Helpsheets ... continued 34 from homepage

A tax avoidance arrangement involving dividend payments towards university fees is under attack from HMRC.

In family and owner-managed companies, it is not uncommon for shares in the company to be spread among family members. This might be done for various reasons – both tax and non-tax related. For example, the company’s shareholders might include an adult child whose parents control the business, or a trust in which the child is the beneficiary. Dividends might be paid on those shares, which go towards the child’s university fees and expenses. There is nothing inherently wrong with dividends being paid and used in this way. However, HM Revenue and Customs (HMRC) has highlighted a marketed planning arrangement around dividends and school fees, which is considered to represent abusive tax avoidance.

Don’t go there!

In June 2023, HMRC published its Spotlight 62 ‘Dividend diversion scheme used to fund education fees’ (https://tinyurl.com/y3c8zw2v). Briefly, the scheme involves a company issuing a new class of shares. A family member (usually a grandparent of the students, or a sibling of the company owner) purchases the new shares for an amount significantly below market value. The family member usually gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children. The company’s shareholders then vote for substantial dividend payments in respect of the new class of share, which is paid to the trustees. The company owner’s children (as the beneficiaries of the trust) are entitled to the dividend. The dividends are taxable income of the company owner’s children. However, the children pay much less tax than if the company owner had received the dividend (i.e., due to the children’s tax-free personal allowance (£12,570 for 2023/24), £1,000 dividend allowances and eligibility to the dividend basic tax rate). HMRC considers that this scheme (or similar arrangements) does not work due to the ‘settlements’ anti-avoidance legislation, which would have the effect of treating the dividends as income of the parents, as opposed to the children.

Wider scope?

Whilst Spotlight 62 is targeted at a specific, marketed tax scheme, HMRC will no doubt be looking at other companies in which the shares are spread among family members including trust arrangements for the owner-manager’s children, where dividends are paid on the company’s shares. HMRC’s Trusts, Settlements and Estates manual (at TSEM4325) lists several factors among those that might be susceptible to challenge under the settlements provisions. Those factors include:

• disproportionately large returns on the amount paid for the shares;
• differing classes of shares (i.e., so-called ‘alphabet’ shares) enabling dividends to be paid only to shareholders paying lower rates of tax;
• income being transferred from the person making most of the profits of a business to a friend or family member who pays tax at a lower rate; and
• dividends are paid only on certain classes of shares.

Of course, there are many family companies in existence that pay dividends, including to (or for) adult children towards university fees, etc. It does not follow that such arrangements are automatically ‘caught’ by the settlements anti-avoidance rules. However, a review by a tax expert in this field may be prudent.

Practical tip

Company owners who receive a ‘nudge’ letter from HMRC about their potential use of Spotlight 62 or similar arrangements should seek professional advice about how to deal with them.

Being a separate legal entity, the money within a company’s bank account belongs to that company, not the owners or directors. Tempting though it is for a business owner to help themselves to the company’s profits, they cannot do so unless it is declared as a dividend or paid as a salary or pension.

There are other ways to extract profits, such as receiving rent for using personal property or interest on a loan made to the company. Alternatively, a close company can make a loan to a director or participator (i.e., shareholder) or their families in the form of an overdrawn loan account, but there are tax consequences.

What are the tax implications of an overdrawn account?

Unless the official rate of interest (2.25% from April 2023) is charged on the loan, a director (like an employee) is subject to income tax on a cheap loan over £10,000 as a benefit-in-kind. Class 1A National Insurance contributions (NICs) will also be payable by the company on the value of the benefit.

The company is required to pay a deposit of 33.75% (under CTA 2010, s 455) on these amounts loaned to participators that remain overdrawn nine months and one day after the company’s accounting period; once the loan is repaid or written off, those section 455 monies are returned.

How is an overdrawn loan repaid?

Usually, if the director is also a participator, a dividend is declared and offset against the loan balance. If the director is not a shareholder, a bonus can do the same thing; for both, however, there are income tax implications for the individual on these monies. The loan can, of course, be repaid using personal funds.

The company could write off the loan. A director who is not a shareholder will be subject to income tax and NICs on the value of that loan; a participator will be treated as having received a dividend on the value of the write-off. If the participator is also a director, the written-off value will be treated as a dividend, but there is a possibility that HMRC may insist upon Class 1 NICs being charged on the writeoff on the basis that it was made in the individual’s capacity as a director, rather than a shareholder, their argument being that it is remuneration derived from employment (per HMRC’s CompanyTaxation Manual at CTM61660). Such write-offs, therefore, need to be carefully minuted and made as part of a shareholders’ resolution and not as a reward to an individual director.

What about loan accounts being subsequently overdrawn again?

Once the loan is repaid or written off, and a company’s section 455 amounts have been repaid and the slate wiped clean, further loans can be made to participators.

However, since 2013 ‘bed and breakfasting’ antiavoidance rules apply to restrict the repayment of a company’s section 455 charge if new loans are subsequently taken out. Loans of £5,000 or more taken out within 30 days of repayment will lead to the section 455 repayment being rendered ineffective. A participator could hang on for more than 30 days before taking out this new loan, but the restriction also applies to loans of £5,000 or more where there had been a pre-existing ‘intention or arrangement’ to take out any further loans after the repayment of a £15,000+ balance.

These bed and breakfasting restrictions do not generally apply where the initial loan is repaid with taxable income (i.e., through dividends or bonuses).

Practical tip

Loans from a close company should be repaid as soon as possible to avoid section 455 charges, ideally through dividends to benefit from lower income tax rates, no NICs charges and to avoid the application of the bed and breakfasting rules. Any loans to directors should bear interest at the official rate to avoid income tax and NICs charges. To avoid the risk of NICs being imposed on the writing off of loans to participators or directors, it should be recorded as being in their capacity as participators rather than as reward for employment by virtue of directorship.

The transfer of shares may be for various reasons – usually when the owner decides to retire, or at least reduce their involvement in the business. Alternatively, parents may wish their children to have some of the company’s shares to receive dividends, possibly to help fund further education. The transfer can be by gift or sale, or the company may issue new shares to the family members, reducing the percentage holding of the other shareholders.

Valuation of the gift

However, invariably the transfer will be a gift. The tax position will depend on who is receiving the shares. If to a spouse or civil partner, transfers of assets between married couples and civil partners can take place tax-free. For capital gains tax (CGT) purposes, the gift takes place at ‘no gain/no loss’ and is also an exempt transfer for inheritance tax (IHT) purposes. However, gifts of shares between family members outside marriage or civil partnerships are chargeable, the transferor being liable based on the open market value of the shares at the date of gift.

Determining the market value is not straightforward, as legislation states that it is a hypothetical purchaser buying the shares from a hypothetical vendor, both of whom are assumed to be willing to buy or sell, and determine what price is to be paid. It is generally accepted that there is no single correct way of valuing the shares of a private company, but by building an in-depth understanding of the company and the market in which it operates, a valuation expert can assist in arriving at a reasonable estimate.

Capital or income?

Gifting shares means no cash changes hands, and as such no cash will be available to pay any CGT due. However, a claim can be made to ‘hold over’ or defer the gain under ‘gift relief’ such that the donee will become liable when they finally sell the shares. On sale, there will be the usual restrictions that the shareholder must own at least 5% of the shares and voting rights in the company and the company’s main activities must be ‘trading’, rather than ‘investment’ (e.g., dealing wholly or mainly in securities, stocks or shares, land or buildings, or making or holding investments, or is a holding company with trading subsidiaries).

Gifting (or transferring) shares within the owner’s lifetime could fall within the ‘settlements’ antiavoidance rules (which prevent someone from taking tax advantages by diverting income to another). However, gifts to family members will not generally be caught, so long as the right to all dividend income is not restricted.

The gift may be subject to IHT should the donor die within seven years of the gift. If the estate’s value (including the gifted shares) exceeds the IHT threshold, IHT may be payable. However, exemptions and reliefs are potentially available (e.g., the annual gift exemption and business property relief), which can reduce the liability.

Since no consideration is received for the shares, there will be no stamp duty implications.

Problems may arise if the family member receiving the shares is an employee of the company at the time of transfer. HMRC could argue that the shares would not have been given if the donee had not been employed and, as such, the gift should be charged as employment income under the ‘employment-related securities’ provisions, or possibly under the ‘disguised remuneration’ rules.

Practical tip

There may be borderline cases where the evidence is inconclusive. For those cases, a non-statutory clearance application to HMRC may be worth considering, setting out the facts and the reasons for the gifts of shares to the family. Where shares pass solely to those children involved in the business, HMRC will generally accept that the transfer was made in the normal course of the domestic, family or personal relationships of the person making the gift, and not as employment income.

The VAT position of services charges on domestic property.

A service charge is a charge made to tenants or owner occupiers (leaseholders) for the upkeep of common areas of an estate or apartment block, such as paths, driveways, communal gardens and children’s playgrounds, corridors, lifts, etc. These sums are due under the terms of the lease or tenancy agreement.

Is VAT charged on service charges?

The general rule is that a service charge is ‘further consideration’ for the main supply. It is therefore normally an additional payment for the main supply of a property rental or lease and is exempt from VAT.

However, if a management company provides services to freehold owners of dwellings, the supply is taxable because there is no supply of domestic accommodation to link those services to.

HMRC considered that this was unfair to freehold owners, especially those living on the same estate as leaseholders. To address this inequity of treatment between owner-occupiers and tenants or leaseholders, an extra-statutory concession allows all mandatory service charges paid by occupants of dwellings towards the:

• upkeep of the common areas of a housing estate, such as paths, driveways and communal gardens; or
• upkeep of the common areas of a block of flats, such as lift maintenance, corridors, stairwells and general lounges; and
• general maintenance of the exterior of the block of flats or individual dwellings, such as painting; and
• provision of an estate warden, house manager or caretaker,
• to be treated as exempt from VAT.

An exception to the exemption was highlighted in the case of Canary Wharf Ltd (LON/95/ 2869 No 14513). Repairs and maintenance, servicing common areas and car parking were held to be separate standard-rated supplies rather than part of the rent when supplied by a management company direct to the tenants. The decision was based on the wording of the lease and the fact that the services supplied were more extensive than those necessary to ensure ‘quiet enjoyment’ of the property by the tenants. It is therefore important to ensure that the lease is correctly drafted in order to avoid a VAT charge to residents.

