Helpsheets ... continued 32 from homepage

Tax and accounting rules are not identical and it is sometimes necessary to adjust the accounting profit to arrive at the profit for tax purposes. One area where the rules differ is in the write-off of capital expenditure.

For accounting purposes, depreciation is charged to the accounts so as to write off the asset over its useful economic life. This may, for example, be on a 33% reducing balance basis or on a 25% straight line basis.

By contrast, for tax purposes, relief for capital expenditure is given by way of capital allowances.

The capital allowances that are available depend on the nature of the asset, and there may be more than one possible claim. For example, qualifying expenditure on plant and machinery may benefit from the annual investment allowance (AIA) which allows a 100% deduction for the expenditure in the year in which it is incurred up to the £1 million AIA limit. Where the AIA is not available, or the taxpayer does not wish to claim it, writing down allowances are given at the rate of 18% for main rate expenditure and at 6% for special rate expenditure. Companies can also benefit from full expensing on qualifying new plant and machinery that would otherwise be eligible for main rate writing down allowances. Like the AIA, this provides immediate relief for the full amount of the expenditure but, unlike the AIA, the amount of expenditure that can benefit from full expensing is not capped. A 50% first-year allowance is available to companies on new qualifying assets that would otherwise qualify for special rate writing down allowances, as long as the expenditure is incurred on or before 31 March 2026. This can be useful if the AIA has been used up. First-year allowances are available at a 100% rate for new zero emission cars. This again is beneficial as expenditure on cars does not qualify for the AIA, full expensing or the 50% first-year allowance available to companies.

Adjusting the profit

As a result of the differences between depreciation and capital allowances, it is necessary to make an adjustment to the accounting profit to arrive at the taxable profit. Depreciation must be added back to the accounting profit and capital allowances deducted (or balancing charges added) to arrive at the taxable profit. Further adjustments may be needed for other expenses that are not allowable for tax purposes, such as entertaining expenses.

Where the AIA or full expensing is claimed, relief is given in full for tax purposes earlier than for accounting purposes. This means that the taxable profit will be lower than the accounting profit in the year in which the expenditure is incurred, but in subsequent years the accounting profit will be lower as depreciation will continue to be charged but the capital allowances have already been given.

Example

A Ltd is a new company and spends £200,000 on plant and machinery on which it claims the AIA.

For accounting purposes, depreciation is charged at 30% on a reducing balance basis.

The accounting profit for the year is £350,000 after charging depreciation of £60,000.

To arrive at the taxable profit, the depreciation of £60,000 must be added back, but the company can deduct the capital allowances of £200,000. The taxable profit is therefore £210,000.

Many businesses begin by buying a customer list from another similar business, sending out marketing adverts rather than waiting to build their own client base via recommendation. A business can also expand by buying a customer list. However, a customer list is usually more than just a list of customer names and contact details. It is essentially the relationship with a customer being bought or transferred, encompassing customer preferences and contact history. These lists are intangible assets, generally long-term and derive their value from a business's intellectual or legal rights even though written down or stored in digital form, which also means that the purchaser is buying part of the goodwill of the business.

The tax rules differ depending on whether the purchasing business is a self-employed business (or partnership) or a company.

Self-employed purchaser

Unfortunately, unincorporated businesses can only claim tax relief against income to the extent that the intangible assets being purchased relate to specific processes, not customers. Therefore, buying a customer list will not be tax deductible against revenue for the purchaser. However, where a deduction against revenue is not possible, the cost will be a capital item potentially available to reduce any capital gain when the business is eventually disposed of. Disposing of a customer list may attract business asset disposal relief as being a business asset if the conditions for a claim are met. The unincorporated seller of a list will be taxed on the amount received as 'other income'.

Corporate purchaser

Buying such a list by a company comes under the 'intangible assets' tax regime as goodwill. Customer lists created post-1 April 2019 are specifically included within the corporate intangibles regime, treated as part of goodwill and /or relevant assets. The tax rules state that relief is available for ‘an intangible fixed asset that consists of information which relates to customers or potential customers of a business or part of a business.’

A client list may be purchased at the same time that a business or part of a business is sold. Where such assets are acquired as part of a business, they should only be capitalised separately in the balance sheet at cost separate from goodwill where their value can be measured reliably. The rate of relief is fixed at 6.5% per annum and is partially restricted should the total amount of the company’s expenditure on qualifying intellectual property, multiplied by six, be less than its expenditure on the relevant assets acquired. The amount of relief is reduced accordingly if the expenditure is greater.

No relief is available where the company has acquired the relevant asset from a related individual or a partnership where one of the partners is a related individual. Consequently, a company cannot write down the cost of goodwill and customer related intangibles acquired on the incorporation of a business, irrespective of whether the asset is already within the intangibles regime or would otherwise have qualified for the 6.5% writing down relief. This is subject to exceptions where the firm acquired the relevant asset from a third party.

The self-employed have historically paid two classes of National Insurance – Class 2 and Class 4. However, this is set to change from April 2024 with the abolition of Class 2 National Insurance contributions.

What are Class 2 contributions?

The payment of Class 2 contributions has enabled a self-employed person to build up entitlement to the state pension and contributory benefits.

Class 2 contributions are flat-rate weekly contributions payable where profits from self-employment exceed the lower profits threshold, set at £12,570 for 2023/24. The threshold is aligned with the personal allowance and the lower profit limit applying for Class 4 purposes.

Where profits fall between the small profits threshold (set at £6,725 for 2023/24) and the lower profits threshold, a self-employed earner is treated as having paid Class 2 contributions at a zero rate, thereby earning a qualifying year without actually having to pay any National Insurance.

A self-employed earner whose profits are below the small profits threshold is not liable to pay Class 2 National Insurance contributions, but can make voluntary contributions if they choose in order to maintain their state pension record. This is a much cheaper option than paying Class 3 contributions.

The abolition of Class 2 contributions has been a long time coming. Class 2 contributions were to have been abolished and Class 4 contributions reformed with effect from 6 April 2019 (having already been delayed a year). Following a U-turn, the reforms were put on hold as a result of concerns that self-employed earners with low earnings would lose out. However, the introduction of the lower profits threshold and a deemed zero rate on contributions between the small profits threshold and lower profits threshold has addressed this issue, paving the way for the abolition of Class 2 contributions.

Class 4 contributions

Class 4 contributions are profit-related contributions payable by self-employed earners. Contributions are payable at the main Class 4 rate on profits between the lower profits limit and the upper profits limit, and at the additional Class 4 rate on profits in excess of the upper profits limit.

For 2024/25, the lower profits limit is £12,570 and the upper profits limit is £50,270, unchanged from 2023/24 and due to remain at this level until 5 April 2028.

For 2024/25, the main Class 4 rate is 8%, having been reduced from 9%. The additional Class 4 rate is 2%.

Building up pension entitlement for 2024/25 and beyond

With the abolition of Class 2 National Insurance contributions from 6 April 2024, self-employed earners will for 2024/25 onwards build up entitlement to the state pension and contributory benefits where their earnings exceed £12,570. This is the point at which Class 4 contributions become payable.

However, self-employed earners with profits between £6,725 and £12,570 for 2024/25 will receive a National Insurance credit, earning them entitlement to the state pension and contributory benefits, despite not paying any National Insurance.

For 2024/25, self-employed earners with profits of less than £6,725 will still be able to make voluntary contributions at the 2023/24 Class 2 rate of £3.45 per week. This will be much cheaper than paying Class 3 voluntary contributions, which are to remain at £17.45 per week for 2024/25.

If you are running an unincorporated business, either as a sole trader or as a partnership comprising only partners who are individuals, you can use the accruals basis to prepare your accounts or, if you are eligible, the cash basis. For 2023/24 and previous years, the cash basis is only available to traders whose turnover, computed in accordance with the cash basis rules, is £150,000 or less. However, following a consultation, the availability of the cash basis is to be extended from 6 April 2024, and from that date will be the default basis of accounts preparation for unincorporated businesses.

Cash basis v accruals basis

The cash basis is a simpler basis of accounts preparation. Under the cash basis, income is only recognised when received and expenses when paid. There is no need to match income and expenditure to the period to which it relates, and consequently, no need to take account of debtors and creditors, and prepayments and accruals. As income is not taken into account until it is received, relief for bad debts in automatic.

Under the cash basis, capital expenditure is deducted in calculating profits unless the expenditure is of a type for which such a deduction is expressly prohibited (as is the case with land, buildings and cars).

For 2023/24 and earlier tax years, the cash basis is available to traders with turnover of £150,000 or less, and those wishing to use the cash basis must elect to do so. Under the cash basis rules as they apply for these years, deductions for interest are capped at £500. There are restrictions too on the way in which losses can be used; sideways loss relief and the carry back of losses in the early years of the trade are not available where the cash basis is used.

By contrast, under the accruals basis, income and expenditure must be matched to the period to which it relates, necessitating the calculation of debtors and creditors, and prepayments and accruals. Deductions for capital expenditure are not permitted, with relief instead being given in the form of capital allowances. There is no restriction on deductions for interest, and the options for relieving losses are greater than under the cash basis.

The cash basis from 2024/25

From 2024/25, the turnover threshold is abolished and the cash basis becomes the default basis of accounts preparation for unincorporated businesses. The accruals basis remains available, but unincorporated businesses wishing to use the accruals basis must now opt out of the cash basis.

