10 qualifying years will not receive a single-tier state pension.
Where a person does not have the full 35 years, they may wish to pay voluntary contributions to boost their pension entitlement. People with some qualifying years, but less than 10, may want to make voluntary contributions to bring their contribution record up to the minimum of 10 years needed for a reduced pension.
Nature of Class 3 contributions
Class 3 National Insurance contributions are voluntary contributions. For 2018/19, Class 3 contributions are payable at a weekly rate of £14.65.
Checking your National Insurance record
Before making voluntary contributions, it is sensible to check your National Insurance record. This can be done online on the Gov.uk website at www.gov.uk/check-national-insurance-record. This will enable you to see what you have paid up to the start of the current tax year (so for 2017/18 and earlier years), any National Insurance credits you have received, and gaps in your record (i.e. years that are not qualifying years). Where there are gaps, you may want to consider paying voluntary contributions to plug the gap – however, if you already have 35 qualifying years or will do by the time you reach state pension age, it will not be worthwhile.
National Insurance credits
National Insurance credits are available in certain situations where people are not working and, therefore, not paying National Insurance credit. Credits are available to those looking for work, who are ill, sick or disabled, caring for someone or registered for child benefit for a child under the age of 12. Where credits are received for a tax year, it will not be possible (or necessary) to make voluntary contributions for that year.
Class 3 contributions must normally be paid within six years of the end of the tax year to which they relate. A later deadline applies in certain circumstances.
Class 2 rather than Class 3
A person whose income from self-employment is below the small profits threshold (£6,250 for 2018/19 and £6,025 for 2017/18) is eligible but not required to pay Class 2 contributions. At £2.95 per week for 2018/19, Class 2 contributions are significantly cheaper than Class 3 contributions. Where it is possible to pay Class 2 voluntarily, this is a much cheaper option than paying Class 3 – saving £608.40 for 2018/19.
However, Class 2 contributions are to be abolished from 6 April 2019, so 2018/19 is the last year for which this option is available.
SDLT and transfers of ownership on marriage and divorce
There are various situations in which land or property may be transferred between couples. This may happen near the start of a relationship when they set up home together or marry or enter into a civil partnership. It may also happen at the end of a relationship if the couple separate or divorce. The extent to which any SDLT is payable will depend on the circumstances and also whether any consideration changes hands.
SDLT is payable by reference to the consideration received. This may be in cash but can also include discharging a debt (so, for example, if a spouse takes on a share of the mortgage, this will count as consideration).
Example 1: Consideration below the SDLT threshold
Harry owns a house, which is valued at £200,000. Harry transfers a 50% share in the property to Sophie. She gives him cash of £100,000 in return.
The total consideration is £100,000. This is less than the SDLT threshold of £125,000. Consequently, no SDLT is payable on the transfer.
Example 2: SDLT payable but no cash changes hand
Following their marriage, Karen moves into her husband Ian’s house. The house is worth £600,000 and Ian has an outstanding mortgage of £400,000. Karen takes on a 50% share of the mortgage. She is not a first-time buyer and she does not own any other property.
Although no cash changes hands, the consideration for the transfer of ownership is equal to the share of the mortgage assumed by Karen. This is equal to £200,000 (50% of £400,000). As this is above the SDLT threshold of £125,000), SDLT is payable.
The SDLT payable is £1,500 ((£125,000 @ 0%) + (£75,000 @ 2%)).
Example 3: Gift
Edward moves into Elsie’s house following their marriage and she gives a 50% share of the property to her new husband. The house is worth £400,000 and Elsie owns it outright.
No cash changes hands and as it is a gift there is no consideration. Consequently, no SDLT is payable, even though the value of the transferred share is more than the SDLT threshold.
Example 3: Separation, divorce or dissolution
Chris and Alison separate and he moves out of the family home. Alison buys him out, paying him £250,000.
Where a transfer of ownership takes place on separation (where the circumstances are such that the separation is likely to prove permanent), or on divorce or the dissolution of a civil partnership, no SDLT is payable. Consequently, Alison does not have to pay SDLT on her acquisition of Chris’ share of their marital home, even though the consideration is more than the SDLT threshold.
Consider the circumstances and the consideration
Whether the transfer of ownership triggers an SDLT bill will depend on the circumstances and the amount of consideration, if any.
Profit extraction: method 1 - taking a salary
Profit extraction: method 1 - taking a salary
There are various ways of taking money out of a company and each method has its own tax and National Insurance consequences, both for the company and the recipient. In this article, we will look at extracting money in the form of a salary.
Taking a small salary can be beneficial from a tax and National Insurance perspective - for both company and the recipient.
To the extent that the salary does not exceed the primary and secondary National Insurance threshold (set at £157 per week, £680 per month, and £8,164 per year for 2017/18), neither the company nor the recipient has to pay any National Insurance.
From the recipient’s perspective, to the extent that the salary is covered by their personal allowance (£11,500 for 2017/18), it is tax-free. Thereafter, it is taxed at the basic, higher or additional rates, as appropriate depending on the amount of the salary.
From the company’s perspective, both the salary and any employer’s National Insurance payable if the salary level is above the secondary threshold, are deductible in computing the profits for corporation tax purpose, generating a corporation tax saving of 19% (financial year 2017 rate).
Another benefit of paying a salary is that, unlike a dividend, it is not payable out of retained profits, and thus a salary can still be paid if the company is making a loss.
The optimal salary level will depend on circumstance. As a rule of thumb, where the personal allowance is not otherwise utilised, it is beneficial to pay a salary equal to the primary and secondary threshold for National Insurance purposes. For 2017/18, this equates to a salary of £680 per month. The salary will be free of tax and National Insurance in the hands of the recipient, the company will have no National Insurance to pay and the salary will be deductible for corporation tax purposes.
Paying a salary that is between the lower earnings limit for National Insurance purposes (£113 per week, £490 per month and £5,876 a year) and the primary threshold allows the recipient to earn a qualifying year for state pension and benefit purposes without actually having to pay any National Insurance. This is hugely beneficial if the recipient has no other means of earning a qualifying year and does not have the 35 years needed for the full single-tier state pension.
If the company is eligible for the employment allowance (set at £3,000 for 2017/18), and the recipient’s personal allowance is available in full, it can be beneficial paying a salary equal to the personal allowance, provided that there is sufficient employment allowance available to shelter an employer’s National Insurance liability that would otherwise arise. At a salary equal to the personal allowance, the employee would pay employee Class 1 contributions on the salary in excess of the primary threshold (£3,336 for 2017/18 (being £11,500 - £8,164)) – a National Insurance liability of £400.32 (£3,336 @ 12%). However, the additional salary (as for all salary payments) is deductible in computing the company’s profits for corporation tax purposes, so will generate a corporation tax saving of £633.84 (£3,336 @ 19%). The corporation tax saving outweighs the employee National Insurance cost by £233.52 – making it worthwhile to pay a salary equal to the personal allowance rather than the primary and secondary threshold. The same result is obtained if the employee/director is under 21 (or an apprentice under 25), regardless of whether the employment allowance is available, as no employer National Insurance is payable until the earnings exceed £866 per week (£3,750 per month, £45,000 per year).