Where this concession is applied, the services charge becomes exempt, so any input tax incurred on related maintenance costs, etc., cannot be reclaimed by the service provider and adds to their base costs which will be passed on to residents.

Separate charges

If the landlord makes a separate charge for unmetered supplies of gas and electricity used by occupants, it should be treated as further payment for the main supply of exempt domestic accommodation. However, if the landlord charges occupants for separately metered supplies of gas and electricity, the charges are subject to VAT at the reduced rate.

Optional services supplied personally to occupants, such as shopping, carpet cleaning or painting a private flat, are standard-rated.

Charges by managing agents

A managing agent collecting the mandatory service charges from the occupants on behalf of the landlords can treat the charges as exempt, provided the agent invoices and collects the service charges directly from the occupants.

However, any management fee charged directly by the managing agents to the occupants is standard rated because it relates to the managing agent’s supply to the landlord, rather than the landlord’s supply to the tenants.

Practical tip The supply of domestic management charges is normally exempt from VAT but there are some exceptions. Related input tax cannot therefore be recovered by the managing agent.

HMRC’s attempts to apportion blame simply to assess tax over extended periods can and should be resisted.

The long arm allowing HM Revenue and Customs (HMRC) to go back to previous years to charge extra tax only extends so far. If an individual’s tax return is submitted online to HMRC within the normal time limit of 31 January following the end of the relevant tax year, HMRC may generally open an enquiry into the return up to the end of the 12-month period after the day on which the return was delivered.

Extended time limits

However, if this enquiry window has closed, HMRC may use its ‘discovery’ powers to assess closed years, within certain limits. For income tax and capital gains tax (CGT) purposes, the ‘ordinary’ time limit for HMRC to make a discovery assessment is four years after the end of the tax year to which it relates.

Alternatively, a discovery of lost income tax or CGT brought about carelessly is assessable up to six years after the end of the tax year. For lost income tax or CGT involving an ‘offshore matter’ or ‘offshore transfer’, the assessment time limit is 12 years, and where the loss of income tax or CGT has been brought about deliberately, HMRC may make a discovery assessment up to 20 years after the end of the relevant tax year.

Careless or deliberate?

There is no statutory definition of ‘careless’ for discovery assessment purposes, although the penalties legislation states that a ‘careless’ inaccuracy is due to a failure to take ‘reasonable care’. The discovery assessment provisions regarding a careless loss of income tax or CGT refer to the loss being brought about by the person who is the subject of the assessment or by another person acting on that person’s behalf. The same applies to a deliberate loss of tax.

What does ‘acting’ on a taxpayer’s behalf entail? HMRC’s Enquiry Manual (at EM3232) refers to the following guidance from case law: ‘Examples would in our view include completing a return, filing a return, entering into correspondence with HMRC, providing documents and information to HMRC and seeking external advice as to the legal and tax position of the taxpayer’.

HMRC couldn’t prove it!

It is not enough for HMRC to simply allege careless or deliberate actions where assessments would otherwise be out of time. For example, in Danapal v Revenue and Customs [2023] UKUT 86 (TCC), on 11 March 2016, HMRC issued a discovery assessment for 2009/10 based on careless behaviour by the taxpayer’s accountant. On 2 August 2016, a discovery assessment was issued for 2006/07 and 2007/08 based on deliberate behaviour. The taxpayer appealed. The First-tier Tribunal found that the extended time limit for making assessments applied. The taxpayer appealed to the Upper Tribunal (UT), which allowed his appeal. The UT concluded that the assessments were all out of time, as HMRC had not satisfied the burden of proving that either the taxpayer or his accountants acted carelessly or deliberately in relation to the insufficiency of tax discovered by HMRC.

Practical tip

The burden rests with HMRC to prove that the taxpayer or agent acted carelessly or deliberately in relation to an insufficiency of tax etc., for an extended time limit discovery assessment to be valid. Taxpayers and advisers should be prepared to challenge HMRC on this point, if appropriate.

Some capital gains tax planning points that should be considered before the sale of a business.

Generally, capital gains by individuals are taxed at 10% up to the basic rate income tax threshold and 20% for higher or additional rate taxpayers (with an 8% extra charge for disposals of residential property).

However, capital gains tax can be mitigated on the sale of a business, perhaps when the owner retires, by claiming business asset disposal relief (BADR). This was known as entrepreneurs’ relief until 2020, but the rules are substantially the same and qualification for the relief will reduce the 20% charge to 10% for gains of up to £1 million (higher limits applied before 2020).

BADR can be claimed by sole traders and partners disposing of all or part of their business as well as company directors and employees who own at least 5% of the ordinary shares and voting rights in a ‘qualifying company’ when they sell shares or make associated disposals. This article considers some factors that may be relevant in avoiding traps or maximising the relief.

Asset ownership

The business owner may not own all the business assets. For example, one spouse (and I refer also to civil partners) might operate a business from a building that is owned by both spouses. The business owner will potentially be entitled to BADR on the sale of their share, but the other would not.

Consider transferring ownership or bringing the other spouse into the business as a partner or director and shareholder, noting that the conditions for relief must generally be satisfied for at least two years before the disposal and not overlooking any stamp duty or similar considerations.

The £1 million limit

Could the relief be increased? If a spouse is involved in the business but is not a partner or shareholder, could or should they be given a share of the business?

Subject to the two-year ownership period and other conditions, both parties might then each receive a £1 million allowance. Similar considerations may apply to other family members, especially if there is a plan that they should benefit from the eventual sale proceeds. A gift of part of the business or shares to a spouse will generally be on a no gain/no loss basis, so without a capital gains tax (CGT) liability. Gifts to others do not have this benefit, but the gain may be deferred with the relief applying to gifts of business assets. As with all such transactions, do not let the tax considerations outweigh other factors. Remember that the £1 million allowance is a lifetime rather than an annual amount, but any unused relief would be available for a future qualifying disposal.

Receiving rent

Entrepreneurs may often retain ownership of a business property themselves and charge the business a rent for its use. If there is a mortgage on the property, rent will be needed to obtain a tax deduction for the interest paid, and this can yield National Insurance contributions savings for the owner and income tax or corporation tax savings for the business.

However, it will prejudice BADR, which will be restricted based on the period for which rent has been received since April 2008 and the proportion of the rent received compared to a market rent.

If rent is not charged for a property, it would not be possible to claim capital allowances for any qualifying assets. Depending on the amounts involved and the likely eventual capital gain, more tax relief might be obtained from such allowances over the period of ownership rather than from BADR on disposal.

Get help!

The rules regarding BADR are complex and HMRC will not provide advance clearance, so professional advice on the conditions and how they affect the particular circumstances of each business and its owners is essential.

Note also that there are subtle differences in the rules between director/shareholders and self employed individuals.

Practical tip

Remember that BADR should not be considered in isolation. Other non-tax issues may be relevant to the transfer of property or business interests to spouses or family members and the effect on other taxes should also be taken into account. For example, the sale of a business asset and the receipt

As widely predicted, in his 2024 Spring Budget, the Chancellor announced a 2% cut in the main rates of Class 1 and Class 4 National Insurance contributions. We explain what employees and the self-employed will now pay in 2024/25.

Employees

The main rate of primary Class 1 National Insurance contributions, which are payable by employed earners on earnings between the primary threshold and the upper earnings limit, fell from 12% to 10% with effect from 6 January 2024. The rate was due to remain at 10% for 2024/25 but has now been reduced by a further 2% to 8%. This latest cut will save employees up to £754 in Class 1 National Insurance contributions in 2024/25

As a result of the latest cut, employees will now pay primary Class 1 contributions at a rate of 8% on earnings between the primary threshold, set at £242 per week (£1,048 per month; £12,570 per year), and the upper earnings limit, set at £967 per week (£4,189 per month; £50,270 per year) and at a rate of 2% on earnings in excess of the upper earnings limit.

Employed earners whose earnings are between the lower earnings limit of £123 per week (£533 per month; £6,396 per year) and the primary threshold are treated as paying notional contributions at a zero rate which gives them a qualifying year for state pension purposes.

Employers

Employers did not benefit from a rate cut and the secondary rate remains at 13.8% for 2024/25.

Self-employed

At the time of the 2023 Autumn Statement, the Chancellor announced that the main rate of Class 4 National Insurance contributions would fall by 1%, from 9% to 8%, with effect from 6 April 2024. A further 2% cut was announced in the Spring Budget, reducing the main rate to 6%.

As a result, for 2024/25, self-employed earners will pay Class 4 National Insurance contributions at 6% on profits between £12,570 and £50,270 and at 2% on profits in excess of £50,270. Self-employed earners with profits between the small profits threshold, set at £6,725, and the lower profits limit of £12,570 are awarded a National Insurance credit to provide them with a qualifying year for state pension purposes.

Class 2 contributions have been abolished for 2024/25 onwards. However, self-employed earners with earnings below £6,725 can make voluntary contributions at the 2023/24 rate of £3.45 per week to preserve their state pension entitlement.

Rising interest rates mean that individuals may now be paying tax on their savings income which previously they received it tax free. Where this is the case, it is prudent to consider the options available to earn savings income tax free. ISAs feature on this list.

Savings allowance for basic and higher rate taxpayers

Individuals who pay tax at the basic or higher rate are entitled to a savings allowance. For 2024/25, the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers.

When interest rates were low, many taxpayers did not need to think about tax-free savings accounts as the savings allowance was sufficient to cover any interest that they earned. With higher interest rates, this may no longer be the case. For example, a higher rate taxpayer with savings of £20,000 would only receive interest of £400 a year at an interest rate of 2% which would be covered by their savings allowance of £500. However, if the taxpayer was now receiving interest of 5% on their savings of £20,000, the interest would be £1,000 a year of which only £500 would be covered by the allowance, leaving the remaining £500 taxable.

Additional rate taxpayers do not receive a savings allowance.

ISAs

Individual Savings Accounts (ISAs) are tax-free savings accounts. There are four different types of ISAs:

1. cash ISA;
2. stocks and shares ISA;
3. innovative finance ISA; and
4. lifetime ISA.

Individuals have an annual ISA allowance which they can invest in one or more of the different ISAs.