The restrictions on interest deductions and loss relief are lifted, so traders using the cash basis are able to use losses in the same way as those using the accruals basis, and can deduct any interest and finance costs in full.

Making the switch

When moving between the accruals basis and the cash basis, some adjustments are necessary to ensure that all income is taxed once and relief for expenses is given once. Without adjustment, some income may be taxed twice or not at all, and some expenses may be relieved twice or not at all. For example, if a trader prepares accounts to 31 March each year and undertook work in March 2024, submitting his invoice for £5,000 on 28 March 2024, and accounts for the year to 31 March 2024 are prepared under the accruals basis, the invoice would be taken into account in calculating his 2023/24 profit. However, if the invoice was paid on 20 April 2024 and the trader used the cash basis for that year, without adjustment, the same £5,000 would also be taxed in 2024/25.

No one wants to pay more tax than they need to and, where possible, disposals should be timed to ensure that the best result is achieved from a tax perspective. Where a disposal is made around the end of the tax year, accelerating or delaying the disposal date can impact on the tax that is paid. This is particularly true this year, as the capital gains tax annual exempt amount falls from £6,000 for 2023/24 to £3,000 for 2024/25.

Don’t waste the exempt amount

Each individual has their own annual exempt amount for capital gains tax purposes. It is set against net gains for the tax year (chargeable gains less allowable losses for the year), but before using up any capital losses from previous tax years. The annual exempt amount is lost if it is not used in the tax year – it cannot be carried forward.

Spouses and civil partners are able to transfer assets between. This is useful from a tax planning perspective. If one spouse or civil partner has already used their annual exempt amount and wants to dispose of an asset that would trigger a capital gain, transferring the asset, or a share in it, to the other spouse or civil partner prior to disposal will enable the unused annual exempt amount to be set against the gain.

Timing considerations

When considering whether it is preferable to make a disposal in 2023/24 or wait until 2024/25, it is helpful to consider the following questions:

 1. Have I used up my annual exempt amount for 2023/24?

 2. Will I be a basic rate, higher or additional rate taxpayer in 2023/24?

 3. Have I realised any losses in 2023/24?

 4. Has my spouse/civil partner used their annual exempt amount for 2023/24?

 5. What rate does my spouse or civil partner pay tax at?

 6. Do I expect to realise gains and/or losses in 2024/25?

 7. What rate do I expect to pay tax at in 2024/25?

 8. What rate do I expect my spouse or civil partner to pay tax at in 2024/25?

If you have not made any disposals in 2023/24, it would be better to realise any gain before 6 April 2024 to take advantage of the higher annual exempt amount for 2023/24. Where a spouse or civil partner’s annual exempt amount is available, this can be accessed too by making a no gain/no loss transfer. Making a disposal in 2023/24 rather than 2024/25 can save a couple up to £1,200 in capital gains tax.

The position is slightly more complicated if losses are involved, as allowable losses for the tax year are set against chargeable gains for the same year before applying the annual exempt amount. Unrelieved losses for earlier years are applied after the annual exempt amount. To the extent that allowable losses of the tax year are not relieved against chargeable gains of that year, they can be carried forward.

If you have unrelieved losses for 2023/24 that exceed the chargeable gain, the annual exempt amount would be lost anyway, so there is nothing to be gained by making the disposal before 6 April 2024. Instead, by delaying it, you will be able to set the 2024/25 annual exempt amount against the gain before using the losses carried forward from 2023/24, reducing the overall bill.

If the 2023/24 annual exempt amount has already been used up, when deciding whether to delay the disposal so that it falls in the 2024/25 tax year, it is also necessary to consider the rate at which the gain would be taxed and the overall tax bill. For example, if you are a basic rate taxpayer in 2023/24 but are likely to be a higher rate taxpayer in 2024/25, it may be better to make the disposal prior to 6 April 2024so the gain will be taxed at 10% rather than 20% (or 18% rather than 28% where it relates to residential property), particularly if you are likely to make other gains in 2024/25 that will use up the annual exempt amount.

Planning ahead is the key. Do the sums first and time the disposal accordingly.

The inheritance tax consequences of gifting the family home to adult offspring. It is not uncommon for an elderly parent (usually widowed) to make a lifetime gift of their home to adult offspring. This may be done for non-tax reasons (e.g., in the hope of sheltering against future care home costs; specialist advice would be needed on this point), or to reduce exposure to inheritance tax (IHT) on their death estate. Passing it on In the latter case, the parent will be hoping to survive at least seven years from making the gift, so that the gift becomes an exempt transfer for IHT purposes. Circumstances vary, but typical situations include where the parent:

a. gifts an interest in the home (e.g., an equal share) to the adult child, who co-occupies with the parent;

b. gifts their home to the adult child, who co-occupies;

c. gifts an equal share of their home, but the child lives elsewhere;

d. gifts their home, but the child lives elsewhere.

This article focuses on scenario (a).

What’s the problem?

A possible pitfall in gifting an interest in the home to a co-occupying adult child is the ‘gifts with reservation’ (GWR) IHT anti-avoidance rules. Those rules are broadly designed to prevent ‘cake and eat it’ situations, where someone gives away an asset in the hope of surviving at least seven years so that the gift becomes exempt from IHT whilst the donor continues to have the use or enjoyment of the asset during all or part of that period. If ‘caught’ by the GWR rules, the gifted asset is treated as forming part of the individual’s death estate for IHT purposes. However, the GWR charge is subject to various exclusions and exceptions.

Escape from GWR

Are there any possible let-outs from a GWR charge in scenario (a)? Thankfully, there is an exception that can apply where (for example) the parent gifts an interest in their home to an adult child, who co-occupies the residence. This statutory exception applies to the gift of ‘an undivided share of an interest in land’ where ‘the donor and donee occupy the land, and the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift’ (FA 1986, s 102B(4)). Returning to scenario (a), this means that if the parent gifts an interest in their home to (say) their adult son, and shares the property outgoings, there should be no GWR. There should be documentary evidence of the change of ownership (e.g., a declaration of trust stating their respective ‘tenant-in-common’ shares), and the son’s name should be added to the property deeds. It is important that the son does not contribute towards the parent’s share of the household running costs; but there is nothing to stop the parent continuing to pay all the household running costs. In addition to this exception from a GWR charge for IHT purposes, there is an exemption from a ‘pre-owned assets’ income tax charge in circumstances such as scenario (a) (FA 2004, Sch 15, para 11(5)(c)).

Practical tip Consideration should also be given to whether any IHT ‘residence nil-rate band’ could be made available on the deceased’s death under the ‘downsizing’ provisions (in IHTA 1984, s 8FB).

Although inheritance tax (IHT) can arise on some lifetime gifts or ‘transfers of value’, the main concern for most is its impact on the estate at death. Gifts made in the seven years before death will also be treated (to some extent) as part of the estate on death, but before that they are likely to be a potentially exempt transfer (PET) and not part of the estate.

While having the required effect of reducing future IHT liability, the gift may result in an immediate capital gains tax liability because this applies to disposals, not just sales. If this is an issue, gifts into trust may be a solution, but professional advice will normally be required on this because the order of gifts to individuals and trusts can affect future liabilities. However, as well as charitable donations, some gifts are not taken into account at all and are exempt from IHT.

Gifts below specific amounts

An individual may make gifts of up to £3,000 a year exempt from IHT, and if the previous year’s exemption was not used, this can be brought forward to the following year, but no further. So, a person who did not make any gifts in the previous tax year could make exempt gifts of up to £6,000 in this year. A spouse or civil partner would have their own exemption, so a couple could gift £6,000 (or £12,000 if no gifts were made in the previous year). However, note that the annual exemption cannot reduce the IHT liability on the estate at death.

Gifts of up to £250 to any individual are exempt from IHT, but this does not apply to exempt parts of a larger gift.

Gifts to a spouse or civil partner.

Unless the recipient is not domiciled in the UK, the whole of a gift to a spouse or civil partner is exempt from IHT. This does mean that the recipient’s estate is increased with potential IHT implications on their death. However, if the donor is the first to die, any unused nil-rate band of theirs can pass to the spouse, which may mitigate that liability.

When considering whether to transfer assets to a spouse or to children, consideration should be given to the type of asset and whether other reliefs (e.g., business or agricultural property reliefs) might be better used to facilitate gifts to future generations.

Gifts in consideration of marriage.

Gifts that are made or promised before a wedding or civil partnership and are conditional on that event taking place are exempt, with the exemption depending on the relationship to the bride, groom or civil partner.

For a parent, the limit is £5,000; for a grandparent or great-grandparent, £2,500; for a future spouse or civil partner, £2,500; and for anyone else, £1,000.

Gifts made as normal expenditure of out income.

An exemption that is perhaps not so well known is for gifts made as part of a person’s normal expenditure. To be effective, the donor must show that gifts are made from surplus, after-tax income rather than capital and that they retain enough income to maintain their usual standard of living.

Some flexibility is possible, but gifts from income that has been saved for several years (and is therefore now treated as capital) would not qualify for relief. Note also that the exemption is for gifts made as normal expenditure; this might be regular payments such as paying school fees, insurance premiums or other payments that are part of a regular sequence. A one-off gift would not qualify here.

