Helpsheets ... continued 31 from homepage

The profitability or earning capacity of a business may depend on one person or on a small number of people. Where this is the case, the business may be seriously compromised if that person, or one of those persons, falls seriously ill or has an accident. To protect against financial loss should such a situation arise, it is possible to take out a policy insuring against the loss of profits arising from the death, critical illness, sickness, accident or injury of a director, employee or other ‘key’ person. This is known as key person insurance.

Deductibility of premiums

As with any business expense, premiums paid in respect of key person insurance are deductible if they are incurred wholly and exclusively for the purposes of the business. This will be the case if the sole purpose in taking out the insurance is the trade purpose of meeting a loss of trading income that may result from the loss of service of the key person.

The extent to which the sole purpose test is met is a question of fact which is determined by taking account of what the company directors or, in the case of an unincorporated business, the proprietors, were aiming to achieve as a result of taking out the policy.

If the underlying purpose is not a trade purpose, the premiums cannot be deducted as a business expense. There are various scenarios in which a policy may be taken out for a purpose other than a trade purpose. This would be the case, for example, if a policy is taken out in respect of only those directors who are also major shareholders with a view to protecting the value of the shares and, in the event of the insured’s death, his or her estate.

Where the policy is a life assurance policy, the premiums are deductible only if the policy is a term policy providing cover only against the eventuality of the insured dying within the term of the policy, and no other benefits. The insurance term should not extend beyond the period of the insured’s usefulness to the company.

To qualify for a deduction in the computation of taxable profits, the premiums must be a revenue expense rather than capital expenditure. No deduction is given for a policy that provides against a capital loss. Further, no deduction is available for premiums to the extent that they contribute to a capital investment. This will be the case where a policy, whether a whole life, endowment, critical illness or accident policy, has an investment element.

Key person policies associated with loan finance

Care must be taken where such a policy is taken out as a condition of the provision of long-term finance. HMRC have confirmed that for an unincorporated business, the key person insurance policy premiums are not an incidental cost of the loan finance and as such are not deductible. The premiums are a cost of the life policy itself. For a company, the loan relationship rules apply and, as the premium is not considered to be an incidental cost of the loan finance, a loan relationship debit is not available.

Insurance receipts

Where the premium is deductible, any payout from the policy is taxable as a trading receipt. However, if a deduction was not available for the premium (for example, where it is a condition of the provision of loan finance), any payout is similarly left out of account.

Partner note: HMRC’s Business Income Manual at BIM 45525ff.

The end of a business will not necessarily mean that no further expenses are incurred. Where expenses are incurred after the business has ceased, tax relief may be available.

Allowable post-cessation expenses

An expense will be an allowable post-cessation expense if:

• the business has ceased; and
• the expense would have been deductible in calculating the trading profits had it been incurred prior to cessation.

This means that the ‘wholly and exclusively’ test must be met and, unless the cash basis is used and the expense is a capital expense for which a deduction is allowed under the cash basis, revenue in nature.

If the expense only partially relates to the business, a deduction is available for the business portion if that can be determined. If apportionment is not possible, no deduction is forthcoming.

Relief is not available for expenses that relate to the cessation itself.

Examples of post-cessation expenses include the cost of remedying defective work and associated legal and professional costs and the cost of collecting debts relating to the trade.

Method of relief

There are four ways in which a post-cessation expense can be relieved:

• as a deduction from post-cessation receipts;
• as a loss set against total income;
• as a loss deducted from chargeable gains; or
• against future post-cessation receipts.

Relief is given in the above order.

Method 1 – deduction from post-cessation receipts

Where there are post-cessation receipts in the same period from the same trade, relief for allowable post-cessation expenses must be given as a deduction from those receipts before considering other methods of relief.

Method 2 – against total income

Where there are no post-cessation receipts in the same period, if the post-cessation expenses are incurred by someone subject to income tax (i.e., by an unincorporated business rather than by a company), the post-cessation expenses can be set against the total income of the same tax year.

Method 3 – against capital gains

To the extent that the post-cessation expenses exceed the individual’s total income, they can be set against any chargeable gains of the same tax year.

Method 4 – against future post-cessation receipts

If it is not possible to relieve the post-cessation receipts under methods 1 to 3, they can be carried forward and set against any future post-cessation receipts from the same trade.

Post-cessation expenses incurred by persons subject to income tax cannot be set against bad or doubtful debts paid after cessation or against a trading receipt that relates to post-cessation expenditure.

Post-cessation receipts

Receipts received after the business ceased are taxable if they would have been taxable had they been received when the business was trading.

An election can be made to carry back receipts received within six years of cessation to the date of cessation. Where such an election is made, the receipts are treated as if they were received on the date of cessation.

Earlier this year, HMRC sent ‘nudge’ letters to social influencers who they suspect may not have declared the tax that they owe. They have also cracked down on gifts provided to influencers in return for promoting brands.

Social media influencers and content creators, including those running blogs, may receive payments in cash. This may be in the form of sponsorship. They may also receive gifts in return for promoting a band. Many are unaware that this counts as income on which they must pay tax.

Normal trading rules apply

The first point to note is that there are no special tax rules for online traders, influencers and content creators – normal tax rules apply. Consequently, where they have trading income in excess of the £1,000 trading allowance they must declare it to HMRC. Anyone who is not already registered for Self Assessment must do so. This can be done online on the Gov.uk website.

Income tax will be payable on profits to the extent that they are not sheltered by the personal allowance. As with other traders, influencers and content creators can opt to deduct the £1,000 trading allowance to arrive at their taxable profit where this is beneficial rather than actual costs. This will be the case where costs are less than £1,000. Class 2 and Class 4 National Insurance are also payable once profits exceed £12,570.

Gifts

Many influencers receive gifts from brands. This may take various forms. The brand may simply send a gift to an influencer with a high number of followers as a goodwill gesture in the hope that they will promote it. This is in the nature of a business gift in that it is voluntary without any expectation of anything in return.

A brand may also gift a product to an influencer in return for the influencer promoting that brand or advertising that item. The influencer may be expected to provide a minimum number of posts including affiliated links to the brand’s site. HMRC do not consider gifts of this nature to be simple business gifts as something is expected in return. Rather, the ‘gift’ constitutes non-monetary consideration for the promotion of the brand’s business or for advertising a specific product. This is the case even if there is no formal contract between the brand and the influencer; HMRC consider there to be an implied contract representing a barter transaction. Influencers and content creators who receive gifts in this way must pay tax on those gifts. The gift is valued at the amount for which the influencer could sell it rather than its retail value.

Business rates, rather than council tax, are charged on most non-domestic properties, such as shops, offices, warehouses, pubs, factories, guest houses and holiday lets. Business rates are based on the rateable value of the property. There are various reliefs that may be available to reduce the bill.

The properties are revalued regularly to reflect changes in the property market. The most recent revaluation came into effect this year, taking effect from 1 April 2023 based on the rateable value on 1 April 2021.

During revaluation, all properties are given a new rateable value. The multipliers are also revised.

Transitional relief

Transitional relief caps the amount by which the business rates bill can change each year as a result of a revaluation. The relief is given if your business rates bill changes by more than a certain amount. The effect of the relief is to phase in the changes to the bill as a result of the revaluation.

The amount by which the bill can change from one year to the next as a result of a revaluation depends on the rateable value of the property and whether the bill has increased or decreased as a result of the revaluation. The following shows the permitted increases for 2023/24, 2024/25 and 2025/26.

Rateable value 2023/24 2024/25 2025/26

Up to £20,000 (£28,000 in London) 5% 10% plus inflation 25% plus inflation

£20,001 (£28,001 in London) to £100,000 15% 25% plus inflation 40% plus inflation

Over £100,000 30% 40% plus inflation 55% plus inflation

It is worthwhile checking your business rates bills to ensure that they have not gone up as a result of the revaluation by more than the amount shown in the table above. The bill may rise significantly, for example, if as a result of the revaluation a business no longer benefits from small business rate relief.

If you think the bill is not correct, for example, because the property details are incorrect or because you think the rateable value is too high, you should contact the Valuation Office Agency (VOA) via your business rates account. You should also check you have received any reliefs to which you are entitled and claim them by writing to your Local Authority if they are not reflected in your bill.

The decision to acquire a business asset, be it a van or any other type of machine, will generally depend on how it is intended to finance the purchase. If the business has a healthy bank account, the purchase may be outright but, if not, other methods may be considered including hire purchase or leasing contract. Different tax implications depend on the type of asset, the type of contract entered into and whether the profits are calculated on a cash basis or accruals basis; VAT will also need to be considered (should the business be VAT registered.) Tax relief is allowed for the financial year of purchase if the asset is purchased in cash; however, other methods have different rules.

Tax relief

Capital expenditure is not usually deducted in calculating profits for tax purposes - capital allowances being claimed instead. The exception is where accounts are prepared using the cash basis, then relief is given against profits unless the asset is of a type that is specifically disallowed (e.g., cars). Where accounts are prepared using the accruals basis, a deduction is not given for capital expenditure, although capital allowances may be allowed instead.