The limit applies to the amount invested across all four ISAs in the tax year. For 2024/25, the limit is £20,000. The individual can choose how to allocate this. For example, an individual could invest £10,000 in a cash ISA and £10,000 in a stocks and shares ISA in 2024/25. However, investments in a lifetime ISA are capped at £4,000 a year but this counts towards the annual £20,000 ISA allowance.

There is no tax to pay on interest on cash in an ISA or income (such as a dividends) or capital gains on investments held within an ISA.

Cash ISA

Banks and building societies offer cash ISAs which, as the name suggests, are accounts that hold cash only. National Savings and Investments also offer cash ISA products. Interest on cash in an ISA is tax-free.

Where interest from savings accounts exceeds the personal savings allowance, consideration could be given to moving some of the cash to an ISA to allow the interest to remain tax-free.

Stocks and shares ISA

Investments in a stocks and shares ISA can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds. However, it is not possible to transfer stocks and shares already owned outside an ISA into a stocks and shares ISA with the exception of those awarded under an employee share plan.

Innovative finance ISA

An innovative finance ISA is one that contains peer-to-peer loans rather than cash or stocks and shares.

Lifetime ISA

A Lifetime ISA can only be opened by someone aged 18 and over but under 40. A person can invest up to £4,000 a year in a Lifetime ISA until they reach the age of 50. The first payment must be made before they reach the age of 40. The Government add a bonus of 25% (capped at £1,000 a year).

Money can only be withdrawn to buy a first home or on reaching age 60, or if the saver is terminally ill with less than 12 months to live. If withdrawals are made in other circumstances, a withdrawal charge of 25% applies, clawing back the Government bonus.

New UK ISA

At the Spring Budget, the Chancellor announced that the Government would be launching a new UK ISA which would provide savers with the opportunity to earn tax-free savings income while investing in UK companies. The UK ISA will have its own £5,000 allowance which would be available in addition to the existing £20,000 ISA allowance.

The Government are consulting on what this may look like.

Financial advice

It is important to take financial advice from a qualified professional before making investments.

A sole trader or proprietor of an unincorporated business may incur training costs. The tax treatment of those costs depends on whether the costs are regarded as ‘revenue’ or ‘capital’ expenditure. HMRC have revised their guidance in this area, expanding the range of training for which a deduction is available.

Old rules

Previously, HMRC only treated training costs as revenue expenditure where they updated existing knowledge or expertise. Any training that provided the proprietor with a new skill was deemed to be capital expenditure with the result that the proprietor was unable to deduct the costs in computing their taxable trading profits.

New rules

HMRC now accept that expenditure incurred by the owner of a business on training courses undertaken by them is revenue expenditure if the course of learning:

• updates existing expertise or knowledge; or
• provides new knowledge or expertise.

This means that costs incurred on training to acquire new skills or knowledge to keep pace with technological advances or changes in industry practice will usually be allowable where they relate to the proprietor’s existing business area. They also accept that courses that are ancillary to the owner’s main business area, for example, an introductory bookkeeping course, may also be classed as revenue expenditure depending on the facts of the case.

Expenditure on training unrelated to the owner’s existing business, such as that which would allow them to branch out into a new area, is unlikely to be allowed as a deduction. This is illustrated by the decision reached by the Special Commissioners in a case in which a taxpayer who traded as an English tutor and as an advisor in bringing appeals before various tribunals was denied a deduction for the cost of resitting examination fees that would have provided him with a diploma in law. The deduction was denied as the course was a ‘bridging course’ to equip him with new skills to allow him to move into new areas of practice which the Special Commissioners found to be capital expenditure.

Application

HMRC’s updated guidance contains examples to illustrate when a deduction for training costs would be forthcoming and when it would be denied.

Allowable expenditure would include:

• costs incurred by a wedding photographer on an online refresher course using photo editing software;
• the costs of an introductory bookkeeping course incurred by a plumber to help him run his business better;
• the costs of an e-commerce and website development course incurred by a potter currently selling his pottery on a local stall which will enable him to move his business online;
• costs incurred by a web designer in completing a short course in AI which will provide her with new expertise in an upcoming area of technology related to her business;
• the costs incurred by a gas fitter on training in connection with installing heat pump systems as these skills are likely to be needed to future-proof his business;
• the costs of a nutrition course incurred by a personal trainer as her clients expect her to have a basic understanding of nutrition and this knowledge can be used in developing training plans; and
• the costs of a beginners’ course on drawing illustrations undertaken by an author who writes children’s books she sells online as this will improve the books she creates and save the costs of an illustrator.

By contrast, the following costs are likely to be disallowed:

• the costs of a course to become a driving instructor incurred by someone who is unemployed and wishes to become a driving instructor as the costs do not relate to an existing business;
• the costs of a sports science degree incurred by the owner of a sportswear shop selling branded clothing as the knowledge acquired will not specifically help him to sell sportswear;
• the costs of a tattooing course incurred by a freelance make-up artist as they are not related to her existing business; and
• the costs of a painting and decorating course incurred by a taxi driver who wants to move into the painting and decorating business as the course is not related to his current business.

As announced at the time of the Spring Budget, multiple dwellings relief for stamp duty land tax (SDLT) is to be abolished from 1 June 2024. The relief is available where a purchaser buys two or more dwellings in a single transaction or series of linked transactions.

Nature of the relief

The relief was introduced in 2011 to remove barriers to investment in property and to promote the supply of homes for the private rental sector.

A buyer is able to claim the relief where they buy two or more dwellings in a single transaction or a series of linked transactions. Where the relief applies, the SDLT is calculated by reference to the average value of the dwellings rather than on their aggregate value.

The rate of tax is worked out as follows:

1. Divide the total amount paid for the properties by the number of dwellings.
2. Work out the SDLT due on that figure.
3. Multiply this by the number of dwellings.

This is subject to a minimum rate of 1% of the amount paid for the dwellings.

Example 1

Tom buys four houses for £1.6 million. The average price of each property is £400,000 (£1.6 million divided by four).

SDLT at the residential rates on a property costing £400,000 is £7,500, being 0% on the first £250,000 and 5% on the next £150,000.

The total SDLT due on all the properties is £30,000 (£7,500 x 4).

If SDLT had been paid on the total consideration of £1.6 million, the bill would have been £103,250 ((£250,000 @ 0%) + (£675,000 @ 5%) + (£575,000 @10%) + (£100,000 @ 12%)).

Example 2

Lucy buys three properties for £600,000, an average price of £200,000 per dwelling.

No SDLT is due on a residential property costing £200,000. However, where multiple dwellings relief applies, the minimum charge is 1% of the consideration, i.e. £6,000. Consequently, Lucy must pay SDLT of £6,000.

If SDLT had been paid on the total consideration of £600,000, the bill would have been £17,500 ((£250,000 @ 0%) + (£350,000 @ 5%).

Abolition

In November 2021, the Government published a consultation on multiple dwellings relief which considered options for tackling abuse of the relief. The consultation also looked at SDLT on mixed property purchases. The consultation ran until February 2022. The Government response was published at the time of the Spring Budget on 6 March 2024.

The consultation indicated that the availability of the relief has minimal impact on the supply of private rented housing and was not cost effective. Consequently, it is being abolished.

Multiple dwellings relief will no longer be available in respect of transactions with an effective date of 1 June 2024 or later. This is the completion date.

However, if contracts were exchanged on or before 6 March 2024, the relief will continue to be available, even if completion takes place on or after 1 June 2024. It will also apply where the contract is substantially performed before 1 June 2024.

If linked transactions include the purchase of dwellings that complete both before 1 June 2024 and on or after 1 June 2024, for the purposes of the relief, the pre and post 1 June 2024 completions will be unlinked, with multiple dwellings relief being available for those completing before 1 June 2024 but not for those completing on or after that date.

Impact

The abolition of the relief will increase the SDLT payable on the purchase of multiple dwellings considerably. In example 1 above, Tom would pay £103250 rather than £30,000, an additional £73,250 whereas Lucy in example 2 would pay £17,500 rather than £6,000, an additional £11,500.

VAT can be confusing at the best of times, with the reverse charge being arguably one of the more complex applications. It does not help that different rules depend on different scenarios. For example, the reverse charge mechanism does not apply in the case of a zero-rated supply of services (e.g. most food items and children’s clothing).

Under the UK VAT system, the supplier usually pays the balance of VAT owing to HMRC but with the reverse charge it is the other way round. Instead, the buyer customer is deemed to be the 'end user' and as such makes the payment (the end user being someone not making an onward supply). When the reverse charge mechanism applies, the buyer customer must apply ('self-assess') the same rate of VAT that would apply if it was a domestic transaction.

Where a business-to-business relationship exists, the place of supply is where the customer resides. Therefore, where a UK VAT registered supplier makes a sale of services to a non-UK customer (whether VAT registered in their country of registration or not), the supplier does not charge VAT as the transaction is outside the scope of VAT.

However, should the customer's business be VAT registered in a VAT-operational country, they will either show the reverse charge on their VAT return or treat the purchase as counting towards the VAT registration threshold in their own country. If the customer's business is a non-EU company, the supply is still deemed to be where the customer resides and any local sales taxes are usually the customer's responsibility. After Brexit, businesses based in Great Britain (England, Scotland and Wales) can no longer apply the reverse charge to EU sales. However, businesses based in Northern Ireland can still apply the reverse charge as normal because they are still within the EU VAT area.

Services supplied to non-business overseas customers are generally supplied where the supplier belongs. In this instance the supply follows the usual UK supply rules, i.e. UK VAT is charged if the supply is standard rated.

However, when a UK VAT registered business receives a service from overseas, the reverse charge applies. The net of VAT figure is used for both the sale and purchase, effectively treating the transaction as both a sale and a purchase i.e. as a sale to itself.

The scenario most frequently encountered concerning the reverse charge is under the 'domestic reverse charge' (DRC). The DRC applies where a UK VAT registered business supplies or receives specified standard or reduced VAT rate services reported under the construction industry scheme (CIS) Note that the word 'domestic' refers to UK to UK business transactions whereas typically the rules relate to cross-border transactions – this charge is separate from the non-UK reverse charge rules.

Under the DRC rules, where a VAT registered subcontractor invoices a VAT registered contractor for their services reported under CIS, the subcontractor does not charge VAT. Instead, it will be the contractor's responsibility to undertake the 'reverse charge' and declare both the input and output VAT on their VAT return. This includes materials supplied by a builder as part of their work but not materials bought on a stand-alone basis without services.