Practical tip To be effective for IHT purposes, the giver of the gifted asset should not retain any use of it. For example, giving a painting to someone, but keeping it in the giver’s house will be a ‘gift with reservation of benefit’. Unless a ‘rent’ is paid for that benefit, the asset will remain part of the giver’s estate.

The rules on valuing benefits-in-kind for income tax purposes.

As an employee, it is normal to receive and to be taxed on the worker’s salary, wages and bonuses for the work performed in the employment. However, employers may also wish to remunerate the employee by providing benefits-in-kind.

These additional benefits are also taxable, but on what value of this benefit does the employee need to pay income tax?

What is the cash equivalent?

The basic premise for the value of the benefit for taxation purposes is the ‘cash equivalent’ of the benefit provided. How much it cost the employer to provide the benefit will determine how much the employee is taxed.

For example, if an employee receives private medical insurance, which costs the employer £1,000 a year, the taxable amount will be £1,000. If the employee pays towards the cost of the benefit, this amount contributed will be deducted from the taxable amount.

So, if the employee in this example contributed £300 annually towards the private medical insurance, the taxable amount of the benefit would reduce to £700 (i.e., £1,000 - £300).

Note that for this deduction to be made, the employee must have paid their contribution to the benefit by 6 July after the end of the tax year in which the benefit was provided.

In-house benefits

The situation can be complicated when the benefit provided is created from an in-house product or service. What is the cash equivalent chargeable on the employee? Is it the sales value, the cost value or some other formula?

This issue was resolved in the famous case of Pepper v Hart [1992] STC 898. In that case, ten employees were given the benefit of school fees for their children at a ‘concessionary fee’ at the college in which they were schoolmasters. The Inland Revenue (as it was known at the time) argued that the costs of the benefit were proportional to all the costs of running the school.

For example, if the cost of running a school was (say) £1m a year, and there were 100 pupils, the cost associated with the benefit of a child’s place was £10,000. However, the schoolmasters argued that, in fact, the marginal cost of having the children at the school was much less than that and amounted to a little stationery and laundry (it was a boarding school).

On balance, and in the House of Lords, it was held that such benefits should be valued at their marginal cost or the cash equivalent of the benefit provided.

Specific benefits

Despite the generic rules for calculating benefits, there are some benefits that have their own set of provisions. These are company cars (both for the use of the car and the benefit of having fuel provided by the employer), employer-provided accommodation, low-interest loans to employees and situations where an employer has lent an asset to an employee.

For example, company cars are taxed using a percentage based on the CO2 rating of the car applied to the list price. The fuel benefit uses this percentage and applies it to a standard amount every year. In 2023/24, this amount is £27,800. A company car with a usage percentage of 26% and a list price of £30,000 would have a car benefit of £7,800 and a fuel benefit of £7,228.

Practical tip An employee is taxable on a benefit provided as a result of the employment. Thus, it does not matter if the benefit is not provided directly to the employee. Even if it is provided to a family member or a member of the employee’s household, if it is paid due to the employee’s employment it will be taxable on the employee.

People set up in business for a variety of reasons. For some it is a dream that becomes a reality some years later. In working towards that dream, they may purchase items before the business starts to trade, to enable the business to trade, rather than for the purposes of the trade, e.g. a professional camera purchased to enable professional photographs to be taken in a portfolio of work before any trading has commenced. Other costs may include rent of premises, purchase of office supplies, marketing, etc. The downside of incurring expenditure prior to commencement is that tax relief for the pre-trading costs is delayed or can be lost altogether.

Normally expenses would not be allowable until the business starts trading but tax legislation specifically allows relief for pre-trading expenses as if incurred on the first day business commences (or the first accounting period for companies) as long as certain conditions are met.

The relief is available for both self-employed traders and companies for expenditure which:

• is incurred in the seven years before the trade, profession or vocation starts;
• is not otherwise allowable as a tax deduction;
• is incurred 'wholly and exclusively' for business purposes; and
• would have been allowed if incurred after the business started.

Be aware that the purchase of trading stock is not deductible as a pre-trading expense since its cost is deductible in arriving at profits when trading begins. Similarly, for expenditure such as rent paid in advance, that proportion relating to pre-trading will not qualify for relief. Capital purchases are not expenses and as such normally such costs would not be tax deductible. However, for the purposes of claiming capital allowances there are special provisions in s12 Capital Allowances Act 2001 to treat pre-trading capital expenditure as incurred on the day that trading starts.

Pre-trading expenses can also be claimed for a rental business – again here we are looking at such costs as management charges, advertising, etc but not expenses incurred should a landlord have lived in a property prior to renting it out. If a property is let at less than the full commercial rent, any expenditure relating to that property will normally fail the ‘wholly and exclusively’ test. Although, strictly, no expenditure on such properties is admissible as an expense of the rental business, expenses can be deducted up to the amount of rent derived from that property. Note that there are special rules for furnished holiday lettings.

The tax treatment of capital costs will depend on whether the accruals basis or cash basis is being used to prepare the accounts. If the cash basis is used, then such expenses will generally be treated as business expenses; if using the accruals basis, a tax deduction may be allowed under the capital allowances rules.

Transfer self-employment into company

Many self-employed individuals incur pre-trading expenses and then transfer the business into a company. In this scenario, the company is the trader but, as the expense was incurred pre-trading, the company cannot claim. One way to satisfy these rules is to set up a company and provide services on a freelance basis to the company, charging the company a fee (e.g. services to look at the feasibility of a project, etc). Tax relief for costs incurred will effectively be claimed, whereas no relief would be possible if the costs were borne by the self employed individual and not charged to the company.

VAT on pre-trading expenses

If items classed as goods e.g. stock, office equipment or vans have not been sold at the registration date, VAT can be reclaimed on items bought in the four years before registration.

VAT can be reclaimed on services (e.g. accountancy fees) supplied in the six months before registration, provided they do not directly relate to goods sold before registration. A valid VAT invoice is required and the purchase must have been for business purposes.

We are increasingly hearing more and more about artificial intelligence (AI) and how its use can change our way of working both now and in the future. AI is constantly evolving, but it generally involves machines using statistics to find patterns in large amounts of data, perform repetitive data tasks without the need for human input and most importantly 'learn' from experience. HMRC intends to enhance its use of this technology and is already putting procedures in place to take full advantage.

HMRC has been using advanced analytical technology for at least a decade with its use of the computer system Connect by pulling together information from various sources to identify potential cases of tax evasion and avoidance. For example, Connect cross-checks property ownership data from the Land Registry, client lists from estate agents and online property rental ads against tax returns. The Valuation Office is supplied with rental data from agents and landlords and, as a government office, Connect uses this information. By this process, buy-to-let landlords who might be underpaying tax on their rental income or never declared the source of income in the first place can be detected. Other data sources include social media, flight sales and passenger information, DVLA records and UK Border Agency records, and the list is being added to all the time.

As of 1 January 2024, online marketplaces and sales platforms (e.g. eBay) are now obliged to provide user data including names, addresses, dates of birth, bank account details and information on sales made through the platform. Anyone earning more than £1,000 a year from a trade must complete a tax return. Initial estimates indicate that the process will cost HMRC £36.7m, including implementation costs and salaries for 24 full-time equivalent staff.

A consultation process headed ‘Improving the data HMRC collects from its customers’(July to October 2022 - updated April 2023) looked at options for increasing the amount and type of data HMRC collects from employers. This included considering how additional information on employees’ occupations, work locations and hours worked could be collected through the PAYE Real Time Information (RTI) system.

One area where HMRC intends to use AI capabilities is when taxpayers submit a tax return. HMRC believes that the 'tax take' could be increased by the use of what HMRC terms 'nudges' when a taxpayer submits a return. AI will be used to predict ‘triggers’ for when customers will be contacting HMRC with queries (e.g. following the issue of an updated tax code), thereby providing what HMRC terms 'interventions' so that taxpayers will no longer need to contact HMRC for the answers to the more fundamental questions.

The main area of interest to HMRC and where AI will be best suited to HMRC's investigation work is to use AI's ability to analyse and assess taxpayer behaviour and patterns of behaviour to ensure compliance with tax laws. Analysis of data analytics will help identify high-risk areas and individuals, building cases for HMRC investigators – a more targeted approach saving resources and time. AI will also work with other tools such as geo-mapping (i.e. the process of taking location-based data including sales numbers, demographic info, etc) and use the resulting information to create a map. By pulling together all information collated from the various sources available, AI will learn to spot anomalies, identifying businesses that are potentially under-reporting their income or overstating their expenses, thereby targeting areas for an investigation.

Practical point

The value of AI to HMRC will not be in the collating of data (which it does already) but in the software's ability to learn to analyse that data in a way that will enable HMRC to do its job.

ICAEW Insights In Focus podcast: https://soundcloud.com/icaew/how-is-hmrc-digitalising-taxation

HMRC IT strategy: 2022 to 2025: https://www.gov.uk/government/publications/hmrc-it-strategy-2022-to-2025/hmrc-it-strategy-2022-to-2025

Not all property is equal when it comes to stamp duty land tax (SDLT). Higher rates apply to residential properties than to non-residential properties, with a 3% supplement applying to second and subsequent residential properties costing more than £40,000. Where a property comprises mixed residential and non-residential use, the lower non-residential rates apply.