The maximum amount claimable under the annual investment allowance (AIA) is £1 million. Qualifying expenditure on plant and machinery (not cars) up to the maximum AIA attracts 100% relief. Any amount higher than £1 million enters either the 6% pool or the 18% capital allowances pool (depending on the type of asset), attracting a writing down allowance at the appropriate rate.

Types of lease

There are two main types of lease: operating leases and finance leases.

Operating leases (hire purchase)

Under a hire purchase agreement, the asset is treated as if it had been purchased outright. It is shown in the balance sheet and depreciation is provided on an annual basis. The agreement usually includes an option to purchase at the end of an initial period. For accounting purposes, expenditure is treated as being incurred as soon as the asset comes into use, even though the asset is not strictly owned until the option to purchase is exercised. Payment of this final fee transfers the asset's title, bringing the legal agreement to an end. Finance charges are not part of the cost but are allowed as a business expense, spread over the term of the agreement. VAT charged by the finance company will be payable with the initial instalment (VAT not recoverable should the asset be a car).

Finance leases

The key difference between a short-funding finance lease and an operating lease is that the lessee cannot claim capital allowances as the lessor retains ownership. A short lease for tax purposes is defined as “a lease whose term is seven years or less” (s70I Capital Allowances Act 2001).

However, the asset is shown on the lessee's balance sheet with the obligation to pay shown as a liability. The finance payments are apportioned between the finance charge and the reduction of the outstanding liability, the finance charge being tax deductible with any VAT attached reclaimed on each payment. The business will be liable for insuring and maintaining the asset.

In comparison, long funding leases are leases lasting more than seven years. Under such a lease it is the lessee rather than the lessor who retains ownership and can claim capital allowances. Should a business enter a new, longer lease in the future and all relevant conditions are met, the lessee can claim the capital allowances based on the present value of the minimum lease payments.

The Bank of England has warned businesses and households that the cost of borrowing will remain high for at least the next two years and although taking out a bank loan is cheaper than a credit card, the interest rate on unsecured loans is at an all-time high of 5.7%. However, there is a source of finance from which a director or participator of a private limited company can borrow at 0% interest and that is from their company. As ever, there are restrictions but such a source of finance is worth considering. Such loans can have a relatively low annual tax cost and be useful (assuming the company has the money available).

A loan from the company may be a formal arrangement under which the company provides the funds and is repaid by a certain date, possibly with interest, or it may be a payment of salary in advance. Where the loan exceeds £10,000, is interest-free or at a low rate below HMRC's 'official rate' (currently 2.25%) the director or employee is generally taxable on the difference between the interest charged and the 'official rate', such loans being termed 'beneficial loans'. Even if the 'official rate' is charged, it would still be cheaper to borrow from the company at that percentage rather than a bank or credit card. The amount is declared to HMRC and confirmed to the director by 6 July after the tax year using a P11D Expenses and Benefits submission; NIC is also charged on the employer.

Borrowing from the company may not be beneficial if the loan is not repaid within nine months and one day after the company's accounting year end. If the loan remains unpaid at that date, the company is liable for an additional tax charge (referred to as the 's455 charge) equal to that payable on a dividend of the same amount taxed at the dividend upper rate (currently 33.75%). Without this charge the director could borrow money from the company indefinitely without any tax implications. Should the loan not be repaid and the charge paid, when the loan is subsequently repaid (or written off), the tax payment is refunded, usually via offset from the corporation tax bill due nine months and one day after the accounting year end in which the loan is repaid. If the loan is written off the company cannot claim a tax deduction for the write-off and consequently the shareholder will be taxed on the amount written off at their marginal dividend rate.

This means that should the director or participator be a basic rate taxpayer and the loan not repaid in time; it would be cheaper for the loan to be taxed as a dividend at 8.75% rather than the company pay the 33.75% charge. Conversely, should the director be a higher rate taxpayer, it would be cheaper for the company to suffer the s455 charge as this would ultimately be repayable on repayment/write-off of the loan. Even when the s455 charge does have to be paid, the shareholder can still end up with more initial funds through taking a loan than taking additional salary or dividends. After all, the director would have had the benefit of  an interest free loan in the meantime.

If timed effectively, it could be possible for a director of a company whose year end is, say, 30 September 2024 to take a loan from the company on 1 October 2023, and so long as the loan is repaid by 1 July 2025 (nine months and one day after the company's year end) no s455 charge will be payable.

Practical point

Under the Companies Act 2006, a loan over £10,000 usually requires shareholders’ approval. The passing of a resolution will also serve to record the date on which the loan  is made.

It is eight years since companies had to deal with two tax rates and marginal relief when calculating their corporation tax liability. That system has now been reinstated and, as of 1 April 2023, the amount of corporation tax will depend on a company’s profits as follows:

• under £50,000 – small profits rate of 19%
• above £250,000 – main rate of 25%
• between £50,000 and £250,000 – main rate of 25% less marginal relief.

What some company owners may not appreciate is that these limits can be further reduced:

• proportionately for an accounting period less than 12 months, or
• divided by the total number of associated companies.

What is an associated company?

Two companies will be associated if:

• one has control of the other, or
• the same person, or persons, have control of both of them.

It is more likely the second condition which may catch some companies.

The associated company rules prevent a company from splitting or fragmenting its business activities between several companies and benefiting from the lower small profits rate – being associated for even one day in the relevant accounting period will be enough to be caught.

The table below shows the impact on the limits of up to four associated companies:

Number of associated companies  Upper profits limit  Lower profits limit

No associated companies                    £250,000                £50,000

One associated company                     £125,000                £25,000

Two associated companies                   £83,333                 £16,667

Three associated companies                £62,500                 £12,500

‘Control’ has the same definition as for close companies i.e., the ability to control a company's affairs, directly or indirectly, through the ownership of 51% or more share capital, voting power or any other rights to income and assets. Where the situation becomes complicated is when determining whether two companies are under the control of the same person or persons. Under this rule, two companies are under the control of the same persons if a group which controls one company is identical to a group which controls the other and, for each company, that group has a ‘minimum controlling combination’.

A ‘minimum controlling combination’ is a group of persons who have control but would not have if any one person was excluded. The way to work this out is to first consider all possible combinations of shareholders that own just over 50% of the first company. If any of these combinations match any of the combinations that own just over 50% of the second company then the two companies are associated.

For example, two companies have unconnected shareholders with the following levels of control:

Company 1

  Mr Adams – 35%

  Mr Brown – 35%

  Mrs Georgio – 30%

Company 2

  Mr Adams – 15%

  Ms Duke – 45%

  Mrs Georgio – 40%

In this combination, even though no one person controls both companies, the companies will be associated as they have a common minimum controlling combination in Mr Adams and Mrs Georgio.

Further, the rules state that where there is 'substantial commercial interdependence' between two companies, the rights and powers of each shareholder’s 'associates' will also need to be considered when working out whether the companies are associated. For example, if a husband and wife each have 100% control of their own companies, those companies will not be associated unless there is 'substantial commercial interdependence' between them.

The three types of 'substantial commercial interdependence' are where:

• Financial – one company financially supports the other, or each has a financial interest in the affairs of the same business or
• Economic – the companies have the same economic objective, common customers or the activities of one benefit the other or
• Organisational – the companies have common management, employees, premises or equipment.

One popular tax-efficient method of extracting surplus monies from a company is for company A to lend money to company B; company B then uses that money to purchase a buy to let investment property – both companies having the same director shareholders (control). Therefore, should a company lend to another under such circumstances, that may be enough to constitute ‘substantial commercial interdependence’ even if there is no other link between them.

Landlords coming to the end of their fixed rate mortgage deal are likely to be paying considerably more in interest when they remortgage. The extent to which tax relief is available for interest payments depends on the type of let, the type of property and whether the business is an unincorporated property business or operated through a company.

Scenario 1: unincorporated landlord and residential lets

Unincorporated landlords letting residential property (other than as a furnished holiday let) face the harshest regime when it comes to securing tax relief for interest and finance costs. The costs cannot be deducted in calculating the taxable profit for the property rental business. Instead, relief is given as a tax reduction equal to 20% of the lowest of the following amounts:

• the landlord’s interest and finance costs;
• the profits of the property business after taking account of any brought forward losses; and
• the landlord’s adjusted net income (income after losses and reliefs but excluding dividend and savings income to the extent that it exceeds the landlord’s personal allowance).

The tax reduction cannot create a tax refund, and where the profits of the property business and/or the landlord’s adjusted net income are less than the interest and finance costs, the tax reduction is capped.

Where it is not possible to deduct 20% of the interest and finance costs for the tax year as to do so would create a tax refund, the unrelieved interest and finance costs are carried forward and taken into account in calculating the tax reduction for the following tax year.