Once the personal allowance has been used up, other profit extraction methods are generally more tax efficient, as the tax on the salary combined with the National Insurance cost (even if the employment allowance is available) will outweigh the corporation tax saving.
Tax-free allowances for trading and property income
New allowances were introduced from the 2017/18 tax year for trading and property income. The availability of these allowances means that those with low levels of trading or property income may not need to report this to HMRC.
The trading allowance is £1,000 for both the 2017/18 and 2018/19 tax years. If you have trading income of less than £1,000, you no longer need to report it to HMRC. This may be the case where a person sells items on eBay, or has a hobby-type business, such as cake making, DIY or crafts which generates only a small income.
Where the trading income is more than £1,000, the trader has the choice of either deducting the £1,000 allowance from income to arrive at the taxable profit, or computing profits in the usual way by deducting actual expenses. If actual expenses are less than £1,000, deducting the allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting the actual expenses will give a lower profit figure, and thus a lower tax bill.
If income is less than £1,000, but the individual makes a loss, they can elect for the allowance not to apply, calculate the loss in the usual way and include the details on their tax return. This will mean that benefit of the loss is not wasted. However, where the loss is small, the hassle of returning it on the tax return may be judged not to be worthwhile.
The property allowance is also set at £1,000 and works in much the same way as the trading allowance. It will benefit those who have a small amount of rental income, for example, from renting out their drive for parking during nearby sporting events.
However, the property allowance cannot be used as well as rent-a-room relief where a householder lets out one or more rooms in his or her home. Rent-a-room relief, which enables the householder to enjoy rental income of up to £7,500 tax-free, trumps the new allowance, but the new allowance can be claimed where rent-a-room relief is not available, i.e. where the let is not of a furnished room in the landlord’s home.
Juliet enjoys baking and makes cupcakes for parties. In 2017/18 she earns £653 from the sale of her cupcakes, more than covering her expenses.
As her trading income is less than £1,000, she does not need to report it to HMRC.
Robert collects sporting memorabilia. He sells items he does not want to keep on eBay. In 2017/18, his income from the sale of sporting memorabilia was £1826. His expenses were £791.
As his expenses are less than £1,000, it is beneficial for him to claim the trading allowance. His taxable profit is, therefore, £826 (£1,826 less the trading allowance of £1,000).
Cash basis for landlords
Since 6 April 2017, the cash basis has been the default basis for qualifying landlords running an unincorporated property business.
Cash basis v accruals basis - The cash basis is easier for a non-accountant to understand, as it simply takes account of money in and money out. Income is recognised when it is received, and expenditure is taken into account when it is paid.
By contrast, Generally Accepted Accounting Practice (GAAP) requires accounts to be prepared under the accruals basis. This matches income and expenditure to the accounting period to which it relates, recognising income when invoiced and expenditure when billed, and necessitating the need to take account of debtors, creditors, prepayments, and accruals.
Qualifying for the cash basis - The cash basis is only eligible to landlords operating an unincorporated property business who are able to answer `no’ to all the following questions:
If the landlord is able to answer `yes’ to any of the above, the accounts must continue to be prepared under the accruals basis.
Default basis –- election needed - Unlike traders, landlords do not need to elect to use the cash basis. If the answer to all five of the above questions is `no’, the cash basis applies by default. By contrast, an unincorporated landlord who is within the cash basis must elect if they wish to prepare accounts under the accruals basis.
Multiple businesses - The cash basis tests are applied separately to each unincorporated property business. There is no requirement that the same basis must be used for all businesses.
Moving to the cash basis - When entering the cash basis, opening debtors are not counted as income when the money is received, and opening creditors are not treated as expenditure when paid. Likewise, if the landlord moves back to the accruals basis, some adjustments are needed to prevent double counting as a result of the timing differences between the bases.
Capital expenditure - The rules for deducting capital expenditure under the cash basis have also been simplified, and in most cases, the landlord can simply deduct the amount of capital expenditure from income when working out profits. Certain assets do not qualify for this treatment – the list includes land, cars, non-depreciating assets, and capital expenditure on education and training.
The usual rules for the replacement of domestic appliances apply equally under the cash basis.
Mileage allowances - Landlords using a car or other vehicle in their property business can claim a fixed deduction based on mileage, as long as capital allowances have not been claimed for the vehicle or, for a vehicle other than a car, the cost has been deducted under the new capital expenditure rules. The usual rate of 45p per mile for cars and vans for the first 10,000 business miles and 25p per mile thereafter, and 24p per mile for motorcycles, is applicable.
Interest - The normal rules governing deduction of interest apply equally under the cash basis.
Working out your dividend tax bill
Dividends are a special case when it comes to tax and have their own rates and rules. The taxation of dividends was radically reformed from 6 April 2016 and the rules outlined below apply to a dividend paid on or after that date.
The first step to working out tax on dividend income is to determine the amount of that income. From 6 April 2016, this is simply the dividends actually received in the tax year. There is no longer any need to gross up as dividends no longer come with an associated tax credit.
The first £5,000 of dividend income is tax-free. All individuals, regardless of whether they are a non-taxpayer, a basic rate taxpayer, a higher rate taxpayer, or an additional rate taxpayer, are entitled to a dividend allowance of £5,000.
Although referred to as an allowance, the dividend allowance works as a nil rate band in that dividends falling within the allowance are taxed at a notional zero rate (so received tax-free). However, it counts as earnings and will use up part of the basic or higher rate band, as applicable.
The Government plans to reduce this allowance to £2,000 from 6 April 2018.
Rate of tax
Once the dividend allowance has been used up, the rate at which dividends are taxed depends on the tax band in which they fall. If the individual has some or all of his or her personal allowance available, this can be set against dividend income before any tax is payable. Where the taxpayer has other sources of income, dividends are treated as the top slice. It is important to remember this to ensure that dividends are taxed at the correct rate.
Dividends are taxed at the dividend rates of tax, rather than the standard income tax rates. For 2017/18, dividend tax rates are as follows:
The dividend ordinary rate applies to dividend income falling within the basic rate band, which for 2017/18 is the first £33,500 of taxable income. This applies to Scottish taxpayers too, rather than the Scottish basic rate band.
The dividend higher rate applies where taxable dividend income sits in the band between £45,001 and £150,000 and the dividend higher rate applies where dividend income falls in the additional rate band (taxable income above £150,000).
In 2017/18, Fiona receives dividend income of £55,000. She also receives a salary of £8,000 from her family company. The tax payable on her dividends is worked out as follows:
Thus, Fiona must pay tax of £7,987.50 on her dividend of £55,000 ((£5,000 @ 0%) + (£3,500 @ 0%) + (£28,500 @ 7.5%) + (£18,000 @ 32.5%)).