The difference in rates has paved the way for speculative refund claims where the residential rates were charged on the basis the non-residential rates should have applied, and the tribunals have been busy hearing these cases. Making such a claim simply on the basis that it might be worth giving it a go is generally a waste of time and money.

Residential property

For SDLT purposes, a residential property is defined as:

• a building suitable for use as a dwelling, or in the process of being constructed or adapted for such use;
• land that is or forms part of the garden or grounds of such a building (including any building or structure on that land); or
• an interest in or right over land that subsists for the benefit of such a building or land.

For example, a house and garden with a garage in the grounds would all count as residential property.

Non-residential property

Non-residential property is simply property that is not residential property.

Mixed-use property

Mixed-use property is property with residential and non-residential elements. SDLT is charged at the non-residential rates on mixed-used property.

Suitable for use as a dwelling

To qualify as a residential property, a property must be ‘suitable for use as a dwelling’. It should be noted that the test is not whether it is actually used as a dwelling, but whether it is ‘suitable’ for use as such. For example, if a business is run from a home office, the room used as the home office will normally remain suitable for use as a dwelling, so the property is a residential property to which the residential rates apply rather than a mixed-use property. By contrast, if the property is divided into separate areas and part adapted for commercial use or business premises, such as a shop or café, the property will be a mixed-use property.

There have been a number of tribunal cases relating to claims for the mixed-use rates, with varied success. Refund claims should only be entertained where there is genuine business use and commercial use can be proven.

Derelict properties and those needing work

Speculative refund claims have also been made in respect of properties needing a lot of work on the basis that in the state in which they were purchased, they were not suitable for use as a dwelling. However, this will only be the case if the property has been damaged to such an extent that normal repair work, modernisation or replacement will not make it habitable. A distinction is drawn between a derelict property (which may be regarded as unsuitable for use as a dwelling) and one in need of renovation, modernisation or repair (which is suitable for use as a dwelling and to which residential property rates apply). For example, the temporary removal of a kitchen or bathroom prior to sale will not prevent a property from being suitable for use as a dwelling.

Refund claims should only be entertained for properties that were genuinely derelict when purchased, not for those simply needing renovation.

As the end of the tax year approaches, it is prudent for those operating their business as a personal or family company to review the profits extracted so far in the tax year and to consider whether it is beneficial to take further profits before the end of the tax year.

There are various ways in which profits can be extracted, and not all routes are equal from a tax perspective. When extracting profits, it makes sense to do so as tax efficiently as possible, while meeting any non-tax considerations that may need to be taken into account. For example, while it may be tax efficient to pay a salary or dividend to a family member, there may be non-tax reasons for not doing so.

Option 1: Salary and bonuses

Where the personal allowance of £12,570 is available in full, it is tax efficient to pay a salary or bonus up to this level. As the personal allowance is equal to the primary Class 1 National Insurance threshold for 2023/24, there will be no employee National Insurance to pay. If the employment allowance is available, there will be no employer’s National Insurance to pay either. However, remember, personal companies where the sole employee is also a director are not entitled to the employment allowance. If the employment allowance is not available, employer’s National Insurance is payable at 13.8% on the excess over £9,100.

If you have not paid a salary or bonus of £12,570 yet this tax year and have the funds available to extract from your company, you may wish to consider paying the shortfall before 6 April 2024.

Option 2: Dividends

Dividends can only be paid from retained profits, and if you have sufficient retained profits, you may wish to pay a dividend before the end of the tax year, particularly if shareholders have not used their dividend allowance, which is £1,000 for 2023/24 and available to all taxpayers regardless of the rate at which they pay tax. The dividend allowance falls to £500 from 6 April 2024, so it may make sense to take dividends before that date if they would be tax-free in 2023/24 but taxed in 2024/25.

Remember, unless you have an alphabet share structure, dividends must be paid in proportion to shareholdings.

Option 3: Pension contributions

It can be very tax efficient for your company to make contributions to your pension scheme on your behalf, particularly if you have not used your annual allowance for the current year, or have unused allowances from the previous three years. The lifting of the lifetime allowance charge paves the way to make further contributions if your pension pot has reached £1,073,100. Your company is able to deduct the contributions in calculating its taxable profits.

Option 4: Benefits in kind

You can also take advantage of tax exemptions to extract profits in the form of tax-free benefits. For example, you can make use of the trivial benefits exemption to provide treats costing no more than £50. Remember, tax-free trivial benefits for company directors are capped at £300 per tax year.

Option 5: Do nothing

If you do not need to use your profits outside your company and would pay further tax on any profits extracted, you may prefer to leave them in your company for now. You also need to ensure that you have sufficient funds available in your business to meet your business costs.

For tax purposes, where an employee uses their own car for work, mileage allowances can be paid tax-free up to the approved amount, which is simply the business mileage for the year multiplied by the approved rate (which for cars and vans is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business miles).

Similar but not identical rules apply for National Insurance, and amounts classed as ‘relevant motoring expenditure’ (RME) are disregarded from the computation of earnings for National Insurance purposes as long as they do not exceed the qualifying amount. As National Insurance is calculated on a non-cumulative basis, the qualifying amount is the business miles in the earnings period multiplied by the approved rate, which for cars and vans is 45p per mile regardless of the number of business miles in the tax year.

Tribunal decision

In a recent decision, the Upper Tribunal found that the type of payments that can fall within the definition of RME was wider than the definition applied by HMRC. More specifically, the tribunal found that the definition of RME was not limited to payments for actual use of the car; it also applied to payments in relation to potential and anticipated use of the employee’s car for business purposes. This means that where an employee has been paid a car allowance, the amount that is disregarded for National Insurance purposes may be higher than previously believed by HMRC – the allowances count as RME and should have been disregarded for National Insurance purposes up to the qualifying amount. Consequently, National Insurance contributions may have been paid where under the revised definition of RME they would now not be due.

For example, if an employee is paid a monthly car allowance of £300 and in one month undertakes 500 miles, the qualifying amount is £225 (500 x 45p). Therefore, £225 of the allowance should now be disregarded for National Insurance purposes. Under the narrow definition previously applied by HMRC, the car allowance was not treated as RME and the full amount was treated as earnings for National Insurance purposes.

Claiming a refund

Employers who have paid National Insurance which under the wider definition of RME would not have been due may be able to correct the position via Real Time Information (RTI). Where this route is taken, claims must be substantiated on a pay-by-pay period basis. HMRC will require the following evidence:

• a list of employees included in the claim, together with their National Insurance numbers;
• evidence of the business mileage undertaken by each employee;
• the amount of the car allowance payments received by these employees;
• details of any other RME payments received by the employees (such as mileage payments); and
• the primary and secondary Class 1 National Insurance contributions that are being reclaimed.

Where it is not possible to correct an overpayment through RTI, claims can be made in writing to HMRC using the reference ‘Relevant Motoring Expenditure’. The claim must include the details listed above, together with an explanation as to why a correction cannot be made through RTI.

Employers paying car allowances to employees who use their own cars for business should review their records to see if they are entitled to a refund.

Employers must pay their workers at least the statutory minimum wage for their age. Depending on the age of the worker, they may be entitled to the higher National Living Wage (NLW) or the National Minimum Wage (NMW) for their age band.

It is important to note that the right to be paid at least the statutory minimum applies to ‘workers’, the definition of which is wider than employees.

The NLW and NMW are increased from April each year. In addition, the qualifying age limit for the NLW is reduced from 1 April 2024.

Lower age limit for the NLW

Currently, workers aged 23 and above are entitled to be paid the NLW. This is the highest rate of the NMW.

From 1 April 2024, the age limit is reduced, and all workers aged 21 and above must be paid at least the NLW.

New rates

The NLW and NMW rates applying from 1 April 2024 are set out in the table below.

                                                                                             Rate

NLW – workers 21 and above.                                           £11.44hr

NMW – workers 18 to 20.                                                   £8.60hr

NMW – workers under 18 but above school leaving age.  £6.40hr

Apprentice rate.                                                                  £6.40hr

Currently, the NLW is set at £10.42 per hour and is payable to workers aged 23 and above. Workers aged 21 and 22 are entitled to receive a NMW of £10.18 per hour. The NMW is set at £7.49 per hour for workers aged 18 to 20 and at £5.28 per hour for workers who have reached school leaving age but who are under the age of 18. The apprentice rate is also £5.28 per hour.

The apprentice rate is payable to apprentices under the age of 19 and also to those who are aged 19 and over and in the first year of their apprenticeship.

Accommodation offset

Where the worker is provided with accommodation, the minimum amount of pay is reduced by the accommodation offset. This is currently £9.10 per day (£63.70 per week). It is increased to £9.99 per day (£69.93 per week) from 1 April 2024.

Giving effect to the increases

It is important that employers comply with the NMW legislation; penalties for non-compliance are high.

It is not necessary for the worker to be paid the NLW/NMW for every hour they work – what matters is that on average they receive the NLW/NMW for the hours worked in a pay reference period. For example, if a worker aged 35 is paid weekly and works a 40-hour week, from 1 April 2024 they must be paid at least £457.60 for the week’s work.