As relief is given as a basic rate tax reduction rather than as a deduction, where the landlord is a higher or additional rate taxpayer, rather than receiving relief at their marginal rate of tax, relief is only given at the basic rate of 20%.

Scenario 2: unincorporated landlord and furnished holiday lets

Furnished holiday lets enjoy tax breaks not available to residential lettings and these extend to the treatment of interest and finance costs. The interest rate restriction for residential lets does not apply to furnished holiday lettings, and unincorporated landlords with furnished holiday lets are able to deduct interest and finance costs in full to arrive at the profit or loss for a furnished holiday lettings business. Consequently, they receive relief for their interest and finance costs at their marginal rate of tax.

Scenario 3: unincorporated landlord and commercial lets

The interest rate restriction applies only to residential lets. Consequently, interest costs on a commercial mortgage can be deducted in calculating the profits of the property business. This means that relief is given at the landlord’s marginal rate of tax.

Scenario 4: property company

Unlike an unincorporated landlord, where the property business is operated through a company, all forms of letting are equal. Interest and finance costs are deducted in calculating the taxable profits of the property company, regardless of the type of property. There are no special rules for residential lets. Relief for the interest is given at the rate at which the company pays corporation tax, which for the financial year 2023 is between 19% and 25%.

The issue of whether a derelict a residential property and liable to stamp duty land tax (SDLT) at the residential rates was considered by the First-tier Tribunal.

The appellants, Mr and Mrs Mudan, purchased a property in London for £1,755,000. As they already had another residential property, they paid SDLT at the residential rates inclusive of the 3% supplement. They subsequently filed an amended return on the basis that the degree of work needed to make the property suitable for occupation meant that it was not a residential property at the transaction date, and therefore SDLT should have been paid at the lower non-residential rates. HMRC opened an enquiry into the return and concluded that the property was suitable for use as a dwelling at the completion date, and hence the higher residential rates applied. The appellants appealed.

State of the property

Although the property had been occupied as a dwelling shortly before completion, it had been extensively vandalised. The points of entry had been broken, there was an ‘unbearable smell’ in the kitchen, the kitchen units had all been broken, none of the utilities worked and the gas and the electricity were unsafe. All the rooms were a mess. The boiler had been ripped off the wall in the boiler room and, while some of the bathrooms were in a reasonable condition, others had been damaged. The family were unable to move into the property for ten months until work to make it habitable had been completed.

The tribunal judge found that while the property was structurally sound, it was not in a state that a reasonable buyer would consider as habitable. For this to be the case, extensive work was needed, including rewiring, installation of a new boiler and kitchen units, repairing windows and removing rubbish from the garden.

The test

For disrepair to prevent a property from being classed as a dwelling it must be so fundamental that the property would need to be demolished. Previous cases set the bar high – faulty cladding of a type used on Grenfell Towers was not deemed sufficient to render a property derelict, although the presence of asbestos meaning the property had to be demolished and could not be safely occupied was.

Consequently, while it was accepted that the property was in a bad state of disrepair, this could be remedied, and the property occupied as a dwelling. At the transaction date, the property was a dwelling, albeit out of repair. Consequently, SDLT was due at the higher residential rates.

HMRC are sending one-to-many ‘nudge’ letters to taxpayers who included an invalid claim for gift hold-over relief in their 2021/22 tax return. This may be because a separate claim form was not included with the return, or the claim form was included but not signed. If you receive such a letter, it is important that you do not ignore it – without a valid claim, HMRC will require any capital gains tax due to be paid now rather than deferred.

What is gift hold-over relief?

Gift hold-over relief is a useful capital gains tax business relief that allows the capital gains tax due on a gift to be deferred by ‘holding over’ the gain, reducing the transferee’s base cost by the amount of the held-over gain. The relief is often used to aid succession planning.

Eligible gifts

The relief is available for:

• gifts of business assets used for the purpose of a trade or profession carried on by an individual as a sole trader or as a partner in a partnership, by an individual’s personal company or by a member of a trading group where the holding company is the individual’s personal company;
• gifts of unlisted shares and securities in a trading company or the holding company of a trading group where the individual owns at least 5% of the shares (for trustees, the holding must be at least 25%);
• gifts of land deemed to be agricultural land for inheritance tax purposes;
• assets the disposal of which is a chargeable transfer for inheritance tax and not a potentially exempt transfer; and
• certain gifts that are exempt from inheritance tax, such as a gift from a trust for bereaved minors.

Mechanics of the relief

As a gift by its very nature is not made at arm’s length, any gain arising on disposal is calculated by reference to the market value of the asset rather than the proceeds, if any. For an outright gift, the full gain (calculated using the market value as the consideration) can be held over. The transferee’s base cost is the market value as reduced by the held-over gain.

Example

Bill gives his son James his workshop, which cost £50,000. At the time of the gift, the market value was £140,000. The gain is £90,000, which Bill and James agree to hold over. James’ base cost is £50,000 – the market value of £140,000 less the held-over gain of £90,000.

If the transferor receives some proceeds, the gain computed by reference to the actual proceeds is immediately chargeable. However, the difference between the market value and the proceeds can be held over.

Example

Elizabeth sells her studio to her daughter Dawn for £40,000. It cost her £30,000 and has a market value of £75,000. They claim hold-over relief. The £10,000 difference between the proceeds (£40,000) and the original cost (£30,000) is immediately chargeable. However, the remainder of the gain (the difference between the market value and the proceeds) of £35,000 is held over. Dawn’s base cost is £40,000 (£75,000 – £35,000).

Joint claim

The claim must be made jointly by the transferor and the transferee on the dedicated claim form. It must be signed by both parties.

Dealing with the letter

If you receive a nudge letter you should send HMRC a valid claim form signed by both parties or, if the gift is not eligible for the relief, amend your tax return to remove the claim.

In setting up a trade it is inevitable that expenses will be incurred before the trade actually commences. Expenses may be incurred on acquiring premises and kitting them out, on buying stock, on office supplies, on professional advice, on marketing, on software, on setting up a website, on legal fees and suchlike. These can mount up, so it is important to secure tax relief where possible. Relief for pre-trading expenses is available to both unincorporated business and companies.

Relief is only available to the person (individual or company) who incurred the expenditure and commenced the trade.

Revenue expenses

The general rule is that revenue expenses incurred in the seven years prior to the date on which the trade starts are deductible if they would be so deductible had the expense been incurred once the trade had commenced. The usual rules to determine whether an expense is deductible apply (i.e., whether it is revenue in nature and incurred wholly and exclusively for the purposes of the business). To give effect to the relief, the pre-trading expenses are treated as if they were incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

Capital expenses

Relief for capital expenses depends on whether the accounts are prepared on the cash basis or not. Where the cash basis is used, if the expense is one that would be deductible under the cash basis capital expenditure rules, as with revenue expenses, the expense is treated as incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

However, if relief would be given through the capital allowances system, capital allowances are available for the pre-trading expenditure, the expenditure being treated as if it had been incurred on the first day of trading.

On 26 October 2023 one of the most significant pieces of company legislation came into being. The main thrust of the Economic Crime and Corporate Transparency Act 2023 is to 'prevent companies and others from carrying out unlawful activities, or facilitating others to carry out unlawful activities'. New obligations are to be imposed on companies that may be of particular concern to directors of micro-companies (currently companies that have a turnover of £632,000 or less or £316,000 or less on their balance sheet).

The Act now requires all companies to file accounts showing key information such as the profit or loss account as well as the balance sheet. This information will be available on the public register for all to view. Those directors who are uncomfortable with this disclosure may want to consider disincorporation as a means of keeping the business going but under self employment rather than via a company.

Disincorporation involves the transfer of the assets and liabilities of a company (i.e. goodwill, property, plant and machinery, stock and creditors) as a going concern to the shareholder(s), who then continue the business in an unincorporated form (sole trader or partnership).

Particular attention must be paid to capital gains. The transfer of chargeable assets will be a connected party transaction, using market value to compute the gains. However, in the absence of a third-party sale, the company will have no proceeds with which to pay the corporation tax and this fact may influence the process. If the company does need funds, this will almost certainly force the proprietor to buy the assets from the company. As a point of note – the payment does not need to be the full market value (even though this will be used to calculate the gain); it only has to be sufficient to leave the company with adequate resources to pay the tax. Be aware that where the proprietor buys the business at an undervalue, the excess of market value over the actual consideration paid is treated as a distribution taxed on the proprietor at their highest rate of income tax.

Alternatively, if the company has enough cash to pay the tax, the business can be distributed to the shareholders with no cash being transferred. Such a situation is a distribution and again the proprietor is taxed at their highest rate of income tax on the grossed-up value of the business transferred. Note that there is a double charge here: the company has a liability on its gains (as well as on any trading profit on the cessation of its trade) and the sole trader/partnership proprietor has a liability on the receipt of the business.

Other points

Any cash remaining in the business can be withdrawn as a dividend, again taxed at the proprietor's highest tax rate.