Paying dividends – are they properly declared
For many personal and family companies, the most tax-efficient way to extract profits is to pay a small salary and to take anything in excess of this as a dividend. However, in order to benefit from the more favourable tax rates and lack of National Insurance attached to dividends, the dividend must be properly declared.
What does this mean?
Sufficient retained profits
The first point to note is that dividends are paid from retained profits. These are profits after tax which have not already been distributed. Dividends come out of retained profits and the retained profits must be sufficient to cover the full amount of the dividend.
If a dividend is paid when the company lacks sufficient retained profits to pay that dividend, it is an unlawful distribution and must be repaid.
Paid in proportion to shareholdings
Dividends must be paid in relation to shareholdings. So, if there are one hundred shares and a dividend of £5 per share is paid, a shareholder with 20 shares must receive £100 (20 x £5), a shareholder with 40 shares must receive £200 (40 x £5), and so on. It is not possible to tailor the payment to the shareholders so they receive a different amount per share. If it is desirable to pay dividends at different rates to different shareholders, an alphabet share structure should be employed.
The directors can declare an interim dividend. They must, however, consider the financial health of the company and ensure that the company has sufficient retained profits from which to pay the dividend. The decision to pay a dividend should be minuted.
A final dividend is recommended by the directors but must be approved by the shareholders in general meeting or by written resolution. They are normally paid at the end of the year. The resolution should be signed by the shareholders.
A dividend voucher should be given to shareholders each time a dividend is paid. This is effectively a receipt. The dividend voucher should show the name and registered address of the company, the name and address of the shareholder, the description of the shares, such as ordinary shares, the number of shares owned at the time the dividend was declared, the amount of the dividend paid, and the date. The voucher should be signed.
Getting it wrong
The cost of getting it wrong can be high. Unless a dividend is properly declared, it is not a dividend and HMRC may seek to tax it as a salary payment instead – with the associated National Insurance and higher rates of tax. At best, it would be regarded as a loan to the director/shareholder, which would have to be repaid and may trigger a section 455 charge and a benefit in kind charge on the loan.
Is the VAT flat rate scheme for me?
The VAT flat rate scheme (FRS) is a simplified VAT scheme that enables VAT registered business to work out how much VAT they need to pay over to HMRC by applying a flat-rate percentage to their VAT-inclusive turnover. However, VAT cannot be reclaimed on purchases (with an exception for certain capital assets over £2,000). The flat rate percentage depends on the business sector in which they operate, and also whether they are classed as a `limited cost business’ and has an `allowance’ built in for VAT on purchases.
Who can join the FRS? - A trader wishing to join the FRS must have VAT-exclusive turnover of £150,000 or less. An application to join the scheme can be made online, or by post (on form VAT600 FRS). Once in the scheme, a trader can remain in it unless, on the anniversary of joining, their turnover was £230,000 or more in the last 12 months, or is expected to be in the next 12 months. A trader must also leave the FRS if they expect their total income in the next 30 days to top £230,000.
What is the flat rate percentage? - The flat rate percentage depends on the sector in which the business operates. The percentages are available on the Gov.uk website. A discount of 1% is given for the first year that the trader is in the scheme.
Where the trader is a limited cost business, the flat rate percentage is 16.5%.
What is a limited cost business? - A limited cost business is one where the ‘spend’ on `relevant goods’ is either:
• less than 2% of the VAT flat rate turnover; or
• more than 2% of VAT flat rate turnover but less than £1,000 a year.
If the period is less than one year, the £1,000 threshold is proportionately reduced (so £250 per quarter).
What counts as ‘relevant goods’ is set out in VAT Notice 733. It includes things like stationery, gas and electricity used in the business, stock, food used in meals sold to customers, fuel used by a taxi business and suchlike. It does not include services, such as accountancy and legal fees, downloadable software, rent, postage, and fuel other than where the business is in the transport sector.
Working out the VAT to pay - One of the main advantages of the FRS is that working out the VAT to pay to HMRC is easy. It is simply a case of multiplying the VAT-inclusive turnover for the quarter by the flat-rate percentage for the business sector.
Example - Paul runs a toy shop and has done for a number of years. For a particular VAT quarter, his VAT-inclusive turnover is £22,000. His flat rate percentage for his sector is 7.5% (retail not listed elsewhere). He is not a limited cost business.
For the VAT quarter he must pay VAT of £1,650 over to HMRC (£22,000 @ 7.5%).
Advantages - The main advantage is one of simplicity. The trader does not need to keep a record of VAT on purchases. The 1% discount in the first year may generate a welcome bonus.
Disadvantages - It may be more costly being in the scheme, particularly for limited cost businesses, who get virtually no relief for any VAT they incur. The flat rate percentage for a limited cost business is 16.5% of VAT-inclusive turnover, which is equivalent to 19.8% of VAT-exclusive turnover; consequently a limited cost business pays over virtually all the VAT charged to customers to HMRC.
Is it for me? - To decide whether the VAT FRS is for you compare what you will pay under the scheme with that payable under normal rules, and factor in the added convenience of the scheme. Then weigh it up.
Claim a deduction for work clothing
Many employees are required to wear a uniform for work. Even where there is no set uniform as such, many employees have clothes that they wear only to work and regard as ‘work clothes’.
So, to what extent, if any, are employees able to claim a deduction for work clothes? And, on the other side of the coin, is there a tax liability if the employee is provided with a uniform or protective clothing by their employer?
General rule for deductibility of expenses
As a general rule, a deduction is only available for employment expenses that are wholly, exclusively and necessarily incurred in the performance of the duties of the employment.
This is a hard test to meet, and one which, due to duality of purpose, clothing will fail. Even if an employee wears certain clothes for work, the clothes also provide ‘warmth and decency’.
Consequently, while an employee may be required to wear a suit and tie to work and only wears it for work, they have to wear something. Their job dictates the nature of what they wear, but as the clothing also provides warmth and decency the cost is not wholly and exclusively incurred, and as such no deduction will be permitted.
Specific industries: deduction for laundry costs, etc.
Although an employee cannot claim a general deduction for ‘work clothing’, if they work in certain industries for which a uniform of protective clothing is required, they may be able to get a fixed rate deduction for the repair and maintenance of work equipment, which includes special clothing.
The permissible fixed rate deductions are set out in a table which can be found in HMRC’s Employment Income Manual at EIM32712. For example, uniformed prison officers are allowed an annual deduction of £80. It should be noted that the same rates have applied since 2008/09.
Where the employee is required to wear a particular uniform, often featuring the employer’s logo, this may be provided by the employer for the employee to wear.