Although the new rates apply from 1 April 2024, they do not need to be paid from that date if it falls in the middle of a pay reference period. Rather, the new rates must be paid from the start of the first pay reference period to begin on or after 1 April 2024. For example, if the worker is paid weekly on a Friday, the new rates must be paid from the week commencing 6 April 2024. However, if the worker is paid for the month on the last day of the calendar month, the new rates must be paid from 1 April 2024.

As well as increasing the rates, employers will need to ensure that workers aged 21 and 22 receive at least the NLW from 1 April 2024.

Despite 4.2 million couples being eligible for the tax break, only 1.8 million are claiming the marriage allowance (MA) – a benefit worth £252 a year. The main reason for not claiming is probably because those eligible are either unaware of the allowance or, if they are aware of it, think they are not eligible.

For example, many commentators and HMRC's website state that to claim one partner must have income less than the personal allowance of £12,570, but this is not what the legislation says. The qualification in the legislation is that neither person is a higher or additional rate taxpayer, not that one of them receives income below the personal allowance. That means that the transferor can have, say, £18,310 of income (comprising salary of £11,310, interest of £6,000 and £1,000 in dividends), make the transfer and still have no tax to pay.

The rules state that a claim can be made if all of the following apply:

• The couple must be married or in a civil partnership when the transferor makes the application to transfer the allowance (there is no requirement for them to live together, such that it can still be transferred after separation or where one spouse has died).
• During the relevant tax year, the transferee is not liable to tax at a rate other than the basic rate, the dividend ordinary rate or the starting rate for savings.
• Neither person receives the married couple’s allowance (an allowance claimable where one person to the marriage was born before 6 April 1935).
• Further, where a taxpayer has an extended basic rate band (e.g. as a result of gift aid payments or pension contributions), that extended basic rate band is used to determine whether the taxpayer is a basic rate taxpayer or not and therefore whether the MA may be claimed.

The MA is not an allowance as such, but a tax reducer enabling the reallocation of £1,260 of the annual personal allowance from one person in the marriage (or civil partnership) to the other. The claim is for the whole £1,260 as a lower amount cannot be transferred, therefore the maximum tax reduction benefit is £252 (£1,260 x 20%).

How to claim – complicated!

The claim is made by the person surrendering the allowance either by ticking a box on the tax return if registered for self-assessment or by completing the MA form MATCF and posting to the address on the form. The recipient cannot claim as there is nowhere on their tax return to indicate the transfer.

Enduring elections

MA elections need to be made each subsequent year if made on the self-assessment tax return and cannot become enduring. In comparison, elections made via completion of the form MATCF will become enduring and carried forward each year until cancelled. If an enduring election is in place and the transferor has income taxed under PAYE, the existence of an enduring MA claim can be determined by the tax code where a suffix ‘N’ indicates transfer to their spouse and suffix ‘M’ indicates receipt from their spouse.

Time limit

The general time limit for making any claim for repayment of overpaid tax is four years and refund claims under the MA are no different. If both partners have PAYE taxed income, the tax codes will be amended; the self-employed and others in self-assessment will have their final tax bill reduced. Otherwise, the refund will be by cheque. From February 2024 the refund can be made to a third party (e.g. an agent), if required.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is introduced from 6 April 2026 From the outset, it will apply to unincorporated traders and landlords with annual business and/or property income of £50,000 or more. It will be extended to unincorporated traders and landlords with business and/or property income of £30,000 or more from April 2027. The Government have yet to make a decision as to when or if it will be extended to those whose annual business and/or property income is less than £30,000, but is keeping the position under review.

At the time of the 2023 Autumn Statement, and following a review into Making Tax Digital for Small Business, the Government announced a number of design changes which will simplify MTD for business owners and landlords.

Nature of MTD

MTD for ITSA requires unincorporated traders and landlords within its scope to keep digital records and provide digital information to HMRC on a quarterly basis.

As a result of the simplification measures, traders and landlords will no longer need to file an End of Period Statement. To facilitate changes or the correction of errors, the quarterly updates will now cover the year-to-date, so that the figures submitted at the end of each quarter are those for the year-to-date at the end of the quarter, rather than just the figures for the quarter in question. Traders and landlords with income below the VAT registration threshold can submit three-line accounts.

It will now also be possible for taxpayers to be represented by more than one agent, which may be helpful if a taxpayer uses one agent to deal with their properties and another for their business affairs.

Impact on landlords

A landlord may find themselves within MTD for ITSA even if they only have a small amount of property income as the trigger is total business and property income. Consequently, if a landlord also has an unincorporated business, it is necessary to look at the total of business and property income to determine if MTD applies and, if so, from when. So, for example, a landlord with only £2,000 of property income will be within MTD for ITSA from April 2026 if they also have business income from an unincorporated business of at least £48,000. Therefore, landlords with a small amount of property income may need to comply with the requirements of MTD in respect of that income from as early as April 2026.

Jointly owned property

Simplifications were also announced at the time of the 2023 Autumn Statement which benefit landlords with jointly owned properties. The simplifications mean that landlords will be able to choose not to submit quarterly updates of expenses that relate to jointly owned properties. They will also be able to keep less detailed records in relation to jointly owned properties, simplifying the transfer of records between the joint owners. However, landlords will still need to submit details of expenses incurred on jointly owned properties to HMRC before they are able to finalise their tax position for the tax year.

In his November 2023 Autumn Statement, the Chancellor announced a reduction in the main primary rate of Class 1 National Insurance from 12% to 10%. Rather than waiting until the start of the 2024/25 tax year to bring in the change, it applies from 6 January 2024.

The change will benefit employers and directors, but will cause something of a headache for employers who will need to implement the change in-year.

Primary Class 1 contributions

Primary contributions are payable by employees and are the mechanism by which they build up entitlement to the state pension. For a year to be a qualifying year, an employee needs earnings at least equal to the lower earnings limit, which is set at £6,396 for 2023/24 (£123 per week).

Class 1 contributions are payable at the main Class 1 rate on earnings between the primary threshold and the upper earnings limit, and at the additional rate on earnings in excess of the upper earnings limit. For 2023/24, the primary threshold is aligned with the personal allowance at £12,570 and the upper earnings limit is set at £50,270, aligned with the point at which higher rate tax becomes payable. Employees with earnings between the lower earnings limit and the primary threshold are treated as having paid primary contributions at a zero rate. This secures a qualifying year for state pension purposes for zero National Insurance cost.

The main primary rate is 12% from 6 April 2023 to 5 January 2024 and 10% from 6 January 2024 to 5 April 2024. The additional primary rate is 2% throughout 2023/24. The reduction in the main primary rate will save an employee up to £62.82 per month.

Directors

Unlike other employees who have an earnings period that corresponds to their pay interval, directors have an annual earnings period regardless of the frequency with which they get paid. Directors’ contributions can be calculated as for PAYE on a cumulative basis by reference to the annual thresholds, or the alternative arrangements can be used under which the contributions are calculated as for other employees each time the director is paid, with the liability being recalculated on an annual basis when the director is paid for the final time in the tax year.

The liability should be calculated using the rates prevailing at the time. However, where the alternative arrangements are used, the in-year change will mean that a composite annual rate for 2023/24 must be used when calculating the annual liability at the year end. For 2023/24 the composite rate is 11.5%.

Giving effect to the changes

Employers will need to update their payroll software before making January 2024 (month 10) payments to employees.

If it is not possible to update the software in time, employers will need to rectify the position before the end of the 2023/24 tax year to ensure that employees and directors have paid the right contributions for the tax year.

As we move into the final months of the 2023/24 tax year, it is time to give some thought to whether you have used your 2023/24 dividend allowance yet, and whether it is worth extracting further profits as dividends before the end of the tax year. Once a salary has been taken equal to the personal allowance of £12,570, it is tax efficient to extract further profits as dividends.

Nature of the dividend allowance

The dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. The allowance is set at £1,000 for 2023/24, but will fall to £500 for 2024/25. Dividends sheltered by the allowance can be enjoyed free of tax by the recipient; however, as the allowance uses up part of the tax band in which the dividends fall, it is more of a zero-rate band than a true allowance.

Dividend tax rates

Dividends are taxed as the top slice of income and the dividend tax rates are less than the general income tax rates. Where dividends fall in the basic rate band, they are taxed at the dividend ordinary rate of 8.75%; where they fall in the higher rate band, they are taxed at the dividend upper rate of 33.75%; and where they fall in the additional rate band, they are taxed at the additional dividend rate of 39.35%. By comparison, the basic rate of income tax is 20%, the higher rate of tax is 40% and the additional rate is 45%.

Restrictions on paying dividends

Dividends are paid from post-tax profits which have already suffered corporation tax. A dividend can only be paid where a company has sufficient retained profits from which to pay the dividend.

Further, dividends must be paid in proportion to shareholdings, although this restriction can be overcome by having an alphabet share structure which allows dividend payments to be tailored to the shareholder’s circumstances. Where this is used, each shareholder has their own class of share, e.g. A ordinary shares, B ordinary shares, and so on, meaning that a dividend can be paid to that shareholder only by declaring a dividend for the class of share that they hold.

Don’t waste the allowance

If you haven’t declared any dividends in 2023/24 and have the profits to do so, it is worth declaring dividends to use up your 2023/24 allowance. As the dividend allowance falls from £1,000 for 2023/24 to £500 for 2024/25, dividends that are not taxable if declared before 6 April 2024 may be taxed if declared on or after that date.