As the company is ‘connected’ to the purchaser and the trade is continuing, the deemed ‘market value’ rule also applies to the transfer of closing stock and any plant and machinery. However, an election can be made for the transfer to be at actual transfer value for stock and at written-down value (or, if higher, the book value) for plant and machinery instead.

No writing down allowances are given on plant and machinery in the final basis period, and a balancing adjustment is calculated.

As a general rule, when a trade ceases, the VAT registered person is deemed to make a taxable supply of goods held by the business. However, there should be no VAT on the transfer by virtue of the ‘transfer of going concern’ provisions. To avoid any delays in obtaining a new VAT registration, consider electing to continue using the business’s existing VAT registration number.

Practical point

It is anticipated that many of the measures introduced by the Act will require secondary legislation and Companies House guidance, as well as the development of Companies House systems to implement the changes. As such, it will likely be at least a year until many of these provisions are implemented.

Private residence relief (PRR) removes the capital gains tax charge that would otherwise arise on a gain on the disposal of an only or main residence. The relief shelters the gain to the extent that it has been lived in as a main residence. Qualifying periods of absence and the last nine months of ownership are also covered by the relief if the property is not occupied as an only or main residence throughout.

Where a house is built and lived in as a main home until it is sold, establishing the period of ownership for PRR purposes is straightforward. However, what if the taxpayer buys a plot of land, demolishes the existing house and builds a new house in which they live until it is sold? This is precisely the question which was considered by the Upper Tribunal in a recent case in which the taxpayers emerged victorious.

The taxpayers (Gerald and Sarah Lee) purchased a plot of land on 26 October 2010. They demolished the existing house and built a new house in which they lived as their main residence from 19 March 2013 until the house was sold on 22 May 2014. They claimed PRR on the full amount of the gain on the basis that they had occupied the new house as their only or main residence throughout the period that they owned the house.

HMRC argued that they need to consider the whole period of ownership from 26 October 2010 to 22 May 2014, not just the period for which the dwelling house was occupied as the main residence. Consequently, only the portion of the gain relating to the period from 19 March 2013 to 22 May 2014 was eligible for PRR as this was the period in which they lived in the new house as their only or main residence. Applying this interpretation, they had amended the Lees’ Self Assessments to show a gain of £541,821 relating to the period from 26 October 2010 to 18 March 2013. The First-tier Tribunal upheld the Lees’ appeal, concluding that for PRR, the relevant period of ownership for which occupation as main residence was required was the ownership of the dwelling house. The legislation was silent on ownership of the land.

HMRC appealed to the Upper Tribunal.

The Upper Tribunal upheld the decision of the First-tier Tribunal on the basis that the statutory interpretation of the legislation was that it referred to ownership of the dwelling house not of the land.

Implications

This is a good result for the taxpayer and particularly for self-builders. Applying the reasoning adopted by the First-tier and Upper Tribunals, it would be possible to buy a plot of land which was left empty for some years and then build a house on that land. As long as the house was occupied throughout as an only or main residence, PRR would apply to the whole gain.

HMRC have recently published a spotlight warning landlords to avoid schemes offering hybrid property arrangements that purport to save tax. HMRC’s view is that the scheme does not work and landlords who are tempted by the advertised advantages might find themselves out of pocket.

Nature of the arrangements

The arrangements are based on the landlord or joint owners of the property transferring their property to a limited liability partnership (LLP) with a corporate member. The LLP allocates profits to members on a discretionary basis.

An LLP is a body corporate under the Limited Liability Partnership Act 2000. An LLP benefits from the flexibilities available to partnerships with the added advantage of limited liability for members.

Under the scheme:

• the individual landlord or their family members, or both, set up a limited company;
• the individual landlords set up an LLP alongside the limited company, which is considered to be the corporate member of the LLP;
• the individual landlords transfer their properties to the LLP;
• the members of the LLP (comprising the individual landlords and the corporate member) allocate the profits of the LLP on a discretionary basis ensuring that the individual members remain basic rate taxpayers and the remaining profits are allocated to the corporate member;
• the corporate member claims a deduction for any mortgage interest and finance costs.

Claims

The scheme claims that by using a hybrid business model, landlords can:

• escape the rules restricting mortgage interest relief for unincorporated landlords letting residential property, securing increased deductions for mortgage interest relief;
• reduce the tax payable on the profits of the property income business;
• reduce capital gains tax payable on any gain when the property is sold; and
• reduce the inheritance tax payable on the landlord’s death.

Dangers

The scheme would be caught by existing tax legislation, meaning that the perceived advantages will not materialise. Landlords taking part in arrangements such as these may end up paying interest and penalties on top of the tax that is due, and also fees to the scheme promoter.

HMRC advise landlords who may have become involved in the scheme to withdraw from it and to settle their tax affairs. They should contact HMRC to make a disclosure. They may also want to take independent professional advice.

Scheme promoters must comply with the disclosure of tax avoidance scheme (DOTAS) legislation and ensure that they advise HMRC of any arrangements that they are marketing. Promoters are liable to penalties if they fail to disclose a scheme which falls within the scope of the DOTAS legislation. Penalties are severe, with initial penalties of up to £600 per day and possible penalties of up to £1 million.

In personal and family companies, directors often borrow money from the company as this is a cheaper and easier option than taking out a commercial loan. However, there can be tax consequences for both the director and the company.

If the loan balance exceeds £10,000 at any point in the tax year, a tax charge would arise under the benefit in kind rules if the interest paid by the director on the loan, if any, is less than that which would be payable at the official rate. The taxable amount is the interest due at the official rate, less any interest paid by the director. The company must also pay Class 1A National Insurance on the taxable amount.

Further tax consequences arise if the company is a close company (as most personal and family companies are) and the director’s loan account is overdrawn at the year end and remains so at the corporation tax due date nine months and one day after the year end. A close company is, broadly, one controlled by five or fewer people. Where this is the case, the company must pay tax on the outstanding loan balance. This tax is known as section 455 tax. If the loan is outstanding at the year end but cleared before the corporation tax due date, there is no section 455 tax to pay, but the loan must be reported on the company tax return. The rate of section 455 tax is linked to the dividend higher rate, and is 33.75% in respect of loans made on or after 6 April 2022.

Although paid at the same time as corporation tax, section 455 tax is not corporation tax and, crucially, is a temporary tax as it becomes repayable once the loan balance is cleared.

The tax can be reclaimed nine months and one day after the end of the accounting period in which the loan was repaid, released or written off. The tax becomes repayable on the day that the corporation tax for the period is due. To reclaim the tax, the loan does not need to be cleared in full – if part of the loan balance is repaid, released or written off, you can reclaim the tax due on that part of the loan.

A claim can be made on form L2P. This can be done online by visiting the Gov.uk website at www.gov.uk/guidance/reclaim-tax-paid-by-close-companies-on-loans-to-participators-l2p. A claim can be made by your agent on your behalf.

To make a claim, you will need your Unique Taxpayer Reference (UTR) and your bank details to hand. You will also need to provide the following information:

• the start and end dates for the accounting period in which the loan was made;
• the date the loan was made;
• the start and end dates for the accounting period when the loan, or part of the loan, was repaid, released or written off;
• the date that the loan, or part of the loan, was repaid, released or written off;
• the amount of the loan or part of the loan repaid, released or written off; and
• the date when the relief is due.

Once a claim has been submitted, HMRC will issue a revised tax calculation showing what is owed. The reclaimed tax will be set against any corporation tax owed to HMRC in the first instance, with any excess being repaid by HMRC.

If you have a company that is dormant and you have filed your company tax return showing that no tax is due, you may think that there is nothing further you need to do as regards the lack of corporation tax due. After all, you have filed a return which shows that you have nothing to pay.

However, that may not be the end of the story. You may receive a letter from HMRC reminding you when the corporation tax for the period is due. The letter will also inform you that if you do not owe any corporation tax, you should tell HMRC as soon as possible. Arguably, you have already done this by filing your return and corporation tax computation. The letter advises that if you do not tell HMRC that no corporation tax is due, you will continue to receive reminders about paying.

To tell HMRC that no corporation tax is due, and put a stop to payment reminder letters, you need to visit the Gov.uk website at www.gov.uk/pay-corporation-tax and select ‘tell HMRC no amount is due’. It is then simply a case of clicking on the ‘nil to pay form’ and entering your 17-digit corporation tax reference, which can be found on the letter. This will be your 10-digit unique taxpayer reference for your company, plus additional digits and letters which indicate the period in question, for example, 1234005678A00101A. It is important that this is entered correctly.

When is a company dormant?

Your company may be dormant if it is not trading and has no other income, for example, from investments. It may also be dormant if it is a new company which has yet to start trading. If you think your company is dormant, you can tell HMRC online (see www.gov.uk/tell-hmrc-your-company-is-dormant-for-corporation-tax). If you cannot use the online form, you can also tell HMRC by post or by phone.