Where an employer provides a uniform or protective clothing to an employee for them to wear at work, generally, there is no tax liability for the employee, and nothing to report to HMRC. In this context, a ‘uniform’ is a set of clothing of a specialised nature which is recognisable as a uniform and which is intended to identify its wearer as having a particular occupation, for example, a nurse’s uniform or fire service uniform.
By contrast, providing employees with ordinary clothes that are the same but have no identifying feature, such as black trousers and a green shirt, does not satisfy the definition of a uniform, and as such would not be exempt from tax. However, permanently fixing a corporate badge or logo to an otherwise ordinary item of clothing may be sufficient to make it a ‘uniform’.
Employer-provided protective clothing is also exempt. This is genuinely protective clothing worn as a physical necessity because of the nature of the job. Examples may include overalls, boots and protective gloves.
Where the employer provides ‘ordinary’ clothes, this will trigger a taxable benefit, even if they are designed to confer a sense of corporate identity. A tax charge will also arise if uniforms or protective clothing are provided under a salary sacrifice arrangement.
Letting out your holiday home
If you have a holiday home and decide to let it out, you may be able to benefit from the slightly more generous tax rules that apply to furnished holiday lettings as compared to other types of let, such as a residential let.
To qualify as a furnished holiday let, the property must be furnished and must be in the UK or the EEA. It must also be let on a commercial basis and pass all three occupancy tests.
Test 1 – pattern of occupation
Test 1 is not met if the total of all lettings that exceed 31 continuous days is more than 155 days in the year. So, for example, if there are lets of 63 days, 32 days, 35 days and 34 days (totalling 164 days), the test is not met and the property is not a furnished holiday letting. A normal holiday letting pattern of one or two week lets will pass the test.
Test 2 – availability conditions
The property must be available for letting for at least 210 days in the tax year. Days when the landlord stays in the property do not count.
Test 3 – the letting condition
The property is let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days do not count (unless the let is extended beyond 31 days for unforeseen circumstances, such as the holidaymaker falling ill).
Second bite at the cherry
As far as test 3 is concerned, it may still be possible for the let to qualify as a furnished holiday letting even if it is not let for 105 days in the tax year by using the following elections:
an averaging election; or
a period of grace election.
Both elections can be used to help a property qualify as a furnished holiday let.
This is useful where the landlord has more than one holiday let – the election allows test 3 to be met if, on average, the properties are let for at least 105 days in the tax year.
So, if a landlord has three holiday cottages which are let, respectively, for 150 days, 98 days and 127 days in the tax year, on average, the properties are let for 125 days in the tax year (375 divided by 3) and test 3 is met. If the test is applied to each cottage individually, the one let for 98 days would not qualify – by making an averaging election, all properties qualify.
Period of grace election
A period of grace election can be made where there was a genuine intention to meet the letting condition, but this did not materialise. The election can be made initially where the letting condition was met in the previous tax year. A further period of grace election can be made the following year if the letting condition is again not met. However, if the letting condition is not met the following year, the property no longer qualifies as a furnished holiday let.
Qualifying as a furnished holiday let has a number of benefits:
But, remember, furnished holiday lets form a separate property business and the profits must be worked out separately from other types of let.
Help to Save
The Help to Save scheme is a Government initiative which is designed to encourage those on low incomes to save. A carrot is provided in the form of a tax-free bonus, which could add up to £1,200 over four years.
Who can benefit?
The Help to Save scheme is only open to those meeting the eligibility criteria. Savers will qualify if they are a UK resident and entitled to Working Tax Credit and receiving Working Tax Credit or Child Tax Credit Payments, or claiming Universal Credit and have household or individual income of at least £542.88 for their last monthly assessment period. The scheme is also open to Crown servants and their spouse or civil partner, and members of the British Armed Forces and their spouse or civil partner if they meet these criteria, but live abroad.
Nature of the scheme
Under the Help to Save scheme savers are able to save up to £50 each month. At the end of two years, the saver will receive a government bonus based on the highest balance achieved of 50% of the amount saved. Savers who carry on saving will receive a further bonus after another two years, of 50% of their additional savings in that period. The maximum bonus is £1,200 payable to someone who saves £50 per month for four years.
Savings can be made in an online account available through Gov.uk.
Tim is eligible for a Help to Save scheme, which he opens on 1 November 2018. He saves £50 into the scheme. On 31 October 2020, he has £1,200 in his account. He receives a tax-free bonus of £600 (being 50% of this amount). Tim continues to save £50 per month for a further two years, saving an additional £1,200 in this period. On 31 October 2022 he receives a further bonus of £600 (being 50% of his savings in the two-year period from 1 November 2020 to 31 October 2022). At the end of the four-year period, the balance on his account is £3,600 (plus any interest earned on the account).
This comprises £2,400 saved by Tim (£50 per month for 48 months) and tax-free bonuses of £1,200 (£600 in 2020 and £600 in 2022).
A trial for the scheme started in January 2018 and the intention is that it will be available generally to eligible savers from October 2018.
Making the most of the trivial benefits exemption
A new tax exemption was introduced with effect from 6 April 2016 which enables employees to enjoy ‘trivial’ benefits tax-free. As is usually the case, availability of the exemption depends on certain conditions being met.
The conditions - for the exemption to apply, all of the following conditions must be satisfied.
Where the benefit is provided to a group of employees and it is impracticable to work out the exact cost per person, the £50 ceiling is taken as met if the average cost is not more than £50.
Close companies – annual cap
A limit is placed on the value of tax-free trivial benefits that can be enjoyed each year by the director or other office holder of a close company. Where the employer is a close company, an annual cap – known as the annual exempt amount – applies. This is set at £300 for each tax year. The cap applies to benefits provided to a director or office holder. Where a benefit is provided to a member of their family or household, this is treated as being provided to the director or office holder and counts towards their annual exempt amount.
It should be noted that the other conditions set out above apply equally to close companies; and thus, only benefits costing not more than £50 per head which are not cash or cash vouchers can be exempt, as long as they fall within the annual exempt amount.
Where a company is not close, there is no limit on the total value of trivial benefits that can be provided each year, as long as each individual benefit costs no more than £50 and the other qualifying conditions are met.
Using the exemption
The exemption can be used to provide employees with regular or one-off treats. For example, birthday and Christmas gifts (up to the £50 limit) can be provided tax-free.
Julie’s employer (which is not a close company) believes in treating staff well to keep them on side. Staff are provided with a fruit basket each Friday. The basket costs £25. Staff receive 50 fruit baskets each year. The total cost is £1,250. As the terms of the exemption are met, the benefit is tax-free.
As the company is not close, the annual cap of £300 does not apply.
Jenny is the director of her personal company, which is close. She is aware of the trivial benefit exemption and uses it to buy herself an item of clothing costing just under £50 every other month. Each item is within the £50 limit and the total annual amount is within the £300 annual exempt amount applying to close company directors. She can enjoy the benefits tax-free, while her company enjoys a corporation tax deduction for their cost.