In a family company scenario, check whether all shareholders have used up their dividend allowance and, if not, consider declaring dividends so that their allowances are not wasted. Options for extracting profits without triggering a personal tax liability are limited, so, where possible, it makes sense to take advantage of the tax-free extraction routes available.

Remember, when assessing how much of your dividend allowance remains unused, to take account of any dividends that you have received from investments.

Further dividends

If you need funds outside the company and have already used your dividend and personal allowance, consider the rate at which those dividends will be taxed. If your basic rate band has not been used in full, it may be preferable to take dividends before 6 April 2024 to ensure that they are taxed at the dividend ordinary rate of 8.75%, particularly if you are likely to be a higher or additional rate taxpayer in 2024/25.

Online marketplaces (e.g., eBay, Amazon and Etsy) are very popular platforms. Sellers range from individuals disposing of their used or unwanted items (e.g., after clearing out their loft!) to established businesses.

Does the occasional sale of secondhand items online or in (say) car boot sales represent taxable income? Selling personal items after clearing out the loft is unlikely to generate an income tax liability, because such items will normally have been bought at a higher cost than their secondhand value, so no trading profit is made (or no allowable loss arises). For those fortunate enough to unearth valuable personal property suitable for the Antiques Roadshow, it will often be subject to the capital gains tax (CGT) rules for chattels, and either be completely exempt from CGT (as ‘wasting chattels’) or exempt where the item was bought and sold for gross consideration of £6,000 or less.

Not taxable…within limits

Regular, organised sales of (say) handmade items are likely to attract the attention of HM Revenue and Customs (HMRC). Nevertheless, such ‘trading’ might not be taxable or reportable. If a hobby is (or becomes) taxable, a ‘trading allowance’ is generally available. The trading allowance exempts trading, casual and/or miscellaneous income of up to £1,000 per tax year from income tax. If the individual’s annual gross income from trading is £1,000 or less, it may not be necessary to notify HMRC or declare this income on a tax return (although a tax return may be required for other reasons). If the individual does not want to use the trading allowance, they may make an election for this ‘full relief’ not to apply, so profits are calculated using the normal rules and they complete a tax return accordingly (e.g., if the trade was loss making). If the individual’s annual gross trading income exceeds £1,000, they can choose between making an election to treat their taxable profit as their total relevant income less the trading allowance without any separate relief for expenses or capital allowances (‘partial relief’), or by calculating their taxable profits as normal (i.e., total income minus actual expenses and capital allowances – the ‘profit method’).

Be careful!

In many cases, the scale of activities will be such that the trading allowance of £1,000 per tax year is insufficient to exempt the gross income from those activities, so it will be necessary for individuals to register for self-assessment and pay tax on their profits. Failure to notify HMRC of this taxable income at the proper time could also result in late notification penalties becoming payable. For example, in Milasenco v Revenue and Customs [2023] UKFTT 620 (TC), the taxpayer was found to be trading on eBay. In addition to being liable to tax on self-employment income from online trading in goods for four tax years (2013/14 to 2016/17), he was charged substantial penalties based on deliberate errors in his tax returns for three of those tax years, and on deliberate failure to notify HMRC for the fourth tax year.

Practical tip

The taxpayer in Milasenco had previously traded on eBay with a trading name for several years and operated a PayPal account showing numerous payments from different individuals. Take a reasonable and realistic view on whether a trade exists. Traders who bury their heads in the sand are likely to be caught sooner or later.

VAT returns and payments should be submitted to HMRC no later than seven days after the end of the month following the end of the VAT period. If the return and/or payment is late, it can result in the business entering either or both of the penalty regimes for late payments or late returns.

If the return has still not been submitted about six weeks after the end of the VAT period or two weeks after the due date for sending in the return, HMRC will produce a ‘central assessment’ for the VAT it estimates the business owes.

The assessment is calculated on the liability of previous VAT returns and is normally inflated to encourage the submission and payment of the VAT return by the due date. If a business is persistently late, the level of the assessment is inflated by greater amounts to encourage compliance.

Any penalties for late payment are initially calculated based on the estimate of the VAT liability.

New method of processing late returns

Previously, when a late VAT return was submitted to HMRC, the central assessment was removed from the VAT account by the next working day. The estimate was replaced in the VAT account by the actual figures submitted. Any checks on the submitted return would take place in due course.

HMRC has confirmed that this approach has now changed. By design, the updated process does not update the VAT account to remove the central assessment until the late return has been fully processed. If the late return is subject to compliance checks, the central assessment will not be removed from the VAT account until those checks are complete.

If HMRC’s system does not flag the late return for additional checks, the balance in the VAT account may still be updated by the next working day.

If a business receives a central assessment, it should endeavour to file the outstanding VAT returns as soon as possible. In some cases, it may be necessary to pay the central assessment to prevent the business from incurring additional penalties. This should also prevent HMRC’s debt management team from chasing the payment.

What can this mean for businesses?

Under the system for processing late returns, if HMRC selects the business for a verification visit following submission of the return and payment, the business’s account will not have been updated and enforcement action will continue if the assessment has not been paid.

This could result in an enforcement officer turning up at a business’s premises and distraining on its goods because the submission of the return will not show up on HMRC’s ledger until the verification has been completed.

This could cause businesses, at the least, embarrassment and, at worst, financial hardship.

Avoid a penalty

If a business does not have the funds to pay its VAT liability, it should still send its return in on time and contact HMRC’s business support line and arrange a ‘Time to Pay’ agreement with them (normally three to six months), which will avoid a penalty. It is therefore important to send in the return and agree a Time to Pay arrangement with HMRC, rather than ignore the problem and hope it will go away – it will not!

Practical tip HMRC’s new method of processing late returns could result in some businesses being subject to enforcement action even if they submitted the return late. Businesses should ensure that the return is submitted on time and if they cannot pay, agree a Time to Pay arrangement with HMRC.

A comparison between trading through a limited company or a partnership.

When considering the best vehicle through which to operate a business, tax is a major consideration which can affect that decision, but it’s not the only one; practical and legal issues should be considered as well.

A limited company is a ‘body corporate’ (i.e., a separate legal person). The company owns the assets, the profits, it conducts the business, pays its own taxes, employs its own people, can sue and be sued, etc. This ‘veil of incorporation’ insulates the business (and the inherent risks) from its owners, thus limiting their personal liability. Directors are appointed to run the business and the owners may appoint themselves as such; they are treated as employed individuals, like any other employee of the company, but subject to stricter rules under company law.

General partnerships are not separate legal entities (except in Scotland); partners have unlimited liability and are subject to ‘joint and several’ liability (i.e., they are all equally responsible for the partnership’s liabilities).

What about the tax differences?

(a) Partnerships

A partnership is defined (in Partnership Act 1890, s 1) as ‘the relation which exists between persons carrying on a business in common with a view to profit’, and for tax purposes it is just that; multiple sole traders coming together. As with the legal position, the partnership is not a separate taxable person (i.e., it is transparent). The partnership completes its own tax return with its own unique tax reference number, but does not actually pay any tax.

The partners’ individual profit shares feed into their own personal tax returns and they pay income tax and (currently) Class 2 and 4 National Insurance contributions (NICs) thereon. Likewise, disposals of partnership assets are assessed on the partners for capital gains tax purposes based on their capital stakes (represented by their capital accounts). Beyond submitting partnership tax returns to HMRC there are no other formalities, with no need to involve Companies House.

Limited liability partnerships (LLPs) apply ‘body corporate’ treatment to partnerships, but generally with the same tax transparency as ordinary partnerships.

(b) Partnership agreement

One thing which is not necessary for a partnership, but is highly recommended, is a partnership agreement drawn up to outline the partners’ wishes and how the partnership should be run.

In the absence of such an agreement, the Partnership Act 1890 prescribes a framework for the partnership to operate within; for example, the partnership dissolves on the death of a single partner, each partner has equal management and profit rights, and no interest on capital.

(c) Companies

Limited companies are not transparent; they are subject to corporation tax on their own account (at a main rate of 25%, or 19% for profits under £50,000); if the owners (shareholders) withdraw post-tax profits as dividends, they are subject to income tax at rates of 8.75%/33.75%/39.35%, so lower than that on self-employed partners’ profits and directors’ salaries; also, dividends are not subject to National Insurance contributions. However, because dividends are paid after corporation tax, there is an element of double taxation on the same profits. Companies alone are also able to benefit from research and development (R&D) and patent box reliefs.

Whereas a partner is taxed on their profit share irrespective of whether they withdraw those profits, a director-shareholder is only subject to personal tax to the extent that those profits are actually withdrawn – which can be carefully controlled. Companies can therefore accumulate profits without incurring personal tax liabilities.

Practical tip Deciding whether to operate as a partnership or company will depend on several factors, e.g., potential claims for research and development relief; the ability to restrict personal tax liabilities, combined with lower corporation tax rates usually means greater overall tax savings especially if profits are retained within the company. Having limited liability may be reason alone to operate through a company, but the simplicity and flexibility of a partnership will often suffice; especially as LLPs can offer the best of both worlds.

An exploration of the different tax payment methods should a taxpayer be struggling to pay.

Payments on account (POAs) for the selfemployed or those taxpayers who have significant income from sources other than employment have been compulsory for nearly 30 years.

