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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.

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.