If you have had a notice to deliver a company tax return, you will need to do this. This will show HMRC that your company is dormant. Once you have told HMRC that your company is dormant, you will not need to file further company tax returns unless you receive a notice to file.

HMRC may also write to you to tell you that they have decided to treat your company as dormant and that you don’t have to pay corporation tax or file company tax returns.

However, you must continue to file confirmation statements and accounts with Companies House. If your company qualifies as ‘small’, you can file dormant company accounts. A company is regarded as dormant by Companies House if there are no significant financial transactions in the year. Filing fees paid to Companies House, penalties for late filing of accounts or money paid for shares when the company was incorporated do not count as significant transactions.

Owners of personal and family companies frequently pay themselves a small salary and extract further profits as dividends. To utilise the unused personal and dividend allowances of other family members, an alphabet share structure (whereby each shareholder has their own class of shares, e.g. A ordinary shares, B ordinary shares, etc.) provides the flexibility to tailor dividend payments to the circumstances of the shareholder.

Minor children also benefit from a personal allowance (set at £12,570 for 2023/24) and a dividend allowance (set at £1,000 for 2023/24). On the face of it, it can be beneficial to pay dividends to minor children to utilise their allowances. However, where shares are gifted by a parent to a child, the associated dividends are treated for tax purposes as dividend income of the parent rather than the child where they exceed £100 a year.

HMRC have recently become aware of a dividend diversion scheme which is marketed as a tax planning option to fund education fees. HMRC are of the view that the arrangements do not work.

The scheme

The scheme in question seeks to avoid tax by allowing the director shareholders to divert dividend income from themselves to their minor children. In a bid to avoid being caught by the settlements legislation, the arrangement works as follows.

1. A company issues a new class of shares which usually entitles the owner of the shares to certain dividends and voting rights.

2. A person other than the company owner, such as a grandparent of the minor child or a sibling of the company owner, purchases the new shares for an amount significantly below their market value.

3. That person gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children.

4. The purchaser of the new shares or the company owner votes for a substantial dividend payment in respect of the new class of shares.

5. The dividend is paid to the trustees of the trust.

6. As beneficiaries of the trust, the company owner’s children are entitled to the dividend.

HMRC are of the view that the arrangements are caught by the settlements legislation and do not work. The effect of the arrangements is to divert dividend income from the company owner to his/her minor children and as such the income will be taxed as that of the company owner rather than as that of the minor child.

Similar arrangements may also fall foul of the settlements legislation.

Where an individual realises a chargeable gain on the disposal of a UK residential property, they must report the gain to HMRC within 60 days of completion and make a payment of the capital gains tax due within the same window.

In most cases, the gain will be reported online – taxpayers will need to create a Capital Gains Tax on UK Property Account if they do not already have one.

However, in response to feedback received, HMRC made a paper version of the return available on a trial basis from February 2023. The trial was initially due to last four months; however, it was extended until the end of September 2023. During the trial period. HMRC reviewed usage of the form to check that it was meeting taxpayers’ needs.

The paper forms are available to download on the Gov.uk website at www.gov.uk/government/publications/report-capital-gains-tax-on-uk-property, together with accompanying notes. They are not intended to replace the online service and should only be used where the taxpayer:

• cannot use the internet;
• has already submitted a Self Assessment tax return for the same tax year to which the report relates; or
• is a secure or Public Department 1 taxpayer who does not file returns online.

The paper form should also be used by an agent who is only dealing with this report, by a corporate trustee or by a non-resident trustee who does not have any capital gains tax to pay.

Where capital gains on UK property are reported using the paper return, the taxpayer should download and print the form, complete it and send the completed form to HMRC at the address on the first page of the form.

After HMRC have received the paper form, they will send the taxpayer a 14-digit reference which starts with an X. The taxpayer will need the reference number when paying the tax that they owe.

Recent tax changes, in particular the interest restriction for unincorporated property businesses with residential lets, have resulted in more landlords operating via a property company. Running a property business through a company has a number of advantages – the rate of corporation tax paid on the profits will usually be less than the rate of income tax that would be paid by an unincorporated landlord and interest and finance costs in relation to residential lets can be deducted in full when calculating the profits chargeable to corporation tax.

There are downsides too – the company does not have a personal allowance so tax is payable from the first pound of profit. Also, if the landlord wishes to use the profits personally outside the company, they will need to be extracted. This may trigger tax and National Insurance liabilities.

Tax-efficient extraction strategy

If the landlord has not already used his or her personal allowance, a popular and tax-efficient profits extraction strategy is to take a salary equal to the personal allowance, which for 2023/24 is set at £12,570. At this level, no employee’s National Insurance is due. If the National Insurance employment allowance is available, there will be no employer’s National Insurance to pay either. However, in the absence of the allowance (as will be the case if the company is a personal company where the landlord is the director and sole employee), there will be a small amount of employer’s National Insurance to pay – for 2023/24 the NIC cost will be £478.86 where a salary of £12,570 is paid. Paying a small salary of between £6,396 and £12,570 has the further benefit of securing a qualifying year for state pension purposes for zero contribution cost.

Once the landlord’s personal allowance has been used up, it is generally more tax efficient to extract further profits as dividends. However, the company must have sufficient retained profits from which to pay the proposed dividends. Further, where there are multiple shareholders with the same class of share, dividends must be paid in proportion to shareholdings (although this restriction can be overcome by having an alphabet share structure). All individuals have a dividend allowance, set at £1,000 for 2023/24. Dividends sheltered by the allowance are tax-free; however, the allowance does form part of band earnings. Once the allowance (and any remaining personal allowance) have been used, dividends (which are treated as the top slice of income) are taxed at 8.75% where they fall within the basic rate band, at 33.75% where they fall within the higher rate band and at 39.35% where they fall within the additional rate band.

The company can also consider making pension contributions on behalf of the landlord. These are deductible in computing the company’s taxable profits.

Voluntary disclosure involves individuals or businesses coming forward to inform HMRC of any errors or omissions in their tax returns, unpaid taxes or any other irregularities, before HMRC discovers them through its own investigations. In recent years HMRC has used a series of campaigns and settlement/disclosure opportunities aimed at particular sections of the taxpaying public to encourage taxpayers to come forward and declare any missing information by offering favourable penalties. Taxpayers who cannot use these open campaigns can still disclose voluntarily by using the Digital Disclosure Service (DDS), the advantage being lower tax-geared penalties than if HMRC had started the investigation. Often HMRC will not investigate voluntary disclosures as deeply than if it opens a case itself.

Digital Disclosure Service

The DDS is an online platform allowing individuals and businesses to disclose any tax irregularities or errors that have not already been reported to HMRC. An online interest and penalty calculator is available for determining the interest and penalties due on any underdeclared tax liability for up to the previous 20 years. The taxpayer will need to use this tool to include these figures when making the disclosure.

The penalty will be a percentage of the additional amount of tax owed, the percentage depending upon the reason for the non-disclosure. The headings are that the error was made:

• despite taking reasonable care (no penalty)

• due to carelessness (0% – 30%)

• because of deliberate non-declaration (20% – 70%)

• where the lost tax involves an offshore matter or transfer which makes the loss of tax significantly harder for HMRC to identify -'deliberate and concealed' (30% –100%)

HMRC states that if reasonable care has been taken in completing returns but the right amount of tax has not been declared, no penalties will be levied. However, HMRC counters this stance with the comment 'We do not expect many people’s circumstances to fall within this category'.

Although the declaration can go back 20 years, in practice, should the non-disclosure be deemed to have been non-deliberate, HMRC will only expect a maximum of four years if registration for Self Assessment was made by the appropriate deadline, and care was taken to ensure the tax affairs were correct but the amount paid was insufficient. The number of years is six years for 'carelessness' and 20 years if a taxpayer 'deliberately misled HMRC about this income'. Current and future tax affairs must be kept up to date. Should the non-declaration not be deliberate but exceed six years, HMRC will invite a taxpayer to make a 'voluntary restitution' of tax payment. However, this cannot be enforced as the liability does not exist. If, for some reason, the taxpayer does decide to pay the tax for the out-of-date years, no penalties or interest can be charged.

Should the taxpayer have taken more than three years to correct the non-compliance, full reductions for disclosure will not be given (with HMRC restricting the maximum statutory penalty reduction by 10 percentage points).

Process of declaration

Completion of an online form notifies HMRC that the taxpayer wishes to make a declaration. Following submission of this form, HMRC will issue a reference number to be shown on the DDS declaration form. The time limit for submission of the DDS form and date of payment of outstanding tax is 90 days after the date of HMRC’s acknowledgement of the notification/filing. Not making this deadline may make the taxpayer liable to a formal investigation. However, more time can be requested if it is impossible to gather all the information and make the disclosure within 90 days.

The DDS online platform includes a page where the amount of interest and penalties the taxpayer has calculated is declared and also a declaration to confirm that the disclosure is correct and complete. As part of the disclosure, the taxpayer makes an offer to pay the outstanding tax. The offer and HMRC’s acceptance letter creates a legally binding contract.