Both parties must be VAT registered for the DRC rules to apply, but only the customer/contractor needs to be CIS registered. Therefore, where a VAT registered supplier/subcontractor supplies services to a non-VAT registered contractor, the DRC rules will not apply and VAT is charged on supplies at 5% or 20% as relevant. If the supplier/subcontractor is not registered for CIS, the DRC rules can still apply. However, the contractor will need to deduct CIS at 30% instead of 20%.

Practical point

If the reverse charge rules apply, the practicalities of completing the return will mean that the supplier/subcontractor issues the invoice without VAT but with a note as to the amount of VAT to be declared by the customer, or at least the rate of VAT. The supplier/subcontractor records the sale in box 6 of their VAT return (being a sale), subject to any partial exemption adjustments.

Since the start of COVID-19 in March 2020, the number of people working from home in the UK has dramatically increased. As of January 2023, research shows that 44% of workers in the UK work from home – which translates into approximately 23.4 million people.

Many of the companies those employees work for would have provided equipment, even if it was only a computer. Supplying equipment for business use is usually viewed as a tax-deductible expense for the business where the employee works in the office. However, what are the tax implications should an employee return to the office at least part of the time and keeps their home working equipment for personal use? The answer depends on who owns the equipment.

Employer transfers ownership to the employee

A PAYE benefit in kind tax charge will arise of at least the market value of the equipment at the date of transfer should ownership be transferred to the employee but no payment made. Any payment made by the employee will reduce the tax charge. Documentation confirming the transfer will be important.

Employer retains ownership

In comparison, should the employer retain ownership but the employee be allowed to use the equipment for personal use, the PAYE benefit in kind tax charge is based on the ‘annual value’ of the equipment. This is 20% of the market value at the date on which it is first made available for the employee’s personal use. Class 1A NIC is also charged on the value of the benefit. It would be advisable for the invoice to be in the name of the business if the delivery address is to the employee's home.

If the employee works flexitime, continuing to work from home for at least some of the time, no tax charge will arise for the employee on the personal use of the equipment, provided this is insignificant. The employer can decide how much private use is allowed but this must be stated clearly to the employee. At the end of the employee’s contract, they must return the item to the employer.

Employer reimbursements

The usual rules regarding reimbursement to employees for the cost of equipment purchased for the company apply. Tax relief will be available for the business should the employer reimburse the employee and the employer retains the equipment.

Notification to HMRC of a taxable expense or benefit is either via the usual PAYE process or by a PAYE Settlement Agreement (PSA). Using a PSA will allow the employer time to consider whether a particular expense or benefit is taxable, rather than having to decide at the time the expense or benefit arises. A PSA allows the employer to make one annual payment to cover all the tax and NIC due on such irregular employee expenses or benefits.

A look at the VAT position of service charges on commercial property.

It is common for leases between landlords and tenants to give details of what services the landlord shall provide and what the tenants shall pay for the upkeep of the building as a whole. The lease may provide for an inclusive rental, or it may require the tenants to contribute by means of an additional charge to the basic rent. These charges are generally referred to as service charges, maintenance charges or additional rent.

The services provided may include:

 • repairs and maintenance to the building;

 • the management of the building;

 • provision of concierge and warden; and

 • insurance.

Are these charges liable to VAT? The normal position is that if a landlord makes a service charge, the VAT liability follows that of the premium or rents payable under the lease or license. These would normally be exempt from VAT unless the landlord has opted to tax, in which case they would be standard rated.

If services are provided to someone who owns the freehold of a building and there are no continuing supplies of accommodation to which the service charge can be linked, the charge is always standard rated.

Other payments to a landlord

A landlord may make charges to its tenants for items other than general services. These charges tend to fall into three categories:

 • further payment for the main supply of accommodation that follows the liability of that supply (normally exempt unless the landlord has opted to tax);

 • supplies other than accommodation (normally standard-rated); or

 • disbursements (outside the scope of VAT).

If the landlord is the policyholder or rateable person, any payment for insurance or rates made by the tenants form part of the main supply of accommodation and are exempt unless the landlord has opted to tax.

If the tenant is the policyholder or rateable person, and the landlord makes payment on the tenant’s behalf, the payments can be treated as disbursements.

If the phone account is in the landlord’s name, any charge made to tenants is payment for a standard rated supply. This includes the cost of calls, installation and rental. If the account is in the name of the tenant but the landlord pays the bill, it can be treated as a disbursement.

If the landlord makes a charge for the use of facilities such as reception and switchboard services, any payment to the landlord will be further consideration for the main supply of accommodation.

If the landlord makes a separate charge for unmetered supplies of gas and electricity, it should be treated as further payment for the main supply of accommodation. However, where it is separately metered, the charges to the tenants are payments for separate supplies of fuel and power. These supplies will be standard rated unless the fuel supplied qualifies for the reduced rate. If the charges for the use of recreational facilities are compulsory, irrespective of whether the tenant uses the facilities, the liability will follow the main supply of accommodation.

Practical tip

If a business pays its landlord a services charge, it will normally only pay VAT if the landlord has opted to tax. Separate payments for phones, fuel and power will be standard rated.

An exploration of where company owners might get useful short-term loans.

The cheapest personal bank loan rates are double what they were 18 months ago, though this has stabilised recently. Currently, the best loan interest rate between £7,000 and £25,000 is 5.9%.

However, there is a source of finance from which a director or participator of a private limited company can borrow at 0% interest - from their company (assuming it has the money available). As ever, there are restrictions; but such loans can have a relatively low annual tax cost and be useful for short-term loans.

The ‘section 455 charge’

A point that is sometimes missed is that a loan can be made by the company to not only its directors; HMRC’s Company Taxation Manual (at CTM60150) states that an associate or a participator can also take advantage. A loan can therefore be made to a director’s husband or wife, parent or grandparent (termed ‘remoter forebear’), a child or grandchild (termed ‘remoter issue’), brother or sister or partner. There needs to be a blood relationship for the penal ‘loans to participators’ tax rules (in CTA 2010, s 455) to apply. For example, there will potentially be no tax implications for a brother-in-law so long as his spouse is not also a shareholder in the company, and he is not the spouse’s brother.

The loan needs to be repaid within nine months and one day after the company’s accounting year end to avoid the section 455 tax rules. Otherwise, the company will be liable for an additional tax charge equal to the dividend upper rate (39.35%). Without this charge, the director could borrow money from the company indefinitely without any tax implications.

Repay or write off?

Should the company be liable for the charge, the tax payment will be refunded when the loan is repaid (or written off.) The refund is usually offset against the corporation tax bill due (with no interest received), effectively nine months and one day after the accounting year end in which the loan is repaid. If no corporation tax is due, it can take a while for HMRC to repay the cash.

If the loan is not repaid and the borrower is a basic or higher rate taxpayer, it would be cheaper for the loan to be converted into a dividend with a tax rate of 8.75% or 33.75% rather than the company pay the 39.35% charge. Conversely, should the director be an additional rate taxpayer (45%), it would be cheaper for the company to suffer the section 455 charge as this would ultimately be repayable on repayment or write-off of the loan. Even when the section 455 charge tax does have to be paid, the shareholder can still end up with more initial funds by taking a loan than taking additional salary or dividends. After all, the director would still have benefited from an interest-free or low interest loan.

Beneficial loans

A complication arises should the loan exceed £10,000 and is interest-free or at a low rate below HMRC’s ‘official rate’ (currently 2.25%); the director is generally taxable on the difference between the interest charged and the ‘official rate’, such loans being termed ‘beneficial loans’. The benefit-in-kind and employer’s National Insurance contributions can be avoided by levying interest on the loan at the official rate (or more), even if this interest is rolled up in the loan and not immediately paid. If the ‘official rate’ is charged, borrowing from the company is cheaper than a bank loan or credit card. The £10,000 threshold must not be exceeded during the year (even for one day); otherwise, the whole loan becomes taxable.

Unless repayment is made on the sale or winding up of the company, repayment will have to be via personal savings or by taking taxable income from the company (e.g., dividends).

Practical tip

The loan need not be repaid in cash (e.g., a car or property could be transferred to the company by way of an effective repayment in kind).

Determining whether a company car is unavailable for private use is perhaps not as straightforward as it should be.

The income tax charge for an employee on the benefit-in-kind of a car provided by the employer (referred to here as a ‘company’ car for convenience) can be potentially expensive. The benefit-in-kind calculation is beyond the scope of this article but is broadly based on the car’s list price and carbon dioxide emissions.

What does ‘available’ mean?

The car benefit legislation applies if the car is made available to an employee (or member of the employee’s family or household), is made available by reason of the employment, and is available for the employee’s (or member’s) private use (ITEPA 2003, s 114(1)). Note that a key condition for a company car benefit-in-kind charge is that the car is available for the private use of the employee (or a member of the employee’s family or household). But what does ‘available’ mean? It is not defined in the legislation. HM Revenue and Customs (HMRC) guidance (in its Employment Income MI at EIM23300) states that the “ordinary dictionary meaning” is applied, being “at one’s disposal or capable of being used”. Furthermore, car benefit can only apply when the car is ‘made available’. HMRC considers (at EIM23200) this requires:

• a decision by someone (normally the employer) having control of the car; and
• that decision is conveyed to the employee.

Unavailable?

Circumstances where HMRC accepts that a car is unavailable to an employee include:

• the car is physically incapable of being used (e.g., it has broken down and has not been repaired or is in the garage undergoing repairs); and
• the employee is unable to gain access to the car because they do not have the car keys, or power or authority to direct the person who has the keys to hand them over or direct the person who has the keys to drive the employee to a location of the employee’s choice.

If the car was available both before and after the period in question, it must last at least 30 consecutive days to count as a period of unavailability (ITEPA 2003, s 143(2)). A car does not count as unavailable simply because (say) the employee was banned from driving or the car does not meet normal legal requirements. For example, in Norton & Anor v Revenue and Customs [2023] UKUT 48 (TCC), the appellant car dealership bought an expensive and rare Maserati and a rare high-performance Ford GT40. In 2016, HMRC considered that those cars had been made available to the first appellant (TN) as a benefit-in-kind. On appeal, the Upper Tribunal (UT) noted the company’s handbook provided that a company vehicle may not be used without the express permission of management and that any vehicle used must have road tax (or trade plates). The UT held that this prohibition was conditional; as with the legal obstacle to driving an untaxed car, it was not an effective restraint upon use where TN could comply with the company’s handbook by arranging for prior payment of road tax. The appellants’ appeals were dismissed (apart from one discovery assessment).