Use the exemption
While the exemption only covers low-cost items, it can be used to provide employees with regular treats. The costs of providing the benefits is tax-deductible for the employer.
Tax-free rental income of £8,500
By making the most of the rent-a-room relief and the £1,000 property income allowances, it is possible to receive tax-free rental income in 2018/19 of £8,500 (while utilising your personal allowance elsewhere).
Rent-a-room relief is available where you let a room to a lodger or lodgers in your own home. The home does not have to be owned – the relief is also available where you rent a property.
Under the scheme, rental income is tax-free up to £7,500. Where two or more people are entitled to the rental income, the rent-a-room limit is halved, so each person can receive up to £3,750 tax-free.
Where the rental income from letting rooms to lodgers in your house exceeds £7,500 you have a choice. You can either deduct £7,500 from the total rental income and pay tax on the balance or you can work out the actual profit in the usual way. If you make a loss, it is better not to claim rent-a-room relief as you will lose the benefit of the loss.
From 6 April 2017, a new property allowance is available for all types of rental income. Where the rental income is less than £1,000, it does not need to be declared to HMRC. Where it is more than £1,000, as with rent-a-room you have the choice of paying tax on the extra above £1,000 or working out the rental profit in the same way.
No double relief
It is not possible to claim both rent-a-room relief and the property allowance if you let a room to a lodger in your own home, so you must choose. As the rent-a-room threshold is higher, this is the one to pick.
Other sources of rental income
But, if you have another source of rental income as well, for example, a property you let out or if you rent out your drive, you can claim the property allowance in addition to rent-a-room relief.
Paula works as an administrative assistant and earns £20,000 in 2017/18. To make some extra money, she lets out a spare room in her house to a lodger and receives rental income of £8,000 in 2017/18. As she lives near a popular sporting venue, she also lets out her drive when there are major sporting events on. In 2017/18, she receives income of £1,250 from that source.
She claims rent-a-room relief in relation to the income from her lodger, receiving £7,500 tax-free and paying tax on the remaining £500. She also claims the property allowance to set against the rental income from letting out her driveway, receiving £1,000 tax-free and paying tax on the balance of £250. Her personal allowance is set against her salary.
By using both allowances, she is able to enjoy a tax-free rental income of £8,500 tax-free.
Correcting VAT errors
Making a mistake in your VAT return is easily done. Maybe you missed something out accidentally or added up some figures wrongly. However, should this happen and you discover that you have made a mistake in a return which you have already filed, don’t panic – it is easy to put things right. Providing the errors meet certain conditions, you do not need to tell HMRC about them – you can simply correct them by adjusting your next VAT return.
You can adjust your current VAT return to correct errors on past returns as long as the errors:
The reporting threshold, which applies to net errors, is £10,000. Net errors that are not more than £10,000 (and which satisfy the other adjustment conditions) can be corrected by adjusting the next VAT return. Errors of more than £10,000 (up to a maximum of £50,000) can also be adjusted via the next VAT return if the error is not more than 1% of the box 6 figure (total value of sales and all other outputs excluding any VAT).
Errors that exceed the reporting threshold must be reported to HMRC. They cannot be corrected by adjusting the next return.
Making the adjustment
Making the adjustment is simple – you just need to:
You must also keep details of the nature of the error and the date that it occurred. Your own VAT must also be corrected.
Richard is a landscape gardener. He is VAT registered and submits returns quarterly. In December 2017, he discovers when preparing his year-end accounts that he has recorded a purchase invoice for £2,400 plus VAT twice, once in January 2017 and once in February 2017. As a result, he has over-claimed VAT of £480 in the quarter to 28 February 2017. At the time that the error is discovered, his next VAT is the quarter to 28 February 2018. As the error was not deliberate, within the last four years and within the reporting threshold, he can correct it in that return. Before adjusting for the error, the box 1 figure for the period (VAT due for the period on sales and other outputs) was £5,360. He needs to increase the box 1 figure by £480 to pay back the amount reclaimed in the earlier return in error. His adjusted box 1 figure is therefore £5,840 (£5,360 + £480).
Not all errors can be corrected by adjusting the VAT return. Errors which are above the reporting threshold, made more than four years ago or which are deliberate need to be notified to HMRC. This can be done by notifying HMRC’s VAT error correction team (see www.gov.uk/government/organisations/hm-revenue-customs/contact/vat-correct-errors-on-your-vat-return for contact details), either on form VAT652 (see www.gov.uk/government/publications/vat-notification-of-errors-in-vat-returns-vat-652) or by letter.
Where the error arose as a result of careless or dishonest behaviour, interest or penalties may be charged.
Paying expenses – what can you ignore for tax purposes?
Employees often incur expenses when doing their job. For example, an employee may be required to attend a meeting with a client or supplier and may incur travel expenses and possibly subsistence expenses in doing so. The employee will often incur the expense in the first instance and reclaim the amount from their employer, in accordance with the employer’s expenses policy.
Where an employer meets or reimburses expenses incurred by an employee, what are the tax implications and what, if anything, needs to be reported to HMRC?
Exemption not dispensation
It is no longer necessary to consider whether a dispensation is in force – an exemption for qualifying paid and reimbursed expenses replaced the dispensation regime from 6 April 2016 onwards. This makes life easier – if the item would be deductible if the employee incurred the expense him or herself, the exemption applies and the payment or reimbursement of the expenses can simply be ignored for tax purposes – there is no need to tell HMRC about it and no tax to pay.
The general rule governing whether an expense is deductible applies and to qualify the employee must be obliged to incur the expense and it must be incurred wholly, exclusively and necessarily in the performance of their duties. Separate tests apply for travel expenses – with deductions for travel in the performance of the duties and necessary attendance, subject to the exclusion for home to work travel (`ordinary commuting’) and more generous rules for short-term postings of less than 24 months. Specific deductions are allowed for fees and subscriptions (paid to qualifying bodies on HMRC’s List 3), and also for employee liabilities and indemnities and associated insurance.
In practice, this means that if an employee is required to travel to meet with a customer in another part of the country and in doing so incurs bus, train and taxi fees, which he or she reclaims from the employer, the employer and employee can ignore the reimbursement for tax purposes and do not need to tell HMRC.
To simplify matters, the employer may pay scale rate expenses rather than reimburse the actual costs incurred by the employee. As long as the employer pays expenses at the statutory rate, there is no tax to pay and the expenses do not need to be reported to HMRC. Where an employee is covered by a Working Rule Agreement under which specific rates are set for particular occupations, the rates set out in the agreement can be paid tax-free. The employer can also agree bespoke rates with HMRC, which can be paid tax-free.
Many employers use their own cars for work and claim a mileage allowance from their employer. As long as the amount paid does not exceed the tax-free amount under the Approved Mileage Allowance Payments Scheme, the mileage payments are tax-free and do not need to be reported to HMRC. The tax-free rates are 45p per mile for the first 10,000 business miles and 25p per mile thereafter for cars and vans, and 24p per mile for motorcycles.