Most business owners know that VAT registration is a legal requirement should total taxable turnover for the previous 12 months exceed £85,000 or turnover is expected to exceed £85,000 in the next 30 days.

Once a business becomes liable, that liability ceases should HMRC be satisfied that the business is not expected to exceed the deregistration limit in the following 12 months. This limit is usually set at £2,000 below the registration limit – currently £83,000 until at least April 2026.

So far so good, but what is the situation where, for example, a business has a one-off client and that income takes the business over the VAT registration threshold but this is unlikely to occur again, at least not in the foreseeable future? In this case the business is still obliged to notify HMRC that the threshold has been exceeded but at the same time can apply for exception from registration, providing evidence that the expected turnover in the next 12 months is estimated to be below £83,000.

The recommendation to date has been to complete a paper registration Form VAT1 and at the same time write to HMRC asking for exception as this will give HMRC complete information about the firm’s business and trading circumstances. However, as from 13 November 2023 HMRC will remove the ability of taxpayers to submit a paper VAT registration form requiring online registration only (unless the individual is digitally excluded or unable to utilise online services). The concern must be that the link between the digital online registration and the paper application for exception will be missed.

However, HMRC’s registration manual confirms that 'In cases where exception is being applied for, the applicant will not necessarily be liable to register…Applications may therefore be accepted in writing without an accompanying VAT1'. If the business fails to notify and subsequently discovers they should have registered then it could be faced with paying penalties for both late registering and for not telling HMRC in the first place. The challenge is providing clear evidence as to why the threshold was temporarily exceeded and the belief that VAT registration should not be made.

HMRC will consider the exception and write with its decision. If HMRC disagrees, VAT registration will go ahead based on the date the registration should have applied.

Late application for exception

Sometimes a firm may be unaware that they have exceeded the registration limit and it is only when pulling together the annual accounts that it is discovered that the limit has been exceeded. In such cases an exception application can still be made even though some months may have passed since the threshold was breached. This opportunity exists despite the wording of VAT Notice 700/1, para 3.7, which states: 'You’ve still got to tell HMRC’s VAT Registration Service that you’ve reached the threshold within 30 days of the end of that month'.

Justifying the exception request in these circumstances is done by using the known facts on the date the breach was made rather than based on actual turnover figures achieved since the breach. HMRC’s manual states: 'If you receive an application for retrospective exception containing information which would have been available at that time and would have led you to grant exception from registration at the earlier date, then it would be reasonable to allow retrospection now.' If HMRC does not agree, it will backdate the registration, applying penalties and interest as relevant.

Making any employee redundant is a difficult decision and potentially distressing for all involved. Getting the process wrong could result in one or more employment tribunal claims. Professional advice should always be sought.

When an employee is made redundant, various elements may comprise the final payment. Apart from the normal earnings from the employment (salary, accrued holiday pay, accrued bonuses, etc.) to the last deemed working day, payments made specifically on the termination of employment will make up the termination award. Such payments may include statutory redundancy pay, payments in lieu of notice (PILON), compensation for loss of office and non-cash benefits.

An employee with at least two years’ continuous employment when made redundant qualifies for statutory redundancy pay. The amount depends on the employee's age and length of service capped at 20 years and further capped at £643 a week with the maximum statutory redundancy payment being £19,290. Any additional payment should be included in the employment contract.

Should there be a PILON clause in the employee's contract then the employer must make payment of all monies that the employee would have received during the notice period and tax as earnings to include NIC. If no PILON clause exists (and there is no legal requirement for there to be so), there is a complex statutory formula known as 'post-employment notice pay' ('PENP') used to calculate the amount of payment that should be taxed as earnings. The calculation is based on the employee’s basic pay and the number of days (or months) of unserved notice. The formula ensures tax is charged on the basic pay that the employee would have received if they had worked their full notice period (statutory or contractual, whichever is longer). The system prevents employers and employees from labelling a payment as ‘compensation’ or ‘ex gratia’ or some other similar term in an attempt to obtain the £30,000 tax exemption.

Provided a payment or benefit is not a distribution (e.g., dividend) or part of a capital transaction then the first £30,000 of any redundancy payment is exempt from income tax and NIC with only the balance being chargeable. Non-cash benefits are also considered when calculating the exempt amount where the value used is the cash equivalent or 'monies worth' if higher, e.g., if an employee keeps a company car as part of the termination package, the car's market value is included in the £30,000 exempt amount figure. Some benefits in kind are exempt from tax and are not taken into account e.g., the provision of a mobile phone.

No NIC is levied up to the £30,000 threshold but any excess is liable to employer's class 1A NIC. For payments more than £30,000, companies may see a benefit in paying that excess amount as pension contributions to avoid the NIC charge.

Although the employer must assess and report packages valued at more than £30,000 to HMRC, the tax charge may not arise at the termination date because a cash payment is treated as received when it is paid or when the recipient is entitled to the payment. Therefore, a package greater than £30,000 but paid in instalments will be taxed as and when received such that tax and NIC may arise in a year later than the termination date. Non-cash benefits are received when they are ‘used or enjoyed’.

Letting holiday properties, particularly in coastal resorts, may have a strong seasonal bias, and when business is slow during the off-season, it can be tempting to let the property on a longer let. For example, a property could be let on short-term holiday lets over the summer months and on a six-month residential let during the winter. However, adopting this approach may have tax implications and prevent the property from accessing the tax benefits available to furnished holiday lets (FHLs).

Definition of a furnished holiday let

Furnished holiday lets benefit from more generous tax rules than residential lets. They are able to access capital gains tax business reliefs, and also are not subject to the interest rate restriction applying to residential lets, meaning interest and finance costs can be deducted in full in calculating the taxable profit.

However, these benefits are only available to properties that pass certain tests. To qualify as an FHL the property must be let furnished and must meet all three of the following occupancy conditions.

Condition 1 – the pattern of occupation condition

For the property to be an FHL, the total of all lets that exceed 31 days must not be more than 155 days in the year.

Condition 2 – the availability condition

The property must be available for letting for at least 210 days in the tax year.

Condition 3 – the letting condition

The property must be actually let for at least 105 days in the tax year. Where this test is not met in relation to a particular property for a particular year, the property may qualify as an FHL by virtue of averaging or a period of grace election.

For a continuing let, the tests are applied for the tax year.

Implications of long lets

Letting an FHL for longer periods may mean that the pattern of occupancy condition is not met. Where lets of more than 31 days total more than 155 days in the tax year, the property will not be an FHL. This will mean that during the off-season, a longer let cannot exceed 155 days (roughly five months) – lets longer than this will mean that the pattern of occupancy condition is not met. Assuming lets are kept at below 31 days during the peak season, the property can only be let on longer lets in the off-season for a maximum of five months if the goal is to retain FHL status.

However, the maxim of not letting the tax tail wag the dog should be borne in mind – it may be preferable for the property to be let on a residential let during the off-season rather than it being left empty, even if this jeopardises its FHL status.

The High-Income Child Benefit Charge (HICBC) is a tax charge that claws back child benefit where the claimant or his or her partner have adjusted net income of at least £50,000. Where both parties have income in excess of this, the charge is levied on the partner with the highest income.

The charge is equal to 1% of the child benefit paid for the tax year for every £100 by which adjusted net income exceeds £50,000. Once adjusted net income reaches £60,000, the charge is equal to the child benefit for the tax year.

To avoid receiving a benefit that has to be paid back, a couple may elect not to receive the benefit. However, it is important to claim it to access the associated National Insurance credits, particularly where the claimant’s income is not sufficient for the year to be a qualifying year for state pension purposes.

Check who is the claimant

For child benefit purposes, the claimant may not be the person who actually receives the child benefit – HMRC regard the claimant as the person who signs the claim form. The claimant can elect for the benefit to be paid to someone else, for example, a husband may complete the form and sign it, but elect for the child benefit in respect of their child to be paid to his wife. While a couple remain together, this may not matter. However, if a couple separate, it is important to be clear which partner is the claimant to avoid unnecessary and unexpected tax charges.

The Meades case

A recent case highlighted the importance of checking child benefit claims on separation.

In 2021, HMRC issued Mr Meades with an amendment to his 2019/20 tax return on the basis that he was liable for the HICBC for that year.

Mr Meades married his former wife in 2010. In 2012, he claimed child benefit in respect of their child, electing for the benefit to be paid to his ex-wife (the child’s mother). The couple separated in July 2017 and the marriage was dissolved on 4 April 2019. Mr Meades provided financial support to his former wife and met household bills. Mr Meades remarried in November 2019. He lived with his new wife as a married couple throughout 2019/20.

The couple did not revise their child benefit claim on separation. Consequently, Mr Meades remained the claimant. As he provided financial support for his child, he was entitled to claim the benefit. The tribunal found that HMRC were right to assess him for the HICBC for 2019/20 as he was the claimant and his income exceeded £50,000. It did not matter that the benefit was paid to his ex-wife.