Practical tip

HMRC guidance (at EIM25175) confirms that a car does not count as unavailable simply because there is no road tax (or MOT certificate, or insurance); the car must be withdrawn so that the employee cannot access it.

A look at the submission of late VAT returns and the four-year cap.

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 are submitted late, it can result in the business entering either or both of the penalty regimes for late payments or late returns.

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 3-6 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!

If a business receives a penalty for a late return or payment, it can appeal the penalty if it has a ‘reasonable excuse’; but specifically excluded from being a reasonable excuse are:

 • a shortage of funds; and

 • reliance on others.

This narrows down the chances of a successful appeal as a business cannot blame its accountant or say it had no money!

System breakdown If a business cannot complete its VAT return because of a system breakdown or similar reason, it can estimate its return, providing it gets prior permission from HMRC.

The figures should be adjusted on the next return if possible. Provided the estimated return and payment are submitted by the due date, no default is recorded.

Missing returns

If a business fails to send in a return at all and is a ‘payment trader’ (i.e., pays money to HMRC), the HMRC computer will calculate what it thinks is due and send an assessment for that amount to the business for payment. If the business pays the assessment knowing that it is significantly less than its actual liability, it could be liable to a penalty for deliberately concealing the facts from HMRC and face a penalty of up to 100% of the tax due.

If the business thinks that the assessment is too high, it cannot appeal HMRC’s decision unless it sends in its VAT return, which automatically cancels the assessment anyway.

If the business continues to fail to send in its returns, the assessments issued by HMRC get larger and larger to encourage the business to send in its return.

If a business is normally in a repayment position and fails to send in its return, the period will remain open, but HMRC will not make any further repayments until the return is submitted.

When a return is not sent in, the normal four-year time limits for issuing assessments do not apply and HMRC can enforce the debt for any missing returns once they have established the liability due to them no matter how long ago as they can require that the return is submitted.

However, if a business submits its VAT return more than four years late and the central assessment that was paid was more than the amount due, the overpayment is subject to the four-year cap and will not be repaid. Similarly, if the return is for a repayment, the repayment will be made but the amount paid on the central assessment will be subject to the four-year cap and not repaid.

Practical tip

If a business sends in its returns late, it will receive a penalty and an assessment that cannot be appealed unless it sends in the missing return. There is no time limit on collecting any money due on an outstanding return, but any overpaid central assessment is subject to the four-year cap.

Capital gains tax is based on the gain on the disposal of a chargeable asset, which itself is a reasonably simple calculation. One takes the cost of the asset from the proceeds, and voilà!

However, the cost that can be deducted is made up of four different components: the historical cost of the asset, any enhancement expenditure, and the incidental costs of acquisition and disposal. It is these final two components where taxpayers are often unsure of what can be included.

Incidental costs of acquisition

Incidental costs of acquisition are defined in the legislation as being only deductible to the extent that they are incurred wholly and exclusively for the purpose of the acquisition of the asset.

Examples would include the fees payable to a professional in acquiring the asset. For example, if the asset is a building, a solicitor is likely to be involved with the conveyancing, a mortgage adviser with the creation of any mortgage or a valuer or surveyor with the property structure report. There is often a commission payable by the purchaser at auction or to a purchasing agent if the buyer uses such an agent. Further professional fees may be required if an accountant or other such legal adviser is used.

The process of transferring ownership into the hands of the buyer will also sometimes have a cost. For example, for a property in (say) London, there is stamp duty land tax and for shares, stamp duty, which are both deductible. Other conveyancing charges (e.g., land registry fees) are also deductible, as are any marketing or advertising costs, such as the cost to advertise in the ‘wanted’ section of an online or paper publication.

Incidental costs of disposal

On the sale of the asset, there may also be incidental costs to consider. Again, the expenditure must be wholly and exclusively incurred for the purpose of the disposal. All the expenses listed above are likewise deductible when such costs are necessarily incurred in the disposal of an asset.

If the gain arises due to the termination of a trust where the beneficiary is absolutely entitled to the trust property, any expenses on the termination can also be offset as incidental costs of disposal.

In addition, costs reasonably incurred in making an initial valuation or apportionment of the asset being sold for capital gains purposes are also deductible. However, if the initial valuation or apportionment is challenged by HMRC, any costs of the challenge or further litigation are not covered as an incidental cost of disposal.

Example: Which costs are allowable?

Janet sold her second home in Brighton in November 2023. She had nominated her first home as her main residence with HMRC. She was a hoarder, and the house was untidy, so she paid a company to come in and ‘stage’ the house for sale. This cost £1,000 a month. She moved out and rented a house in the next street at £2,500 a month and put most of her furniture in storage, which cost £300 a month. Her heating cost £400 more a month in the rented house.

The house sold after two months and Janet deducted the cost of the staging, the rental of the separate house, the storage and the extra heating as incidental costs of disposal.

However, only the staging was an allowable deduction. This was incurred ‘wholly and exclusively’ for the sale. The other expenses had additional purposes, like putting a roof over Janet’s head, keeping her warm and keeping her furniture secure. They were too far removed from the sale to be wholly and exclusively associated with the disposal.

Practical tip Double-check that all incidental costs deducted are wholly and exclusively for the purpose of the sale or purchase of the asset and that there is no other reason they were incurred that could cause them to become unable to be offset.

HMRC’s apparently stricter application of the rules regarding company purchases of own shares by multiple completion.

The purchase by a company of its own shares (e.g., from a retiring or dissenting individual shareholder) is possible where company law requirements are met.

Tax treatment

For tax purposes, any payment in excess of the capital originally subscribed for the shares is normally a taxable income distribution, similar to a dividend. However, there is a potential exception from this income tax treatment for unquoted trading companies. If certain conditions are satisfied, the individual vendor is normally treated as receiving a capital payment instead. Capital gains tax (CGT) treatment will often be more tax-efficient for the shareholder than an income distribution.

Buy now, pay later?

If the company has cashflow difficulties, it might be tempting to arrange the purchase of own shares such that all the shares are purchased immediately, with the company paying the vendor by periodic instalments. However, for a purchase of own shares to be valid under company law, the company must make full payment at the time of purchase. If the company and shareholder agreed that the shares be bought back immediately, but that the shareholder lends part of the sale proceeds back to the company immediately after the purchase, this would pass the ‘substantial reduction’ test for CGT treatment, but there may be a problem with the ‘no continuing connection’ test if the loan back results in the vendor possessing an interest in the company of more than 30% of the combined issued share and loan capital.

In April 1989, the ICAEW issued Technical Release number 745 (TR745), following discussions with the Inland Revenue on various problems and issues arising from the company’s purchase of its own shares. The Revenue stated that as beneficial ownership of the shares passes at the date of contract, there is a disposal by the vendor for CGT purposes at that time, even though payments for the shares are made at later dates. The Revenue’s comments In TR745 suggest that the company may enter into a single, unconditional contract to purchase the vendor’s shares, with different completion dates in respect of different blocks of shares within a single contract. The ‘substantial reduction’ test would only need to be considered at the date of contract, not on each completion. To pass the 30% ‘no continuing connection’ test, the vendor must lose beneficial ownership of the shares at the contract date. However, the Revenue’s comments in TR745 indicate that beneficial ownership of the shares is considered to pass at the date of the contract.

Moving the goalposts?

However, HMRC published guidance in February 2022 to ‘clarify’ its position regarding purchases of own shares and multiple completion contracts. On the ‘no continuing connection’ test and the 30% threshold, HMRC considers that the word ‘possesses’ in the tax legislation refers to legal (as opposed to beneficial) ownership. Consequently, if the vendor remains a legal owner of ‘non-completed’ shares that exceeds the 30% limit, they will remain connected with the company, so they would not qualify for CGT treatment.

Practical tip

Disputes with HMRC about ownership and possession might be avoided if the phasing of the various share purchase completions can be structured such that the ‘substantial reduction’ and ‘no continuing connection’ tests are satisfied after completion in respect of the first phase.

A family investment company could be useful when passing assets to future generations. It is a natural instinct for individuals to wish to preserve their wealth for successive generations of their family. Trusts may seem a natural way to achieve this. However, the alternative of a family investment company (FIC) is worthy of consideration. This may be particularly true for entrepreneurs already familiar with the limited company structure and given the tax charges that can apply to trusts.

Further, the share structure of the FIC can offer some flexibility, because the company’s articles could restrict share ownership to bloodline members of the family. This should protect assets in the case of a divorce, although planning may be required when assets pass on death. Different share classes would allow dividends to be allocated to specific family members. Care should also be taken with provisions in the articles regarding share transfers, the resolution of any conflicts of interest, the appointment and removal of directors, and how they make decisions.

Setting up the company

Generally, parents setting up the FIC would be issued with voting shares ensuring control of the company, but perhaps with no entitlement to capital growth. Non-voting shares giving rights to dividends and capital growth could be issued to other family members before the company holds cash or valuable assets.

Allocating such shares at this stage will be important to avoid later reorganisations that might give rise to transfers of value and inheritance tax issues.

Passing assets to the company

Ultimately, the FIC exists to hold assets or cash for the benefit of future generations, but care needs to be taken when passing such assets to it. For example, gifts from one individual to another will be a potentially exempt transfer (PET) for inheritance tax purposes. However, a company is not an individual, so a transfer of cash or assets directly to the company would be chargeable if more than the nil-rate band.

One solution is to loan money to the company, which uses it to purchase assets. Alternatively, money could be given to family members (a PET), who then loan this to the company. These loans can be withdrawn as and when required or passed to the next generation. Again, such a gift could be a PET.

Of course, if assets are transferred or sold to the company, do not overlook capital gains tax (and stamp duty land tax or its equivalent in Scotland and Wales, if applicable).

Company liabilities

Once assets are owned by the company and producing income or gains, the FIC will be liable to corporation tax. If (as is likely) it is a close investment holding company, the company will not be eligible for the small companies rate of 19%, and would be taxed at 25%.