Beware salary sacrifice
As with most exemptions, the exemption for paid and reimbursed expenses does not apply where the expenses are met under a salary sacrifice arrangement.
Where the amount paid by the employer covers both deductible and non-deductible expenses, it is necessary to split the payment and report the non-deductible (non-qualifying) element to HMRC.
Tax-free parties – how to exceed the £150 per head limit
The tax system contains a limited exemption for Christmas parties and other annual functions, under which employees can enjoy an employer-provided annual function tax-free as long as the cost per head is not more than £150. However, by combining this exemption with that for trivial benefits, it is possible to exceed the £150 per head limit without triggering a tax.
Exemption for annual parties and functions
The first exemption to consider is that for an annual party or function. For the exemption to apply, the party or function must be available to employees generally or, where the employer operates from more than one location, to employees generally at one location. The exemption applies to an annual event rather than a one-off event, so a Christmas party or summer barbecue held every year would qualify, but an 10th anniversary party would not.
If the employer only provides one function, the exemption applies if the cost per head is not more than £150. If this figure is exceeded, the whole amount is taxable, not just the excess over £150.
Where two or more functions are provided in the tax year, the aggregate cost cannot exceed £150 per head. The £150 per head limit can be used to cover two or more functions as long as the whole cost of the function falls within the limit – the £150 limit is an exemption not a tax-free allowance. Where there are two or more contenders for the exemption, it can be used to best effect.
A company hosts three annual functions each year costing £80 per head, £60 per head and £40 per head, the £150 limit can be best used to cover the £80 per head and £60 per head functions (a total cost of £140 per head). The remainder of the exemption of £10 per head is not sufficient to cover the remaining function costing £40 per head; consequently the whole of this amount falls outside the exemption.
Benefits are exempt under the trivial benefits exemption as long as the cost of providing them is not more than £50. Where the recipient is a director or office holder in a close company, tax-free trivial benefits are capped at £300 per tax year; otherwise there is no overall annual limit.
Mix and match
By combining the exemptions for annual parties and that for trivial benefits, it is possible for employees to enjoy tax-free functions costing more than £150 per head.
Assume the facts as in example 1 above. However, by bringing the trivial benefits exemption into the mix, it is possible for employees to enjoy the £40 per head tax-free as well. Consequently the employees can enjoy functions costing a total of £180 per head tax-free.
The trivial benefits exemption can also be used for one-off functions (which are outside the annual party exemption) tax-free, as long as the cost per employee is not more than £50.
Parents with children under the age of 12 can now take advantage of the Government’s tax-free childcare scheme and open an account online and receive a tax-free Government top-up. The scheme was originally launched last April for under twos and access has gradually been widened. It was extended to children under 9 in January and to children under 12 from 14 February 2018.
How does it work?
Parents can open an account online into which they can deposit money. They can then use it to pay their childcare costs for a child under 12 or a disabled child under 17. For every £8 deposited in the account, the Government adds a tax-free top up of £2. The maximum tax-free top-up that can be received each tax year is £2,000 per child (or £4,000 where the child is disabled).
To be eligible to open an account, the parent and his or her partner (if they have one) must be over 21 and expect to earn on average £120 per week. The earnings condition does not apply in the first year of self-employment. This is equivalent to 16 hours at the National Living Wage. The scheme is open to the self-employed, as well as to employees. However, if either the parent or their partner earns more than £100,000, they are not eligible for the help.
Parents may still qualify for tax-free childcare if they are not working because they are on maternity, paternity, or adoption leave, or if they are not able to work because they are disabled or have caring responsibilities and receive carers’ allowance, employment and support allowance, incapacity benefit or severe disablement benefit.
The top-up is only available to fund childcare for an eligible child. This is a child who is under 12, or under 17 if disabled, who usually lives with the applicant.
The money in the account can be used to pay for a range of regulated childcare, such as nurseries, childminders, after-school clubs, and holiday clubs. However, it cannot be used to pay for unregulated childcare, such as that provided by a relative.
But a word of caution – the money in the account can only be used to pay a childcare provider if the provider is signed up to the Tax-Free Childcare scheme. This is something to check with your provider.
Rebecca and her husband Joe both work and both earn more than £120 per week. Neither earns more than £100,000. They have two children aged 2 and 4, who attend a nursery. The nursery is regulated and signed up to tax-free childcare.
Rebecca opens a tax-free childcare account online. She makes regular deposits into the account totalling £16,000 a year. She qualifies for the maximum top up of £2,000 per child – a total tax-free top-up of £4,000. She is able to use the account to pay her nursery fees.
Interaction with other forms of help
A person cannot benefit from tax-free childcare at the same time as receiving childcare vouchers or support with childcare costs from their employer. Where a person is in an employer scheme, they can choose whether to remain in that scheme or leave the scheme and sign up for a tax-free childcare account instead.
Tax-free childcare is available if the parent receives tax credits for childcare or universal credit for childcare. However, it can be used in conjunction with the 15 hours free childcare and 30 hours free childcare schemes.
Where a person is eligible for more than one form of help with childcare costs, they should crunch the numbers to see which option is best for them.
Tax-free income from renting out your drive
Your drive may not normally warrant a lot of attention— however, it may have the potential to generate a tax-free income. Parking near to town centres and stations is always limited, and parking is always needed for events. Owning a drive, field or land that can be utilised for parking provides the opportunity to earn some money; even better, it may be tax-free.
£1,000 property allowance
Two new allowances – each set at £1,000 – were introduced from 6 April 2017, one for trading income and one for property income. The allowances are available in addition to the personal allowance.
As far as the property allowance is concerned, if income from property is £1,000 or less in the tax year, there is no tax to pay and there is no need to tell HMRC about it. All very easy!
Gill lives near a park. During the summer, a number of events are held in the park, including open air concerts, sporting events, fayres and suchlike. Gill has a large drive which has parking for four cars. She provides parking during the summer for people attending events in the park, charging £10 per car.
During the 2018/19 tax year, Gill earns £420 from parking. She works full-time as a veterinary nurse and her personal allowance is fully used up against her wages. She has no other income from property or elsewhere.
As the income from letting out her drive is less than £1,000, the whole amount is tax-free and does not need to be reported to HMRC.
Note: If Gill had made a loss, it would have been beneficial not to claim the allowance, so the loss could be carried forward for offset against any future property income.
Property income of more than the allowance
Where property income exceeds £1,000 in the tax year, the taxpayer has two choices:
deduct the £1,000 allowance from the receipts and pay tax on the excess; or
work out the profit or loss in the normal way.
The most beneficial option will depend on the level of the expenses.
If receipts exceed expenses, but expenses are less than £1,000, the best result is to claim the property allowance and pay tax to the extent that income exceeds £1,000. If expenses are more than £1,000, the best result will be obtained by working out the profit in the usual way, deducting allowable expenses from receipts.