Lessons

On separation, it is advisable to review child benefit claims to check who is the claimant. Mr Meades would not have been liable for the HICBC after he separated from his ex-wife had she been the claimant as he would have been neither the claimant nor the claimant’s partner. Had the couple reviewed their claim and realised this, Mr Meades could have ended his claim and a new claim could have been made by the child’s mother. This would have prevented him from being liable to the charge. It would also have prevented Mr Meades’ new partner from a potential liability to the charge in respect of the benefit paid to his ex-wife, which would have been the case had her income been both more than £50,000 and higher than that of Mr Meades – as they lived together as a married couple throughout 2019/20, she was potentially liable for the charge as the claimant’s partner.

If you have unrelieved overlap profits, you will not be able to claim relief for those profits after 2023/24. Overlap profits are profits that have been assessed twice – either in the early years of a business or on a change of accounting date.

From 2024/25, unincorporated businesses will be taxed on the profits for the tax year regardless of the date to which they prepare their accounts. Where the accounting period does not correspond with the tax year, the profits from two accounting periods will be apportioned to arrive at the profits for the tax year. As a result, profits are only ever taxed once, removing the problem of overlap profits.

The current year basis (under which the profits taxed for the tax year are those for the accounting period ending in that tax year) came to an end in 2022/23. Under the current year basis, relief for overlap profits was given either on a change of accounting date which resulted in more than 12 months’ profits being taxed in a tax year, or on cessation.

The 2023/24 tax year is a transitional year moving from the current year basis to the tax year basis. The profits for that year are those from the end of the accounting date in 2022/23 to the accounting date ending in 2023/24 (the standard part) plus those from the end of that period to 5 April 2024 (the transition part). Any unrelieved overlap profits can be deducted from the transition profits.

If relief for remaining overlap profits is not claimed for 2023/24, it will be lost.

Establishing overlap profits

On 11 September 2023, HMRC launched an online service to help unincorporated businesses establish their overlap profits available for relief. The service is available on the Gov.uk website at www.gov.uk/guidance/get-your-overlap-relief-figure.

You may be able to make a claim for overlap relief for 2023/24 if:

• your accounting date does not align with the tax year (i.e., it is not a date between 31 March and 5 April inclusive);
• you changed your accounting date to align with the tax year but did not claim relief for overlap profits on the change of accounting date; or
• you changed your accounting date in 2023/24to align with the tax year.

You may also be able to claim overlap relief in 2023/24 if you stopped trading in that year.

It may be that you are able to find your overlap profits from your previous tax returns, entered as ‘Overlap Profit Carried Forward’ on either the self-employment pages (SA103) or the partnership pages (SA104).

If you cannot find your overlap relief figure, you can use the online service to establish your overlap profits – but only if you provided this information in a previous return.

Using the service

To use the service, you will need to sign in with your Government Gateway user ID and password for Self Assessment. Your agent can also use the service on your behalf.

You will need to provide the following information, so it is advisable to ensure that you have it to hand before you start:

• your name;
• the name of your business or a description of it;
• your business address;
• your unique taxpayer reference;
• details of whether your business is a sole trader or a partnership;
• the date that your business started or you became a partner in the partnership (you can provide the starting tax year if you are unsure of the exact date);
• the most recent period of account or basis period used by your business; and
• if you have changed your accounting date, the year or years of the change.

You will also be asked for your contact details and whether you would like a response by email or by letter.

After providing your information you will receive a confirmation email or letter containing your submission reference. HMRC will generally aim to provide details of your overlap relief within three weeks. However, for complex cases, it may take longer.

The Approved Mileage Allowance Payment (AMAP) was introduced in 2002 as a statutory simplification to allow employers to make tax-free payments up to certain limits to their employees when they carry out business travel in their cars, vans, motorcycles or cycles. The Allowance is a set rate supposedly to help cover the cost of fuel, vehicle excise duty (VED) and upkeep of the car or van and has been the same amount since April 2011:

• Cars and vans: 45 pence per mile for the first 10,000 miles in a tax year, 25 pence per mile thereafter
• Motorcycles: 24 pence per mile
• Bicycles: 20 pence per mile.

The mileage rate does not include incidental expenses incurred in connection with a particular journey, such as tolls, congestion charges and parking fees – these are allowable as a deduction where incurred solely for business purposes.

Note that the AMAP relates to employees only and not the self employed. A self-employed person can make a 'strict' or 'actual' claim, based on the aggregate of motoring costs incurred, subject to the fraction of qualifying business mileage over total mileage in the tax year. The self employed can also make a purely business-mileage-based claim similar to employees using the same rates as being acceptable to HMRC (termed making a 'simplified expenses claim').

If the employer pays less than this approved amount, the employee may be able to claim tax relief on the difference. Paying more brings tax implications for both employee and employer as well as extra administration.

One cost that is noticeable by its absence from the list in paragraph one above is any deduction for loan interest. Many business owners rely on hire purchase/loans to pay for their business vehicle and, unless the loan is interest-free, then this amount can be sizeable. For anyone employed claiming under AMAP for use of their car, if the car was purchased via finance, HMRC has confirmed that loan interest cannot be claimed. HMRC's PAYE guidance states that 'AMAPS cover any general or mileage-related expenses in relation to the car itself (such as fuel, servicing, tyres, road fund licence, insurance and depreciation), plus interest on any loan to buy the vehicle. No additional deduction is available for expenses of that type'. As ever, this is HMRC's view and not the law.

For the self employed the situation is different. If the self employed use their car for business, claiming mileage as 'simplified expenses' using the AMAP rates, then it is arguable that loan interest can be claimed. Unlike for the employed, HMRC has not specifically stated that loan interest is not included in the fixed amount. When the law was passed introducing the 'simplified expenses' method of calculation for a business, HMRC’s technical note stated that simplified expenses are ‘fixed allowances for business mileage (rather than deductions for actual expenditure on purchasing, maintaining and running a motor vehicle…)’. Other than this sentence HMRC has made no comment. Interest cannot be said to be an ‘expenditure on purchasing’; it is the cost associated with choosing a particular way of financing the acquisition, i.e. a loan. Interest incurred on a loan used for buying an asset used for the business should, therefore, be allowed as a deduction.

Practical point

Note that directors, being employees of their company, will only be able to claim the AMAP mileage rate and not loan interest.

The usual method of declaring employees’ benefits in kind and taxable expenses is via the annual P11D form submission. Employers can also 'payroll' these benefits and expenses instead, although completion of a P11D(b) for declaring National Insurance is required.

However, not all employers want their employees to pay tax on those benefits and this is where PAYE settlement agreements (PSAs) come in. This may be as a goodwill gesture, or simply as a way of easing the administrative burden of reviewing what may be a large number of minor benefits. By entering into this formal arrangement, the employer agrees to settle the tax on the employee’s behalf by one annual submission and payment to HMRC. A PSA remains in place unless varied or cancelled by the employer or HMRC. Although there is a legal framework for the detailed calculation of the tax payable, it is open to the employer and HMRC to agree on one method of calculation covering all items involved.

Importantly, as the tax payment on the employee's behalf is itself a benefit, the tax is payable on the grossed-up value of the benefit; this means that the total tax bill will be higher than if the employees had paid the tax themselves. When a PSA is agreed, Class 1B National Insurance contributions replace any Class 1 or Class 1A National Insurance contributions liability attached to the benefits and expenses in the agreement and are payable on the total amount payable.

Some company benefits may be small ('trivial') being covered by the trivial benefits exemption and as such are not taxable. Other benefits may be minor but taxable (e.g. telephone bills, small gifts and vouchers, staff entertainment such as a ticket to an event and non-business expenses when travelling overnight on business which exceed the daily limit) and are therefore ideal to be included in a PSA. Other benefits covered by a PSA may be those that are irregular in nature (e.g. qualifying relocation expenses  in excess of the £8,000 tax-free limit, the cost of attending an overseas conference, the expenses of a spouse accompanying an employee on a business trip abroad or the use of a company holiday flat). Many PSAs are used where it is impracticable to calculate the benefit's value (e.g. where a group of employees is provided with benefits with no fixed value such as shared taxis home which do not qualify for the late-night taxi exemption). PSAs are also used to include payments for those who have previously been treated as self-employed and reclassified as employees.

Another advantage of a PSA is a reduced exposure to penalties and interest by allowing a review at the end of the year to ensure that all taxable items have been accounted for.

What tax rate should be used?

The value of the benefits provided are taxed at the marginal tax rates of each employee concerned. Importantly, it is necessary to consider the tax rates applicable to employees resident in each of the countries of the UK, since the devolved governments can set their income tax rates separately.

Practical point

HMRC requests PSA calculations to be submitted annually by a certain date, which can differ by agreement but is typically 31 July or 31 August. However, there is no statutory deadline for the submission, so no penalties can be imposed for failure to submit by this date.