In calculating its corporation tax liability, dividends from shareholdings held by the company will probably not be taxable. Further, the company can claim relief for salaries paid to directors for managing its investments and pension contributions, and other benefits could be provided to employees or directors. Generally, the FIC is probably best seen as a means of accumulating wealth for future generations because the corporation tax liability is likely to be less than the potentially higher rates of income tax payable by individuals. However, if regular income withdrawals will be required, potential double taxation (first as corporation tax and then income tax on, say, dividends paid to the shareholders) is likely to result in excessive liabilities.

Conclusion

It will be essential to determine whether an FIC is more suitable than a trust in each case, and careful planning at the outset should help to avoid unexpected tax problems later.

Practical tip

An FIC could be established as an unlimited rather than a limited company. The former may provide more privacy as it does not have to file accounts with Companies House. However, the members do not benefit from limited liability and would be responsible for company debts and liabilities if not covered by its assets.

The VAT implication of using your home to work from.

If you run your business from home or have an office at home, you are entitled to claim back the VAT on any legitimate business expenses.

This means that if you incur extra costs in running your business from home, you can reclaim the VAT on those costs as well as a proportion of the running costs of the house.

Example: Office at home

If you work from home and your office takes up 20% of the floor space of your house, HMRC will allow you to reclaim 20% of the VAT on your utility bills, such as gas and electricity.

The law states that your calculation of VAT claimable on mixed business and private use costs must be fair and reasonable. So, consider different ways you could claim a higher proportion (e.g., floor area, number of rooms, time usage etc.).

VAT on other additional costs

As well as day-to-day running costs, your business may pay for other legitimate business costs of running your business from home, such as decoration costs and furniture.

There’s no problem claiming VAT back on the costs of making your office a comfortable place to work. This includes the cost of any office furniture, redecoration, carpets and even display items such as pictures on the wall. As always, make sure you get a VAT invoice to support your claim in case you get a visit from HMRC.

Tips and traps

 • Although you can reclaim VAT on items you buy to make your home office look good, avoid paintings etc. that might increase in value, as you could end up out of pocket. That’s because you’ll usually have to pay the VAT on the increased value when you stop using the asset in your business.

 • Some costs are more obviously business related. If you have a separate business phone or broadband line at home, you can reclaim 100% of the related VAT. But if you have only one connection for both private and business, you’ll have to make a fair and reasonable estimate of the VAT you can reclaim. For example, 90% of calls are private but are free; conversely, business calls are made at chargeable times and account for 50% of the bill. So, you can reclaim 50% of the VAT.

 • You do not have to limit your claim to the household costs mentioned above. Perhaps you use a cleaning company which also spruces up your home office? Or do you store files etc. at home and incur VAT on security costs (e.g., alarms)? Put your thinking cap on and see what else you can reclaim.

 • To reclaim VAT on domestic costs, they must be paid for by the business. This is easy if you’re a sole trader or partner, as HMRC accepts that you and the business are one and the same. But directors must make sure the bills are in the name of their company. They must also reimburse the company for private use to avoid tax and National Insurance contributions problems.

 • HMRC will accept claims made through the expenses system, so if you are a director and the household bills are in your name, claim a fair proportion of them on your monthly expenses claim, even if the bill is not in the company’s name.

Extensions and conversions

With more and more people now choosing to work from home, the question of what can be done with the VAT on the conversion costs is becoming a common issue.

For example, a business may decide to build an extension or have a loft conversion to give sufficient office space to run the business. The office will contain the usual computers, desks, etc., and be decorated and furnished in line with the proposed use. In these circumstances, the VAT on these costs can be reclaimed. If it is through a limited company, get the invoices addressed to the business.

Practical tip

If you run your business from home, you can reclaim the VAT on the direct business costs and on a fair and reasonable proportion of joint business and private costs.

An overview of the capital v revenue battle lines.

When running a business and looking at which expenses to set off against turnover to calculate taxable profits, it’s important that those expenses should be revenue in nature – rather than capital. It sounds obvious but there are several grey areas where it is anything but obvious whether the subject of expenditure was revenue or capital in nature.

Repairs

An oft-encountered issue, especially with regard to property, is whether a repair is revenue (as repairs are) or whether it is an improvement (i.e., a capital expense). Generally, if a replacement is made of a part of an asset, it will be regarded as a repair and thus allowable for income tax (Samuel Jones v. CIR (1951) 32 TC 513). If, however, a replacement represents the whole (or a substantial part) of the asset, then it will be capital (Bullcroft Main Collieries v O’Grady (1932) 17 TC 93). Initial repairs to a recently-acquired asset will generally be considered as a capital outlay – in the case of a second-hand ship being bought (Law Shipping Company Ltd v. IRC (1923) 12 TC 62), before it could be made seaworthy, a significant amount was spent to make it ship-shape – i.e., it is effectively an extension of the purchase price (which will, of course, be a capital expense). In contrast, initial repairs to remedy wear and tear on an asset which is already operating will be considered revenue and thus allowable (Odeon Assoc Theatres Ltd v. Jones (1971) 48 TC 257).

It is possible that, over time, technological changes mean that an improvement is actually just bringing something up to date, in which case HMRC will accept that this is a simple ‘like-for like’ replacement and not an improvement (HMRC manual BIM46925). The common example is that of double-glazing replacing a single-glazed window; whilst on the face of it an improvement, it is accepted these days that double-glazing is the norm and not an improvement.

Software

Another area where there might be some question mark over the revenue or capital divide is software. Generally, if a lump sum is paid for the use of software, HMRC will regard that as a capital outlay unless it has an expected economic life of less than two years. The creation of a website, for example, which HMRC considers analogous to a shop window (HMRC manual BIM35815). However, if regular payments are made (like a rental), then it will be treated as revenue expense spread over the useful life of the software. The then Inland Revenue produced their views on the matter 30 years ago in the Tax Bulletin Issue 9F (November 1993).

If it is capital?

Then capital allowances will be available for plant and machinery, writing off 18% or 6% of the cost each year over the useful life of the asset. Up to £1million of capital expenditure can be written off each year through the Annual Investment Allowance; for companies, an additional first-year allowance known as ‘full expensing’ is available for many new and unused plant and machinery (though not cars) bought between 1 April 2023 and 1 April 2026.

For other assets, the expenditure on costs and improvements can be deducted from the disposal proceeds for capital gains tax purposes.

The guiding principles

There have been umpteen cases throughout the last century trying to give clarity on this matter. HMRC manual BIM35901 tries pulling all the threads together and suggests looking at the nature of what is being bought and aspects such as: involving recurring payments (a ‘once and for all’ cost is likely to point to a capital outlay); the object and whether it gives ‘enduring benefit’; the acquisition, improvement or disposal of an asset will be capital; and if it’s a tangible asset, is it stock in trade, a fixed asset or is it a short-life tangible asset?

Practical tip

Careful analysis of a purchase of questionable status should always be made. Just because a client calls something a ‘repair’ does not mean you should automatically assume it is allowable as a revenue expense, for example. Ask for more detail wherever possible to help you decide whether it is capital or revenue.

The 2024/25 tax year starts on 6 April 2024. Although many of the rates and thresholds are the same as for 2023/24, there are some changes.

Income tax

The income tax rates for 2024/25 for England, Northern Ireland and Wales are set out in the table below

                            Rate       Band of taxable income

Basic rate             20%             £1 to £37,700

Higher rate           40%         £37,701 to £125,140

Additional rate      45%            Over £125,140

The income tax rates applying to the non-savings non-dividend income of Scottish taxpayers are set by the Scottish Government.

Personal allowances

The personal allowance for 2024/25 remains at £12,570. Once adjusted net income reaches £100,000, it is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. This means that individuals with adjusted net income of £125,140 and above do not receive a personal allowance.

The marriage allowance, which allows an individual to transfer 10% of their personal allowance (as rounded up to the nearest £10) to their spouse or civil partner as long as neither pays tax at a rate in excess of the basic rate, remains at £1,260 for 2024/25.

The married couple’s  allowance, available where at least one spouse or civil partner was born before 6 April 1935, is set at £11,080 for 2024/25. The allowance is reduced where income exceeds £37,000 by £1 for every £2 by which adjusted net income exceeds £37,000 until the minimum amount of the allowance is reached. This is set at £4,280 for 2024/25. Effect is given to the married couple’s allowance in the form of a 10% tax reduction.

Dividends

All individuals, regardless of the rate at which they pay tax, are entitled to a dividend allowance. This is set at £500 for 2024/25.

Dividends not sheltered by the dividend allowance or any unused personal allowances are treated as the top slice of income and taxed at the appropriate dividend tax rate. This is the ordinary dividend rate of 8.75% where the dividend falls in the basic rate band, the dividend upper rate of 33.75% where the dividend falls in the higher rate band and at 39.35% where the dividend falls in the additional rate band.

Savings

Basic and higher rate taxpayers are entitled to a savings allowance. For 2024/25, this is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not receive a savings allowance.

Savings income falling within the savings starting rate band of £5,000 is taxed at 0%. The starting rate band is reduced by every £1 of taxable income.

Capital gains tax

For 2024/25, the capital gains tax annual exempt amount is £3,000.

Capital gains are taxed at 10% where income and gains do not exceed the basic rate band of £37,700. Where income and gains exceed the basic rate band, capital gains are taxed at 20%. Higher rates apply to gains on residential property. For 2024/25, these are, respectively, 18% and 24%.

The High-Income Child Benefit Charge (HICBC) is a tax charge that operates to claw back child benefit where the claimant and/or their partner have adjusted net income in excess of the clawback threshold. For 2023/24 and previous years, this was set at £50,000. The HICBC was equal to 1% of the child benefit paid for every £100 of adjusted net income in excess of £50,000. Once income reached £60,000 the HICBC is equal to the child benefit paid for the year.

Where both the claimant and their partner have income in excess of £50,000, the HICBC is levied on the partner with the higher income.

Higher thresholds from 6 April 2024

The threshold triggering the HICBC is increased to £60,000 from 6 April 2024. From that date, the clawback rate is reduced to 1% of child benefit for every £200 by which adjusted net income exceeds £60,000. This means that the charge is equal to the child benefit for the year once adjusted net income reaches £80,000.

The increased threshold and reduced clawback rate mean that, for 2024/25, child benefit for the year is not lost unless the higher earning partner has income of £60,000; and as long as their income does not exceed £80,000, some child benefit will be retained.