Richard owns a field near a stately home which he makes available to provide overflow parking for events at the stately home. In 2018/19, he earns £4,800 from parking receipts, and incurs expenses of £860.
If he calculates his profit in the usual way, his taxable profit is £3,940 (£4,800 - £860). However, if he claims the property allowance, his taxable profit falls to £3,800 (£4,800 - £1,000). Claiming the allowance is therefore beneficial.
Taxation of Savings – what can you have tax-free?
There is no one answer to the amount of savings income and, for 2017/18, the answer can range from £0 to £18,650, depending on personal circumstance.
When looking at tax-free savings, there are a number of elements to take into account:
Savings income, such as bank and building society interest, is now paid gross without tax deducted.
Personal allowance - If a person has no other income (or only dividend income in addition to savings income), or their other income is less than £11,500, some or all of the personal allowance (set at £11,500 for 2017/18) will be available to shelter savings income.
Marriage allowance - Where the marriage allowance is claimed, this increases the potential tax-free income by £1,150 in 2017/18.
Savings allowance - In addition to the personal allowance, individuals who pay tax at the basic or higher rate are also entitled to a savings allowance. The amount of the allowance depends on the individual’s marginal rate of tax and is set at £1,000 a year for basic rate taxpayers and at £500 a year for higher rate taxpayers. There is no savings allowance for additional rate taxpayers.
Savings starting rate - Savers with little in the way of other taxable income can also benefit from a 0% savings starting rate on savings of up to £5,000, in addition to savings sheltered by the personal and savings allowance. However, the savings starting rate is quite complicated in that the starting rate limit is reduced by taxable non-savings income. So, if a person has taxable non-savings income of £2,000, the savings starting rate of 0% is available on savings income of £3,000, as the £5,000 limit is reduced by the taxable non-savings income of £2,000 to £3,000. Likewise, if a person has taxable non-savings income of more than £5,000, the savings starting rate limit is reduced to nil.
Case study 1: maximum tax-free savings - Elsie is retired and her only income is savings income, which in 2017/18 is £20,000. Her husband has income of £8,000 and Elsie benefits from the marriage allowance of £1,150. The first £11,500 of her savings income is covered by her personal allowance of £11,500 and the next £1,150 by the marriage allowance, leaving £7,350, of which £1,000 is covered by the personal savings allowance for basic rate taxpayers. This leaves savings income of £6,350. As she has no taxable non-savings income, she is entitled to the savings starting rate of 0% on savings equal to the saving starting rate limit of £5,000. Consequently, she is able to enjoy £18,650 (£11,500 + £1,150 + £1,000 + £5,000) of her savings tax-free and is taxed at the basic rate of 20% on her remaining savings of £1,350 – giving her a tax bill of £270.
Case study 2: reduced starting rate limit - In 2017/18, Arthur has a pension of £14,000 and savings income of £6,000. His personal allowance is set against his pension, leaving him with taxable non-savings income of £2,500. He is entitled to the saving personal allowance of £1,000, which is set against £1,000 of his savings income. As he has taxable non-savings income of less than £5,000, the savings starting rate is reduced by his taxable non-savings income of £2,500 to £2,500. £2,500 of his savings income is eligible for the 0% savings starting rate. He, therefore, receives savings income of £3,500 tax-free. The remaining £2,500 of his savings income is taxed at 20%, as is the excess of his pension over his personal allowance of £2,500. His tax bill for £2017/18 is, therefore, £1,000 (£5,000 @ 20%).
Case study 3: higher rate taxpayer - Wendy has a salary of £50,000 and savings income of £5,000 in 2017/18. Her personal allowance is set against her salary. She is entitled to the personal savings allowance of £500 available to higher rate taxpayers, but she is not eligible for the savings starting rate as her taxable non-savings income (£38,500, being £50,000 - £11,500) is more than £5,000. She receives tax-free savings income of £500.
As the case studies show, the amount of savings income a person may receive can vary considerably depending on what other income they have and the rate at which they pay tax.
Extracting profits as dividends
Dividends provide an opportunity to extract profits in a tax-efficient manner. As a rule of thumb, it is generally tax-effective to take a salary equal to the primary and secondary threshold for National Insurance purposes or the personal allowance (set at £11,850 for 2018/19), depending on whether the employment allowance is available (or the recipient is under 21). Thereafter, it is tax efficient, where possible, to extract any further profits as dividends.
However, it is not as straightforward as deciding to pay a dividend rather than a salary and certain boxes must be ticked.
In order to pay a dividend:
Dividend rather than salary
Once the optimal salary has been paid, the tax hit on dividends is less than on salary. This is predominantly due to the fact that dividends do not attract National Insurance contributions, whereas a salary will attract employee’s and employer’s National Insurance contributions. Dividends are also taxed at a lower rate of tax than salary payments, and benefit from a tax-free dividend allowance. On the downside, dividends are paid from post-tax profits which have suffered a corporation tax deduction (at 19% for the financial year 2017 and 2018). Even allowing for that, the tax taken from paying dividends is lower.
All taxpayers, regardless of the rate at which they pay tax, are entitled to a dividend allowance. The allowance is £2,000 for 2018/19; reduced from £5,000 for 2016/17 and 2017/18.
The allowance is not an allowance as such, but rather a nil rate band which uses up part of the band in which it falls. Dividends, taxed as the top slice of income, are taxed at a zero rate to the extent that they are covered by the allowance.
Dividend tax rates
The dividend tax rates are lower than the usual income tax rates. Dividends are taxed at 7.5% to the extent that they fall within the basic rate band, 32.5% to the extent that they fall within the higher rate band and 38.1% to the extent that they fall within the additional rate band.
VAT capital goods scheme
The VAT capital goods scheme affects input tax recovery in relation to high value capital assets by partially exempt traders and businesses where assets are used for both business and non-business purposes. The scheme aims to correct the amount of VAT recovered when the use of the asset in later years varies from that in the year of purchase, so over the adjustment period the VAT recovered reflects the actual use of the asset over that period.
The scheme does not apply to assets acquired for resale or any used for non-business purposes.
Assets included in the capital goods scheme - the capital goods scheme applies to:
• land, buildings and civil engineering work;
• computers and computer equipment;
• aircraft, ships, boats and other vessels.
Land, buildings and civil engineering work - the capital goods scheme must apply where expenditure of at least £250,000 (excluding VAT) has been incurred on:
• buying land, a building or part of a building, or civil engineering work;
• constructing a building or civil engineering work;
• refurbishing, fitting out, altering or extending a building or civil engineering work (such as roads, bridges, installation of pipes for connecting mains services, etc).