Payment must be made by 19 October (or on or before 22 October if paying electronically) following the end of the relevant tax year.

On separation or divorce, it is common for one spouse to move out of the family home and for the other spouse to continue to live there. Where the couple have children, the spouse remaining in the family home may do so until the youngest child reaches the age of 18, at which point the family home is sold and the proceeds shared. Alternatively, the departing spouse may transfer their interest in the family house to the remaining spouse as part of a divorce settlement, or the marital home may be sold to a third party.

Legislative changes introduced from 6 April 2023 extended the ability of the departing spouse/civil partner to benefit from private residence relief (PRR) and also extended the no gain/no loss rules to a transfer under a divorce settlement of an interest in the marital home to the former spouse/civil partner.

Sale to a third party

Where an individual ceases to live with their spouse or civil partner in a property that was their only or main residence, and they subsequently dispose of their interest in the property to someone other than their former spouse or civil partner, the property is treated as the individual’s only or main residence until the date of disposal if the following conditions are met.

The first condition is that the disposal is made pursuant to an agreement between the individual and his or her spouse or civil partner in contemplation of or otherwise in connection with the dissolution or annulment of the marriage or civil partnership, their judicial separation or the making of a separation order in respect of them, or their separation in other circumstances such that the separation is likely to be made permanent, or it is made pursuant to an order of a court:

• made on granting an order or a decree of divorce or nullity of the marriage, for the dissolution or annulment of the civil partnership, or for judicial separation;
• made in connection with the dissolution or annulment of the marriage or civil partnership or the parties’ judicial separation and which is made at any time after granting such an order or decree;
• made at any time under the Matrimonial Causes Act 1973, ss. 22A 23, 23A, 24 or 24A;
• made at any time under the Matrimonial Causes (Northern Ireland) Order 1978, art. 25 or 26;
• made under the Family Law (Scotland) Act 1985, including incidental orders made under that Act; or
• made at any time under any corresponding provision in the Civil Partnership Act 2004.

The second condition is that during the period between which the individual ceased to live in the property and its disposal, it continues to be the main residence of their spouse or civil partner.

The third condition is that the individual has not given notice for another property to be treated as their main residence during that period.

The extension of the relief will be of benefit to couples who delay the sale of the marital home until, say, the youngest child reaches age 18. The departing spouse will be able to continue to benefit from PRR on their share of the gain as long as they have not elected for another property to be their only or main residence. Previously, PRR was lost nine months after they moved out.

Disposal in connection with a court order

Divorcing couples and civil partners can now benefit from the no gain/no loss rules on a transfer of interest in the marital home from one party to another without time limit where the transfer is made pursuant to an agreement between the individual and his or her spouse or civil partner or former spouse or civil partner in contemplation of or otherwise in connection with the dissolution or annulment of the marriage or civil partnership, their judicial separation or the making of a separation order in respect of them, or their separation in other circumstances such that the separation is likely to be made permanent, or it is made pursuant to an order of a court:

• made on granting an order or a decree of divorce or nullity of the marriage, for the dissolution or annulment of the civil partnership, or for judicial separation;
• made in connection with the dissolution or annulment of the marriage or civil partnership or the parties’ judicial separation and which is made at any time after granting such an order or decree;
• made at any time under the Matrimonial Causes Act 1973, ss. 22A, 23, 23A, 24 or 24A;
• made at any time under the Matrimonial Causes (Northern Ireland) Order 1978, art. 25 or 26;
• made under the Family Law (Scotland) Act 1985, including incidental orders made under that Act; or
• made at any time under any corresponding provision in the Civil Partnership Act 2004.

This will benefit divorcing couples where one party stays in the marital home, preventing a gain arising where an interest in the property is transferred from the departing partner to the remaining partner. The legislation removes the time pressure to make the transfer as there is no deadline by which it must be done. On any eventual sale, the remaining partner will benefit from PRR if the property has been their only or main residence throughout.

Although the deadline for submitting your 2022/23 tax return online is midnight on 31 January 2024, if you owe tax and you want to have it collected through PAYE via an adjustment to your tax code, you will need to file your tax return by the earlier date of 30 December 2023.

If the option to pay any tax you owe via PAYE is available to you, it can be attractive. Not only are you saved from having to pay the bill in full by 31 January 2024, but you can also pay what you owe in instalments without needing to set up a Time to Pay arrangement. Further, there is no interest to pay – a bonus in times of high interest rates.

Qualifying conditions

Paying your Self Assessment tax bill through your tax code is only an option if all of the following conditions are met:

• You owe less than £3,000 in total.
• You already pay tax through PAYE, for example, because you are an employee or because you receive a company pension.
• You submitted your 2022/23 tax return online by 30 December 2023 (or filed a paper return by 31 October 2023).

It is important to note that if your Self Assessment bill is more than £3,000, you cannot pay it via PAYE – even if you make a part payment to reduce the outstanding amount to £3,000 or less. However, if you are struggling to pay, you may be able to set up a Time to Pay arrangement (which can usually be done online if you owe £30,000 or less).

It will not be possible to pay your tax through PAYE if you do not have enough PAYE income for HMRC to collect what you owe or if deducting your Self Assessment tax via PAYE would result in you  paying more than 50% of your PAYE income in tax or paying twice as much tax as you usually do.

Automatic set-up

If you have filed your tax return by the 30 December 2023 deadline and you meet all three of the conditions set out above, HMRC will automatically amend your 2024/25 tax code to collect the tax that you owe under Self Assessment for 2022/23 – you do not need to ask them to do this. If you do not want them to collect tax in this way and you have filed your return by 30 December 2023, you will need to tell them.

Your code is adjusted so that you will pay the tax that you owe in 12 instalments over the tax year in addition to the usual deductions from your pay. For example, if you owe £1,200 and you are a basic rate taxpayer, your personal allowances will be reduced by £6,000, so that if you receive the personal allowance of £12,570, your code for 2024/25 will be 657L. You will pay an additional £100 a month in tax as a result for 2024/25.

The marriage allowance is not a separate allowance as such – rather, it is a transfer of part of one spouse or civil partner’s personal allowance to their spouse or civil partner. It should not be confused with the married couple’s allowance which is available where at least one spouse or civil partner was born before 6 April 1935.

The marriage allowance allows one spouse or civil partner to transfer 10% of their personal allowance (as rounded to the nearest £10) to their spouse or civil partner. However, the transfer is not permitted if the recipient pays tax at the higher or additional rate. For 2023/24 the personal allowance is £12,570 and the marriage allowance is £1,260.

Claiming the marriage allowance is beneficial if one spouse or civil partner is unable to use their personal allowance in full, and the other pays tax at the basic rate. Utilising the allowance can save a couple up to £252 in tax in 2023/24 (£1,260 @ 20%).

The only permitted transfer is £1,260 – it is not possible to transfer more of the personal allowance where this is unused or less if the amount unused is less than £1,260. However, if the unused personal allowance is less than £1,260 and making the transfer would mean that overall, the couple would pay less tax, it would be beneficial (although it may mean that some tax is now payable by the transferor).

Where the marriage allowance is claimed, the personal allowance of the spouse or civil partner making the transfer is reduced by £1,260 to £11,310, whereas the recipient’s personal allowance is increased to £13,830.

Older couples benefiting from the married couple’s allowance cannot also claim the marriage allowance.

Making a claim

A claim can be made online by visiting the Gov.uk website at www.gov.uk/apply-marriage-allowance. The claim can be made for the current tax year and also for 2019/20 and any later tax year for which the couple were eligible to make the claim. Once a claim has been made, it will apply for subsequent tax years until the claim is cancelled. This too can be done online.

Claims for the allowance can also be made through Self Assessment or by completing the marriage allowance form MATCF (see www.gov.uk/guidance/apply-for-marriage-allowance-by-post) and sending it to the address on the form.

Example 1

Alex and Anna are married. Alex earns £30,000 a year. Anna looks after their young daughter and has no income in 2023/24.

The couple claim the marriage allowance. As a result, Alex’s personal allowance is increased by £1,260, reducing the tax that he pays by £252.

Example 2

Jake and John are in a civil partnership. Jake works part-time while studying and earns £12,000 in 2023/24. John has income of £40,000 in 2023/24.

Jake is only able to use £12,000 of his personal allowance, leaving £570 unused. Although he cannot tailor the marriage allowance to transfer this to John, a claim is still worthwhile.

Making the claim will reduce Jake’s personal allowance by £1,260 to £11,310. As a result, he will now have to pay a small amount of tax as his income exceeds his reduced personal allowance by £690, generating a tax liability of £138 (£690 @ 20%).

However, John’s personal allowance will increase by £1,260, reducing the tax that he pays by £252.

Overall, despite the fact that Jake must now pay some tax, the couple’s combined tax bill is reduced by £114 (£252 − £138) as a result of claiming the allowance.