Example

Gemma and George have two children. Gemma looks after the children and does not have an income in either 2023/24 or 2024/25. George has adjusted net income of £70,000 in each year.

In 2023/24, George is liable to the HICBC equal to the child benefit received in the tax year.

However, for 2024/25, George’s HICBC charge is only equal to 50% of their child benefit. His income exceeds the £60,000 threshold by £10,000. At a rate of 1% for every £200 of income above £60,000, this equates to a charge of 50%.

Move to household income

At present, the trigger for the HICBC is individual income not household income. This creates some anomalies. For example, for 2023/24 and earlier years, a couple where each partner had adjusted net income of £49,999 (combined income of £99,998) retain their child benefit in full, whereas a couple where one partner has no income and the other has income of £60,000 lose all their child benefit in the form of the HICBC. For 2024/25, a couple each with adjusted net income of £59,999 (combined income of £119,998) retain their full child benefit, whereas a couple where one partner has no income and the other has income of £80,000 lose all their child benefit in the form of the HICBC.

To address this unfairness, the government announced a move to a system based on household income from April 2026.

Important to claim

Where the HICBC applies, the claimant can elect not to receive child benefit. However, to preserve the associated National Insurance credit, it is important that child benefit is still claimed. This will provide qualifying years for state pension purposes, something that is particularly important if the claimant does not have sufficient income from employment or self-employment to secure a qualifying year.

For capital gains tax purposes, residential property gains have their own, harsher, rules. Not only is taxed charged at a higher rate, but taxpayers also have a shorter window in which to report the gain and pay the corresponding tax over to HMRC.

In the 2024 Spring Budget, the Chancellor announced that the higher rate of capital gains tax on residential property gains would be reduced from 28% to 24% from 6 April 2024. However, this is likely to provide little in the way of comfort for landlords of furnished holiday lettings who will lose the benefit of rollover relief and business asset disposal relief (which reduces the capital gains tax rate to 10%) when the regime is abolished from 6 April 2025. Further, anti-forestalling measures will apply where unconditional contracts for sale are entered into on or after 6 March 2024.

Tax rate

Capital gains tax is charged at the rate of 10% where income and gains do not exceed the basic rate band of £37,700 and thereafter at the rate of 20%. For gains on residential property, the rate is 18% where income and gains fall in the basic rate band; once this is reached, from 6 April 2024, the rate is 24% (a rate of 28% having applied prior to that date).

Reporting the gain

Where a chargeable gain is made on the sale of a UK residential property, this must be reported to HMRC within 60 days of the completion date.

While gains arising on the sale of a home are covered by main residence relief to the extent that the property has been the person’s only or main residence (plus the last nine months), a gain may arise where the property in question is let out or is a second home or has not been the only or main residence throughout the period of ownership.

The gain must be reported online through your Capital Gains Tax on UK property account to report the gain to HMRC online. You can access your account or set one up by signing in to your Government Gateway account.

A paper form can be used if you are unable to report online. You should also use a paper form if you have already filed your tax return for the year in which the disposal occurred.

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

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

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

Paying the associated tax

Capital gains tax on chargeable residential property gains must be paid within 60 days of the completion date. Where the sale completed in 2023/24, the higher residential rate is 28%, whereas for sales completing in 2024/25, the higher residential rate is 24%. For both years, the rate is 18% where income and gains do not exceed £37,700.

The tax payable is the best estimate of that due on the gain. If you have realised losses previously in the tax year or not used your annual exempt amount, you can take these into account in working out how much you need to pay. Payment should be made using the online service, quoting the payment reference number provided by HMRC.

When you file your tax return for the tax year in which the disposal took place, you will need to calculate your capital gains tax liability for the year as whole, paying any balance due. If you have paid too much already because you realised losses in the tax year after the property sale, you will be due a refund.

Business rates, rather than council tax, are payable on non-domestic properties. The rates are worked out by applying the relevant multiplier to the property’s rateable value. However, there are a number of reliefs that are available which may reduce or eliminate the bill.

Multipliers

There are two multipliers – the small business multiplier and the standard multiplier. The small business multiplier applies to properties with a rateable value of less than £51,000 and the standard multiplier applies where the rateable value is £51,000 or more. The last revaluation took place on 1 April 2021 and the values at that date have been used to determine business rates for 2023/24 onwards.

For 2024/25, outside the City of London, the small business multiplier is 49.9 pence in the pound and the standard multiplier is 54.6 pence in the pound. In the City of London, a supplement of 1.8 pence in the pound applies, taking the small business multiplier to 51.7 pence in the pound and the standard multiplier to 56.4 pence in the pound.

For example, business rates of £32,760 would be payable on a property with a rateable value of £60,000 outside the City of London.

Small business rate relief

Small business rate relief is available where the rateable value of the property is £15,000 or less.

No business rates are payable where the rateable value is £12,000 or less. Where the rateable value is between £12,000 and £15,000, the rate of relief tapers from 100% at £12,000 to 0% at £15,000. This means that 50% relief would be available for a property with a rateable value of £13,500, whereas properties with a rateable value of £14,000 would benefit from a reduction of one-third in their bill.

Transitional relief

Transitional relief caps the amount by which business rates can rise as a result of the revaluation which took effect from 1 April 2023.

For2024/25, the increase is capped at 10% plus inflation for properties with a rateable value of up to £20,000 (£28,000 in London), at 25% plus inflation for properties with a rateable value of £20,001 (£28,001 in London) to £100,000, and at 40% plus inflation for properties with a rateable value of more than £100,000.

Empty properties

If a property is empty, business rates are not payable for a period of three months. The relief starts from the date on which the property becomes empty. Once the period has elapsed, business rates are payable in full.

Some properties benefit from an extended period of empty property relief. For example, industrial premises, such as warehouses, benefit from an additional three months’ relief and no business rates are payable on an empty property with a rateable value of under £2,900 until they are occupied.

Following a consultation, the ‘reset period’ for empty property relief is increased from six weeks to 13 weeks (three months) from 1 April 2024. This is to prevent ‘box shifting’ whereby landlords repeatedly occupy properties for short periods to trigger more bouts of empty property relief. Once a property has benefited from empty property relief, it will need to be occupied for at least 13 weeks before any further empty property relief is available.

Other reliefs

There are a number of other circumstances in which business rates relief may be available. Details can be found on the Gov.uk website at www.gov.uk/apply-for-business-rate-relief.

To be allowable as a tax deduction whether under the corporation tax or income tax rules, most expenses must be incurred ‘wholly and exclusively for the purposes of the trade’. Unlike the equivalent rule for employment expenses, the expense is not required to be ‘necessarily’ incurred. This means that as long as an expense is incurred for the business and only for that purpose, a deduction is given.

An area of tax deductions where confusion reigns is in the difference between advertising and entertainment. The line between promoting a company and providing business entertainment can be fine, but the difference is important. Advertising costs are tax deductible whilst those for entertainment are not. The person being entertained may be a customer, a potential customer or any other person. Many business owners will claim taking a potential client out for lunch is purely for the business and advertising to promote the business rather than entertaining and try to claim a tax deduction when not allowed.

Tax law is very definite in disallowing entertaining. However, there is no legal definition of the term. The courts have therefore decided on a broad interpretation in that 'hospitality of any kind' comes under entertaining but only where given for free. HMRC’s view is that food and drink costs are hospitality and always disallowable unless the hospitality provided is what is termed ‘minimal’ or 'incidental'.

A typical case where the 'fine line' can be confused is in the case of Netlogic Consulting Ltd v HMRC [2005] SpC 477. The company held a function for 250 guests and claimed the entire cost as advertising. HMRC disallowed the claim in full as entertainment. The courts found that the room hire cost was an allowable tax deduction because, based on the facts of the case, it was established that ‘the entertainment was incidental to the promotional purpose of the meeting, rather than the hire of the room being incidental to the provision of the entertainment’.

Despite the disallowance rules surrounding entertainment, there are some circumstances whereby expenditure on entertainment can be allowed, particularly if supplied under a contractual obligation (i.e. an obligation that requires the other party to provide something of value in return). As long as the obligation is genuine and the business can demonstrate a full and direct return for the entertainment then the cost will be allowed. The most common situation under this heading will be where hospitality is provided as part of a package of services for which some payment is received.

Despite the ruling above, in practice HMRC accepts that the cost of light refreshments (tea, soft drinks, biscuits, etc.) at a business meeting or event is tax deductible in all circumstances except where the motive is hospitality, e.g. taking a prospective client for a drink at a café or pub.

Following court precedent, if a business gives away its own goods and services (i.e. goods or services in which it trades) to the general public (or a general targeted group) either free of charge or for a subsidised payment as a method of advertising then it is treated as tax deductible. The item must be given as a one-off trial rather than the repeated provision of free goods or services.

Practical point

To ensure that the provision of refreshments is allowable, a business could ask potential customers to pay with their time, e.g. by asking them to complete a questionnaire about the exhibition stand and products at a conference. This turns the arrangement into a tax-deductible commercial transaction.

Some tax planning strategies for the retirement of a business owner.

A tax-efficient disposal method depends on the type of business and whether continuation or cessation is planned. Should no family member be willing or able to take over the reins, the business must be disposed of in another way. The most straightforward and final method is to retire and close the business. However, the business owner may be lucky and find another business wanting to merge or take over.

Sole trader or partnership share

Apart from submitting final tax returns and paying the tax bills, on the disposal of a sole trader business or partnership share, capital gains tax (CGT) may be payable on the sale of any assets (e.g., land and buildings, intangible assets such as goodwill and trademarks), calculated separately on each chargeable asset sold. Any overlap relief available from the early years of the business can be utilised. The normal regime of writing down allowances or first-year allowances does not apply on the closure of a business; instead, the taxpayer is given a balancing allowance or charged a balancing charge in the final period of trading. With a partnership, the partnership itself will continue with any assets usually taken over by the other members.

Company

The four methods of selling a company are:

• share sale;
• asset sale;
• management buyout (MBO): where the management team buys a majority stake in the company; and
• merger with or takeover by another company.

There may be conflicting interests in any share sale as the seller will be looking to sell the shares due to the favourable tax treatment under business asset disposal relief, should the conditions apply (potentially reducing the tax charge to 10% of the gain realised) and to avoid a potential double tax charge, the first charge being on any asset sale, and personally when the cash is withdrawn from the company.