Computer and computer equipment - as far as computers and computer equipment are concerned, the capital goods scheme only applies to individual items costing at least £50,000 (excluding VAT); VAT on smaller items can be reclaimed in the usual way. For example, a network costing more than £50,000 would not be within the scheme if the cost of each individual item is less than £50,000. Likewise, the scheme does not apply to computerised equipment, even if it cost more than £50,000.
Aircraft, ships, boats and other vessels - the capital goods scheme applies where more than £50,000 (excluding VAT) is spent on purchasing, constructing, refurbishing, fitting out, altering or extending an aircraft, ship, boat or other vessel.
Adjustments under the scheme - the VAT that can be reclaimed depends on the extent to which the asset is used over the adjustment period. The adjustment period is made up of ‘intervals’. The number of intervals depends on the type of asset, as follows:
• computers: 5 intervals;
• ships and aircraft: 5 intervals;
• all other capital items: 10 intervals.
The first interval starts on the day on which the asset is first used and ends on the day before the start of the next partial exemption tax year. Subsequent intervals are normally in line with the partial exemption tax year.
The input tax is recovered in the first interval in the normal way. An annual adjustment is needed for subsequent intervals if the extent to which the asset is used in making taxable supplies is different to that in the first interval.
To calculate the adjustment required, it is necessary to determine the baseline recovery percentage (BRP). This is the deductible percentage of the input tax as a percentage of the total VAT on the asset. In later years, the recovery is adjusted for any changes in the partial exemption recovery percentage. VAT Notice 706/2 explains the adjustment calculation in detail.
Adjustment returns - the adjustments are made annually on the second return following the partial exemption year end to which the adjustment relates.
Paying family members
Many small businesses, whether incorporated or not, pay family members for working for the business. However, as a recent case shows, it is easy to make mistakes which can prove costly.
The case in question, Nicholson v HMRC (TC06293), concerned the payment of wages by a sole trader to his son while at university. Mr Nicholson was a central heating salesman, who was trying to build up an internet business. His son had worked for his father for many years, and when he went away to university, he continued to work for his father, ‘promoting the business through internet and leaflet distribution and computer work’.
He was paid at the rate of £10 per hour for 15 hours’ work a week. However, there was no evidence to support the payment of wages on this basis and payments were made partly in cash and partly through the provision of goods – Mr Nicholson bought his son food and drink to help him whilst at university and claimed a deduction in his business accounts for this as ‘wages’.
The First Tier Tax Tribunal disallowed a deduction for the wages paid to Mr Nicholson’s son. Although there was no dispute that his son worked in the business, there was no evidence to back up the claim that the payments had been made wholly and exclusively for the purposes of the trade. It was not possible to reconcile what had been paid as wages to the bank statements, and without contemporaneous records to support the payments, HMRC were unable to accept the sums claimed were ‘wages’ incurred as a business expense. The payments had a dual purpose – the underlying motive was the ‘personal and private’ motive of supporting his son while at university.
Avoiding the pitfalls
Had Mr Nicholson taken a different approach, he would have been able to claim a deduction for the wages paid to his son. The judge noted that had payment been made on a time recorded basis or using some other methodology to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied. If instead Mr Nicholson had made payments to his son’s bank account at the rate of £10 per hour for 15 hours’ work a week, leaving his son to buy food and drink etc. from the money he had earned working for his Dad, the outcome would have been different. The bank statements would provide evidence of what had been paid and this could be linked to the record of hours worked. Maintaining the link is key.
When paying family members, it is also important that the amount paid is reasonable in relation to the work done. The acid test is whether payment would be made to a person who was not a family member at the same rate. A deduction may also be denied if the wages paid are excessive.
Do we need to register for VAT?
A business must register with HMRC for VAT if its VAT taxable turnover is more than the VAT registration threshold. This is currently £85,000 and will remain at this level until 31 March 2020. A business whose VAT taxable turnover is less than £85,000 can choose to register voluntarily, unless everything that is sold is exempt from VAT.
A business which makes taxable supplies for VAT purposes is liable to register if:
Exceeding the threshold temporarily
A business which temporarily goes over the VAT registration threshold, for example as a result of making a one-off high-value sale, may not have to register for VAT. This exception applies if the VAT registration threshold was exceeded in the previous 12 months, but the business can demonstrate that taxable supplies in the next 12 months will not exceed the de-registration threshold (currently £83,000).
What are taxable supplies?
The need to register for VAT is triggered by the level of the taxable turnover. Taxable turnover for VAT is the total value of all taxable supplies, including zero-rated supplies made in the UK or the Isle of Man, excluding:
Any land or buildings which are subject to an option to tax where the sale was not zero-rated must be included in taxable turnover.
A business that makes taxable supplies which are below the VAT threshold can choose to register for VAT voluntarily. This will allow the business to reclaim input VAT, although the business will also have to charge output VAT. Voluntary registration can be particularly beneficial for businesses that sell zero-rated goods; reclaiming the input VAT will often generate a useful VAT repayment.
Overpaid tax? How to claim it back
There are various reasons why you may have paid more tax than you needed to for a tax year. For example, if you only worked at the start of the year, you may not have received all of your personal allowance. Alternatively, if your tax code was incorrect, maybe reflecting historic rather than current benefits in kind, more tax may have been deducted from your pay than you actually owed.
Tax overpaid through PAYE
After the end of the tax year HMRC perform a reconciliation, pulling together all the information that they have received from all sources to work out how much tax you should have paid for a tax year and looking at how much tax you actually paid. Where the two figures are not the same, HMRC will send out a P800 tax calculation or a PA302 simple assessment.
HMRC have started sending out P800 tax calculations and PA302 simple assessments for 2017/18. If you receive a calculation, it is important that you check it carefully – or ask your tax adviser to do so. HMRC do make mistakes!
If the calculation shows that you are due a refund, you can claim this online via your personal tax account (see www.gov.uk/check-income-tax-last-year). However, if you do not claim a refund within 45 days, HMRC will send you a cheque.
You can also claim a refund via your personal tax account if you have paid too much tax and HMRC have not sent a P800 calculation or PA302 simple assessment. If you are unsure whether you have paid too much, you can also check what you have paid online at www.gov.uk/check-income-tax-last-year.
If you are within self-assessment (for example, if you are self-employed or have other sources of income in addition to your job) and you have overpaid tax, HMRC will generally process the tax repayment once you have submitted your return. An overpayment may arise, for example, if your income is lower than the previous year and the payments on account exceed your liability for the year. In particular, if your income drops so that payments on account are not needed for the current year, a repayment may arise.
When completing the self-assessment tax return, you can provide HMRC with details of the bank account to which you would like any repayment to be sent. You can also request that any repayment is made by cheque. Alternatively, if you owe HMRC money, such as for VAT or to repay overpaid tax credits, you can opt to offset the overpayment against the outstanding liabilities.
You can also trigger the repayment online via your personal tax account; by logging in and checking the tax position and asking that the overpayment be repaid.
If the repayment is not received in a few weeks, you may wish call HMRC to chase it up.