POAs are advance payments towards the final tax bill, made twice a year (in January and July) based on the previous year’s tax liability. The payment dates could not come at a worse time for many, just after Christmas and during the school holidays.

Companies do not have to make POAs; their tax bills are due in one lump sum nine months and one day after the accounting year end. Other taxes, including PAYE, have other deadlines.

Other payment methods

Although those dates are contained in law, HMRC offers other payment methods if anyone is struggling to pay or wants to ensure that payments are made on time.

1. A budget payment plan (BPP) allows regular monthly or weekly payments by direct debit towards the next tax bill. With this plan, the taxpayer chooses how much to pay and how often. Payments can also be paused for up to six months, if needed. To use the BPP, previous payments must be up-to-date. This plan can be set up online without having to contact HMRC.

2. A ‘Time to Pay’ (TTP) arrangement is a formal negotiated agreement allowing the spread of tax payments in arrears, typically in 12 monthly instalments. Those lasting over 12 months are only agreed in exceptional cases. For tax due under self-assessment, a TTP arrangement can be applied for online so long the latest tax return has been filed, the amount owing is £30,000 or less, the application is made within 60 days of the payment deadline (which means that for a self-employed taxpayer, the TTP agreement must be in place by 31 March) and the taxpayer does not have any other payment plans or debts with HMRC. Applications not fulfilling the online requirements will need to be made with HMRC initially by a phone call followed by a formal written agreement. Details of income and expenses will need to be declared.

If HMRC accepts a TTP proposal, interest will be charged, but HMRC may lift any penalties. TTP proposals can be rejected; this is usually because:

 • HMRC has reason to doubt the taxpayer’s ability to clear the debt in the period suggested;

 • they have a history of late submissions of returns;

 • they have previously failed to respond to correspondence;

 • they have not kept to previous TTP arrangements;

 • they have not kept HMRC informed of their financial situation; or

 • it appears that the business is not viable and not capable of making a profit, rather than just suffering from short-term problems.

TTPs can also be used for VAT, PAYE and corporation tax arrears (although the conditions for application differ); they can also be used in anticipation of problems with upcoming payments.

3. For those taxpayers who are employed as well as self-employed, payment of a self-assessment tax bill can be made through the PAYE tax code so long as the amount owed is less than £3,000 and the previous year’s tax return was submitted on time. HMRC will automatically collect through the tax code if these conditions are met unless the box on the tax return specifically asking them not to do so has been ticked.

Practical tip

If tax is outstanding on three specific trigger dates, a 5% late payment penalty is charged. These dates are usually thirty days, six months and 12 months after the due date for the tax. For self-assessment, the 5% penalty can be avoided by setting up a TTP arrangement before 31 March 2024 and keeping to the terms of the payment plan, although interest will be charged.

Recruitment agencies often use umbrella companies to pay temporary workers. HMRC confirms that there is no statutory definition of an umbrella company and currently describes it as 'a company that employs temporary workers who work for different end clients', where 'the umbrella will enter into a contract with a recruitment agency that will source work from end clients'. (Tackling non-compliance in the umbrella company market – Consultation).

In effect, umbrella companies act as middlemen employing individuals temporarily who agree to provide their services to end users. Following the clampdown on the use of personal service companies under IR35, the number of umbrella companies has increased. By having an umbrella company which employs the individual and accounts for income tax and National Insurance contributions, IR35 is effectively no longer relevant.

The supply chain works by the client who needs a temporary worker contacting a recruitment agency to find that worker. The recruitment agency pays the umbrella company the assignment rate and the umbrella company employs the worker paying earnings through PAYE, making deductions for the umbrella company's overheads such as:

• its administration fee (called 'a margin')
• an amount to meet their employer’s NIC
• holiday payments
• allowable expenses
• other amounts to cover other specific costs, e.g. apprenticeship levy.

The remainder of the payment is paid to the worker as gross pay, subject to PAYE.

Tax avoidance arrangements, known as disguised remuneration schemes by HMRC, invariably involve an umbrella company making some or all of an individual's pay in the form of a loan, salary advance, grant, annuity or any other payment, telling the individual that the loan, etc is non-repayable and non-taxable when in reality it is. The worker may be asked to sign an employment contract with the umbrella company and a separate agreement. The agreement document will often be a confirmation that the worker agrees to a loan from the umbrella company or maybe another agreement that attempts to disguise some payments as non-taxable. Many workers have limited choice over whether to contract with an umbrella company, or the specific umbrella company to contract with.

The lack of a clear definition of  an umbrella company has led to accusations that such companies take advantage of the uncertainty, denying employment rights and using the format to reduce income tax and NIC. HMRC has also found that both the employment allowance and VAT flat rate scheme are targeted by some umbrella companies who abuse both schemes to benefit from lower levels of employer NICs and VAT respectively (where VAT is charged to their customers as usual but a flat rate of VAT is applied to their gross turnover to calculate the VAT due to HMRC).

HMRC is aware of some umbrella companies charging the worker for their services (including processing pay) and/or directing workers to use umbrella companies in which they hold an interest. Following recognition of an increased number of such schemes, HMRC has set up a special department to investigate such practices and recently undertook a consultation on 'Tackling non-compliance in the umbrella company market', consulting with interested parties and confirming HMRC's intention that there be a definition of umbrella companies, regulation of workers' employment rights, confirming minimum legislative requirements for compliance by umbrella companies and giving HMRC the power to collect an umbrella tax debt from another business in the supply chain (e.g. the initial client or possibly the employment agency).

Practical point

One of the best ways to tell if an umbrella company is compliant with both tax law and employment rights law is to look to see whether the company has accreditation with FCSA (Freelance & Contractor Services Association) or APSCo.

Partner note:

Tackling non-compliance in the umbrella company market – Consultation: https://assets.publishing.service.gov.uk/media/647e0594b32b9e0012a9623e/230411_Umbrellas_condoc_HMT_template.pdf

Understanding off-payroll working (IR35):  https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

A would-be property investor will need to be able to fund the purchase of their investment property. They may choose to do this personally or via a company. If they do not have the funds available, they will need to borrow them. The tax relief that may be available depends on the route taken.

Personal borrowings

The investor may choose to take out a mortgage on the investment property or, alternatively, remortgage their home where this secures a lower interest rate. Where personal borrowings are used to fund the purchase, tax relief is available for the interest on a loan up to the value of the property when it was first let. The loan does not need to be secured on the investment property to qualify for relief.

The way in which relief is given and the rate of relief depend on the type of let.

For residential lets, the interest (and other finance costs) cannot be deducted in calculating the taxable rental profit. Instead, relief is given as a tax reduction, with the tax payable on the rental profit reduced by 20% of the interest and finance costs. If interest and finance costs cannot be relieved in the year in which they are incurred (for example, if there is no tax to pay because the property business made a loss), they are carried forward and may be relieved (by a tax reduction) in subsequent years.

Where the let is a furnished holiday let or a commercial let, the interest and finance costs can be deducted in full in calculating the rental profit or loss. In this way, relief is given at the landlord’s marginal rate of tax.

Corporate borrowings

If the property is to be purchased and held in a company, and the company borrows funds to facilitate the purchase, the associated interest and finance costs are deductible in full in calculating the company’s profits for corporation tax.

Director lends funds to a company

Instead of the company taking out a loan, the director may wish to introduce funds into the company which can be used to buy the investment property. The company may pay the director interest on the loan. This too will be deductible in calculating the company’s taxable profits. However, the company must deduct income tax at 20% from the interest paid to the director and account for this quarterly to HMRC on form CT61. The director would be taxed on the interest received (to the extent it exceeds his or her personal savings allowance) but will receive credit for the tax deducted by the company.

If the director borrows the funds to lend to the company, for example, by releasing equity from his or her home, they will be able to benefit from tax relief on the loan (assuming the company is a close company). However, the company must rent the property out rather than hold it as an investment for the relief to be forthcoming.

Work may be undertaken on a property to repair it or to improve it, and it will not always be clear where the dividing line falls. The distinction is important for tax purposes as, depending on how the accounts are prepared, relief may be given in a different way for capital expenditure and for revenue expenditure.

Where the cash basis is used (as will generally be the case where rental receipts are £150,000 or less), both capital and revenue expenditure can be deducted in calculating taxable profits, as long as it relates wholly to the property business and the capital expenditure is not of a type for which such a deduction is not permitted. However, if the accruals (traditional) basis is used to prepare the accounts, only allowable revenue expenditure can be deducted; relief for capital expenditure is given in the form of capital allowances or in working out the chargeable gain when the property is sold.

Repairs

A ‘repair’ is defined by HMRC as the restoration of an asset by replacing parts of the whole asset. Replacing roof tiles blown off in a storm, repointing brickwork, undertaking interior and exterior decoration and mending broken windows would be repairs. The nature of the work is to put the property back in its original condition rather than making it into something better.

Expenditure on repairs is revenue expenditure. As long as the repairs are undertaken wholly and exclusively for the purposes of the property business, the expenditure can be deducted in full when calculating the taxable profits.

Improvements

Expenditure on improving the property is capital expenditure rather than revenue expenditure. An example here would be the addition of an extension or a loft conversion.

Blurred lines

In practice it will not always be clear whether there has been an improvement or where the line should be drawn.