Conversely, the buyer may prefer to purchase assets only to claim capital allowances and avoid acquiring any previous liabilities of the company, which could be the situation with a share acquisition. The CGT position will depend on the form of consideration and whether that consideration is deferred or under an earn-out agreement. Stamp duty will be due on the market value of the shares, which may be lower than the stamp duty land tax liability on assets should land or buildings be transferred.

Management buyouts

The majority of MBOs are undertaken in one of the following forms:

• The MBO team acquire the seller’s shares in the company.
• The MBO team form a company (NewCo), which acquires the seller’s shares in the company.
• The MBO team forms NewCo, which buys the assets only (this method is possible whether buying a limited company or an unincorporated business).

Given the power balance between the sellers and the MBO team, the usual MBO involves the purchase of shares.

Merger or takeover

Unless the consideration is entirely in cash, the shares in the old company are replaced with shares, securities or debentures in the new company. If the company taking over issues shares only, no CGT is payable if certain conditions are met – one of which is that the reorganisation applies equally to all holders of the class of shares being reorganised. When the new shares are subsequently sold or disposed of, they are treated as though the purchasing company bought them at the same time and cost as the original shares (under rollover relief). CGT will be payable by the selling shareholder if the transaction is greater than £3,000 in cash or 5% of the value of the shares, valued just prior to takeover.

Practical tip

All business plans should include a section headed ‘Developing a plan for succession or closure’. Even if the intention is to close the business completely, this section needs to detail how to do so with a focus on strategic tax planning. If the intention is to keep the business going, the impact of tax on the different methods can have a significant effect on the decision.

A comparison of the tax implications of a personal and company car when used in an individual’s employment.

Given the reliance on and impact of cars, special tax rules are in place to manage the environmental footprint of vehicles.

Going green

Policies such as road tax exemption on electric vehicles (EV) and increased business allowance for cars with low CO2 emissions exist to encourage individuals and businesses alike to make ecofriendly investments in cars.

Personal car used for employment

When employees use their own car to carry out tasks related to their employment, they become eligible to claim an allowable deduction against employment income, reducing their taxable income. Job-related travel excludes home-to-office travel (and viceversa) unless the commuting is to a temporary place of work. Instead of the actual fuel expense incurred on job-related travel, HMRC has set out the following approved mileage allowance payment (AMAP) rates for cars:

• First 10,000 business miles in a tax year 45p per mile
• Each business mile over 10,000 in the tax year 25p per mile

The mileage rate covers the running cost of the car, maintenance expenses, such as fuel, repairs, insurance, vehicle excise duty as well as depreciation.

Warning: Reimbursements!

If the employee is reimbursed for personal car use, the allowable deduction may be partially or completely reduced, with the latter occurring if the employer reimburses according to the AMAP rates. Reimbursement exceeding the AMAP rates would create a benefit-in-kind (BIK), leading to a tax charge for the employee on the excess amount received.

Example 1: Excess reimbursement

An individual using their personal car to cover 16,000 miles for work-related travel in a tax year can claim an allowable deduction of £6,000 (i.e., (10,000 x 45p) + (6,000 x 25p)). However, if the employer reimburses 50p per mile, then instead of claiming the deduction, £2,000 (i.e., (16,000 x 50p) - £6,000 AMAP)) will become a taxable benefit for the employee.

Personal use of a company car

When an employee is provided with a company car, a tax charge may arise if the employee or their family makes personal use of it, even for basic commuting. The car is considered a benefit-in-kind and its taxable amount is determined by applying a specific percentage on the list price. The percentage is based on the C02 emissions of the vehicle.

For 2024/25, electric vehicles are assigned the lowest – 2% for the calculation of the benefit, although this is expected to rise to 5% by 2028. For hybridelectric cars with C02 emissions between one and 50 grams per kilometre, the percentage can be between 2% to 14%, depending on the electric range of the car.

Petrol cars with a base level C02 emission of 55 grams per kilometre attract a higher taxable amount, with 16% applicable on the cost of the car. This increases by 1% for every complete five-gram increase over the base level. To deter the use of diesel cars, tax authorities add an extra 4% to the percentage determined using the diesel car’s CO2 emission rates.

Example 2: BIK calculation of a company car

An employee provided with a petrol car with a list price of £14,500 and CO2 emissions of 72 grams per kilometre will apply 19% (16% + (72 – 55)/5)) on the list price to arrive at the taxable benefit of £2,755.

The employer will be liable to pay Class 1A National Insurance contributions on the same amount.

Cap and reductions

HMRC has set a cap of 37% on the calculation of the taxable benefits for cars (petrol or diesel). The taxable amount can also be reduced if the employee contributes towards the use of the car or has the car made available for part of the tax year, rather than throughout.

Practical tip

The list price can be reduced up to £5,000 if the employee contributes towards the purchase of the company car.

Some considerations when extracting profits out of limited companies.

Once a sole trader or partnership has incorporated, the owner or partners can no longer help themselves to the business’s profits at will; such individuals were previously subject to income tax and National Insurance contributions (NICs) based on those profits, irrespective of how much they took from the business.

However, with limited companies, those profits belong to the company as a separate legal person and are subject to corporation tax on their business’s profits; the company’s owner will only be subject to income tax and NICs on whatever they withdraw. Owners can therefore plan the extent of their withdrawals with a view to mitigating their personal tax liability.

Who can take profits from a company?

Shareholders own the company and take the distributable reserves (i.e., available post-tax profits) in the form of dividends. These are more favourable than other types of income – they are subject to lower rates of income tax and are exempt from NICs, so they will usually make up the bulk of a small company owner’s remuneration.

For such small companies, shareholders will also be the directors; these are officers registered as such at Companies House who actually run and manage the company day-to-day and, for tax purposes, are treated as employees of the company. They will be on the company’s payroll and be able to draw a salary (along with bonuses) subject to PAYE income tax and NICs.

These salaries will be made commensurate to the individual’s duties (which is also necessary for the deductions for the company). Someone who is purely a director may draw an officer’s fee (and usually a pension contribution), which is usually a nominal amount below the NICs employer threshold (to ensure the company is not paying employers’ NICs but the officer still benefits with respect to qualifying years for state pension purposes). Higher salaries or pension contributions will necessitate an employment contract, meaning a director can simultaneously be an officer and employee in law, as well as for tax purposes.

Employer pension contributions from the company are tax-free benefits for the directors or employees, and whilst the salaries are taxable to income tax and NICs, both are deductible for the company; dividends, on the other hand, are declared from post-corporation tax profits, so are effectively subject to tax twice.

How else can profits be withdrawn?

Whilst dividends and salaries or bonuses are the main means of profit withdrawal, the company can be charged rent for use of land and property owned by shareholders or directors. Likewise, interest can be charged for the company’s use of an individual’s capital (i.e., loans). Rent and interest paid are deductible for the company and, whilst subject to income tax for the owner, are not subject to NICs. Companies paying UK-source interest to individuals must deduct income tax at basic rate.

Once a shareholder has decided that the company has ceased trading, the profits therein can be withdrawn by liquidating the company. Once a liquidator has been appointed, distributions from the company are taxed as capital (usually with the benefit of business asset disposal relief and the 10% capital gains tax rate for trading companies). A more informal ‘strike-off’ may be carried out without engaging a liquidator with funds likewise being treated as capital – but only if those company funds are below £25,000; above that amount, the full value will be taxed as dividends.

Practical tip

The director shareholder’s personal tax position will usually dictate to what extent, and in what form, a company’s profits are withdrawn. A great advantage of a limited company is that profits do not have to be withdrawn at all and are not subject to personal tax until that happens but careful planning is needed to balance the double impact of corporation and personal tax liabilities, and deductibility of payments for the company.

The importance of making a will and some inheritance tax and other implications of intestacy.

No-one likes to think about their death, so it is perhaps understandable that many people put off drafting their will, and some die without having made a will.

Death and intestacy

If an individual dies without making a will, the estate is subject to distribution in accordance with the laws of intestacy, in the Administration of Estates Act 1925 (NB this article considers the law in England and Wales; different provisions apply in Scotland and Northern Ireland).

This means that an individual’s estate might not be inherited by the ‘right’ beneficiaries.

Example: Married with children A married couple, Bill and Carol, live in London. They have two adult children, David and Ellie. The estates of Bill and Carol are each worth £1.5m. They assumed (incorrectly) that if they died without leaving a will, the estate of the first spouse to die would pass automatically to the surviving spouse.

Sadly, Bill died in January 2024, intestate. The law requires that Bill’s estate is distributed so that Carol receives all Bill’s personal belongings, plus a statutory lump sum of £322,000, and half of Bill’s residuary estate. The other half of Bill’s residuary estate passes for the benefit of David and Ellie.

In the above example, the distribution of Bill’s estate could cause problems, e.g., if Bill owned the marital home and it constituted nearly all the value of his estate. Not only would the marital home fail to pass automatically to Carol, but there would be an immediate inheritance tax (IHT) liability on that part of Bill’s estate passing to David and Ellie (see below) in excess of Bill’s IHT nil rate band, if available. By contrast, if Bill and Carol had no children, on Bill’s death Carol would have received Bill’s entire estate (mainly comprising the marital home).

IHT and death

On death, an individual is treated as making a transfer of their whole estate immediately before death, and IHT is charged accordingly. The IHT liability will depend (among other things) on the identity of the estate beneficiaries; in other words, whether the recipient is a ‘chargeable person’ (such as a son or daughter) or an ‘exempt person’ (such as a UK domiciled spouse, or charity). However, if (as in the above example) the deceased’s estate is not distributed as intended due to the intestacy rules, all is not necessarily lost. An ‘instrument of variation’ (IOV, commonly referred to as a ‘deed of variation’) could be considered. If certain conditions are satisfied (e.g., the IOV is made within two years of death), it is generally treated for IHT purposes as if a redirection of property that formed part of the deceased’s estate had been made by the deceased (IHTA 1984, s 142).

Practical tip

Aside from IHT, there are several advantages of leaving a will, rather than dying intestate. These include the ability to choose executors and to act immediately after death; getting the beneficiaries’ identity right (i.e., in accordance with the deceased’s wishes) and at the right time or age; and being able to determine legacies (i.e., the recipient and amount), rather than having recourse to the intestacy rules. The drafting of a will (or an IOV, if appropriate) should be undertaken by a suitably qualified and experienced professional.