HMRC recognise the difficulty in determining, at the margin, whether work constitutes a repair or an improvement. They acknowledge that ‘sometimes the improvement may be so small as to count as incidental to a repair’. Where there are no other indicators of capital expenditure, they allow the full amount of the expenditure to be deducted as revenue expenditure.

A further problem can arise where there is an element of improvement because the repair has been carried out using modern materials which give the appearance of an improvement simply because the materials are of a superior quality, provide a better finish or are more durable than those which they replaced. As long as the materials are, taking account of developments over time, broadly equivalent to the old materials, the expenditure will be treated as revenue expenditure and deductible in full. Likewise, any improvements that arise solely as a result of improvements in technology, for example the replacement of single glazing with double glazing, are generally treated as repairs, and consequently the expenditure will be deductible as revenue expenditure.

In deciding whether the revenue/capital boundary has been crossed, the degree of improvement also needs to be considered. Where there is only a trivial increase in performance or capacity resulting from the use of newer, but broadly equivalent, materials, the expenditure remains revenue. But if the improvement arising from the change of materials is significant, the full amount of the expenditure is regarded as capital, including the cost of any work that is needed to ‘make good’, such as redecorating after the improvements have been carried out (even though redecoration work would, on its own, be revenue expenditure).

It may also be necessary to consider whether an apportionment of expenditure is needed where extensive alterations are undertaken. However, if these are so significant as to amount to the reconstruction of the property, the full amount of the associated expenditure will be capital expenditure. Expenditure will only be allowable as revenue expenditure in relation to any parts of the old building that are preserved.

As the end of the tax year approaches, it is prudent to review your pension contributions for the year and consider whether it is worth making further contributions before 6 April 2024. Remember, any annual allowances brought forward from 2020/21 will be lost if not used by this date.

The amount of tax-relieved contributions that can be made in any tax year to a registered pension scheme is limited by both your earnings and your available annual allowances.

Earnings cap

Tax-relieved personal contributions to a registered pension scheme are capped at 100% of earnings for the year or, if higher, £3,600 (gross). This can be limiting for company directors who extract the majority of their profits as dividends, as dividends do not count as earnings for these purposes. However, contributions made by an employer (including those by the director’s personal or family company) are not limited by the earnings cap and can be tax efficient.

Annual allowance

The second limit on tax-relieved pension contributions is the annual allowance. Both individual and employer contributions count towards the allowance.

The allowance is set at £60,000 for 2023/24. However, where both threshold income (broadly income excluding pension contributions) exceeds £200,000 and adjusted net income (broadly income including pension contributions) exceeds £260,000, the allowance is reduced by £1 for every £2 by which adjusted net income exceeds £260,000 until the allowance reaches £10,000.

Where the allowance is not used in full in a tax year, it can be carried forward for three years. However, allowances from an earlier year can only be used where the current year’s annual allowance has been used in full. Allowances not used within this timeframe are lost. If you have made contributions to the level of your annual allowance for 2023/24, further contributions can be made to utilise any unused allowances from 2020/21, 2021/22 and 2022/23. The unused allowances for an earlier year are used before those of a later year.

The annual allowance for 2020/21 to 2022/23 inclusive was set at £40,000; threshold income was £200,000; the adjusted net income abatement threshold was £240,000 and the minimum allowance for the year was £4,000. It is important that the correct figures are used when calculating allowances available from earlier years.

Where a pension has been flexibly accessed by a contributor who has reached age 55, a reduced annual allowance applies to prevent recycling of contributions to benefit from further tax relief. This allowance (the money purchase annual allowance) is set at £10,000 for 2023/24. It was £4,000 for 2020/21 to 2022/23 inclusive.

If tax-relieved contributions are made in excess of the available annual allowance, the excess tax relief not due is clawed back by means of an annual allowance charge.

No lifetime allowance charges

The abolition of the lifetime allowance charge from 6 April 2023 (and the lifetime allowance itself from 6 April 2024) provide an opportunity for those whose tax-relieved pension savings have already reached £1,073,100 to make further contributions without incurring a punitive tax charge. However, where pension savings exceed £1,073,100 when accessed, the tax-free lump sum is capped at £268,275 (being 25% of this figure).

Take advice

In deciding whether to make further pension contributions before the end of the tax year, it is advisable to take financial advice.

Employers can opt to deal with taxable benefits in kind through the payroll (known as ‘payrolling’) rather than reporting them to HMRC after the end of the tax year on the employee’s P11D. However, this is only possible if the employer is registered to payroll the benefits. This must be done before the start of the tax year for which the benefits are to be payrolled. It is not necessary to register the benefits every year – once registered for payrolling, benefits remain registered until deregistered. This too must be done before the start of the tax year for which the deregistration is to have effect.

Nature of payrolling

Where a benefit is payrolled, the taxable amount of that benefit is treated like extra salary paid to the employee in instalments with the employee’s regular salary or wage. For example, if an employee has a company car with a cash equivalent value of £4,800 and is paid monthly, the employee would be treated as if they had received extra pay of £400 each month. This is included in their gross pay for tax purposes. The tax is worked out on the total gross pay (including the payrolled benefits), and deducted from the employee’s cash pay.

As most taxable benefits are liable to Class 1A National Insurance rather than Class 1, the taxable amount of the payrolled benefit is not included in gross pay for National Insurance purposes. Instead, the employer must include payrolled benefits in the calculation of their Class 1A liability on form P11D(b), which must be submitted to HMRC by 6 July after the end of the tax year.

At present, all benefits can be payrolled with the exception of employment-related loans and living accommodation.

Registering new benefits

As the start of the 2024/25 tax year approaches, employers should review the benefits that they want to payroll in that tax year. If there are any benefits that are to be payrolled for the first time, the employer will need to register to payroll those benefits before the new tax year starts on 6 April 2024. This can be done online using HMRC’s payrolling employees’ taxable benefits online service (see www.gov.uk/guidance/paying-your-employees-expenses-and-benefits-through-your-payroll).

It is also prudent to review benefits already registered for payrolling to check that you still want to payroll those benefits in 2024/25. If not, the registration will need to be cancelled before 6 April 2024. This too can be done using HMRC’s payrolling employees’ taxable benefits online service.

Looking ahead

In their January 2024 simplification update, HMRC revealed that payrolling will become mandatory from April 2026. If you are still reporting expenses and benefits after the year end on the P11D, you may wish to consider moving to payrolling ahead of the 2026 mandation date. This will save the task of filing P11Ds too (although a P11D(b) will still be required).

An arrangement allowing a company’s employees to benefit from the growth and success of the business without owning part of it.

Many company owners wish to incentivise and retain key employees by offering share option schemes through the company, or simply by arranging for the company to issue shares to those employees.

Nice idea, but…

However, some company owners may be put off the idea of employee shares diluting the value (and possibly the voting power) of their own shares. There may also be concerns about what happens if the employee leaves (or dies) while owning shares in the company. In addition, share schemes can be complex (e.g., potentially involving the creation of a new class of employee shares, scheme provisions for ‘good’ and ‘bad’ leavers, adherence to detailed legislation for ‘approved’ tax status, and compliance with HM Revenue and Customs (HMRC) registration and reporting requirements).

Let’s pretend!

Instead of offering employees ‘real’ shares, some company owners may therefore prefer the company to offer employees ‘phantom’ (i.e., hypothetical, or ‘pretend’) shares instead. A phantom share scheme is broadly an agreement between the company and employee, containing rules to determine how the scheme will operate. A phantom share scheme typically allows participating employees to benefit from any growth in value of the company’s shares (e.g., on a future sale of the company). In addition, ‘dividend’ payments on phantom shares can be linked to actual dividend payments on ‘real’ shares.

Tax treatment

For income tax and National Insurance contributions (NICs) purposes, HMRC accepts there is no payment of earnings when the company awards phantom shares, i.e., the employee is only receiving the possibility of future payments in respect of the phantom shares (see HMRC’s Employment Income Manual at EIM01600). Payments by the company in respect of phantom shares (e.g., ‘dividends’, or in respect of increases in the notional value of phantom shares based on increases in the company’s value) are treated in the same way as bonuses, so the employee is liable to income tax and employee’s NICs on such payments. The company will normally be able to claim a corporation tax deduction on the phantom share payments, plus employer’s NICs. A phantom share option is not normally treated like a ‘real’ share option, so the grant of the phantom share option is not subject to the employment-related securities tax regime as securities or securities options (see HMRC’s Employment Related Securities Manual at ERSM110020).

Give it some thought

Phantom share schemes offer simplicity and flexibility. However, there are several issues to consider beforehand. For example, the company will need to have a sufficiently strong cash position to satisfy its payment obligations in respect of the phantom shares. In addition, company valuations will be necessary from time to time where phantom shares are linked to increases in the company’s value (e.g., when phantom shares are first awarded, and on occasions requiring payments based on the notional value of the phantom shares, such as if the company is subsequently sold). Furthermore, phantom share schemes may not be as efficient for tax and NICs purposes as ‘real’ share schemes, or alternative employee benefits (e.g., certain benefits-in-kind may be more tax-efficient).

Practical tip Phantom share schemes are relatively straightforward to set up and administer. Nevertheless, it would be prudent to seek expert advice on the tax, company, employment and commercial law implications of running a scheme.