Helpsheets ... continued 35 from homepage

The capital gains tax only or main residence exemption and the required ‘quality of occupation’.

The exemption from capital gains tax (CGT) for a dwelling that is the taxpayer’s ‘only or main residence’ is an important one for homeowners. The value of the exemption means that some may be tempted to claim it on properties that may not clearly fall within its parameters. We must therefore look at what is meant by an only or main residence.

In its online guidance headed ‘Work out tax relief when you sell your home’, under ‘What counts as your home?’ HMRC states: “You must have lived in your home as your only or main residence at some point while you owned it…”

Quality of occupation

As intimated by HMRC, the important factor to remember is that the exemption applies on the disposal of a dwelling-house or part of a dwellinghouse which is, or has at any time in their period of ownership been, the owner’s only or main residence.

Having a dwelling designated as the only or main residence throughout the period of ownership means that the gain accruing during that period of occupation will normally be exempt from CGT. It will also mean that certain periods (e.g., the last nine months) will be exempt even if the property is not then occupied.

Various court cases have determined that whether a property has been a residence depends on the quality of occupation. For example, in Moore v Thompson (1986) 61 TC 15 it was noted that “even occasional and short residence in a place can make that a residence; but the question [is] one of fact and degree”.

Court and tribunal cases

Someone who has been living in a property for only a short period before selling it may gain an insight from the following legal decisions:

 • Goodwin v Curtis (1998) 70 TC 478: The taxpayer lived in a farmhouse for 32 days and the court held this was only a temporary occupation, so the house was not his residence.

 • Harte v HMRC (TC01951): The short periods that the owner lived in a house did not qualify for main residence relief.

 • Moore v HMRC (TC02827): The court held that a house was not a long-term dwelling because it was occupied for only a few months between the owner separating from his wife and buying another house.

 • Iles v HMRC (TC03565): A flat occupied for only 25 days did not qualify.

The owners did not qualify for relief in the above cases, but in Dutton Forshaw v HMRC (TC04644), although a flat was occupied for only seven weeks, there was evidence that it would have been occupied for longer had he not had to live elsewhere, so relief was granted. The gain was also exempt in Bailey v HMRC (TC06085), where the owner had intended the property to be his main residence but had to move out after a short period because he could not get a mortgage and for health reasons.

More than just intention

We can see from these cases that, generally, for a property to be an only or main residence, there should be a degree of permanence or expectation of continuity. Mere intention to occupy a house for a longer period is unlikely to be sufficient without good evidence of other factors preventing this.

Further, the dwelling should be occupied as a residence. This will mean more than, say, simply sleeping at the property. The occupant should be able to cook and eat, bathe and spend leisure time there. If it is felt that a property’s status as a main residence might be questioned, evidence of this (e.g., bills and photographs of the property in use) may prove conclusive.

Practical tip

In its guidance, HMRC also states: “You don’t get tax relief if you bought it just to make a gain.” This is based on a less well-known part of the legislation (TCGA 1992, s 224(3)).

How will planning can help to reduce inheritance tax liabilities.

In April 2023, the National Will Register reported that 42% of adults in the UK had not made any provisions for their estate distribution in the event of death.

This leads to individuals having no control over how the estate is eventually distributed and increases the likelihood of a high inheritance tax (IHT) charge suffered by the beneficiaries.

To ensure that inheritance left behind is maximised with a minimum tax charge, a number of planning measures can be considered when a will is drawn up, including those outlined below.

Exempt beneficiaries

The primary advantage of a will is that the deceased’s estate is distributed according to the wishes of the individual. A popular measure is to leave the entire estate to the spouse or civil partner, as this could lead to the entire inheritance being exempt.

Charity organisations are generally also exempt beneficiaries. Not only is the asset donated to a charity treated as an exempt transfer on death, but if the transfer is more than equal to 10% of the estate’s baseline amount, the IHT charge goes down to 36% (from 40%).

The baseline amount is the estate’s value after adjusting for any exemptions and the nil-rate band (NRB) but before the charitable donation and residence nil-rate band (RNRB) are dealt with.

Exempt transfers

If the individual has children who are minors, they can set up a bare trust in their will. This results in the assets transferred to the trust being managed by the trustees until such time as the beneficiary comes of legal age, whereupon the rights to all the capital and any income from the asset pass to the beneficiary.

Not only is this an effective way of protecting the interests of the dependents, but transfers to a trust result in the asset being excluded from the death estate calculation, leading to a reduced IHT charge.

Life policies

Another option is setting up a life insurance policy in trust. This will exclude the policy payout from the death estate calculation, but the payout can still be made to the beneficiaries specified in the instructions to the trustees.

Any risk of lifetime IHT on the premiums paid can be reduced or avoided by using the annual exemption of £3,000, or by ensuring that the premiums satisfy the conditions to fall within the ‘normal expenditure out of income’ exemption (see IHTA 1984, 21(2)).

Reduction in tax charge

In the context of families, an effective double IHT charge can be avoided if the individual ‘skips’ a generation when specifying the beneficiaries in the will. Assets left to the children will lead to an initial tax charge that will repeat when these assets are then transferred to the next generation.

The family as a whole can potentially save tax if the initial inheritance is bequeathed directly to the grandchildren, leading to a single tax charge on the assets transferred.

Naming direct descendants (children or grandchildren) as the beneficiaries of the residence possessed by the individual will lead to the deduction of £175,000 RNRB in the taxable estate calculation. This will lead to a direct tax reduction of £70,000 (i.e., £175,000 x 40%) and may be doubled if the unused RNRB of a deceased spouse or civil partner is available.

Investing in unquoted or quoted shares and securities of trading companies controlled by the individual can lead business property relief, provided assets have been owned for at least two years. Depending upon the type of investment, the relief can reduce the value of the investments by 50% or 100%, thereby possibly eliminating or reducing the tax charge.

As long as the individual is of sound mind and not under any undue pressure, the document written, signed, dated and witnessed by two independent witnesses will be legally valid.

Practical tip

A will can easily be replaced by a new one; or a codicil could be drawn up to amend the current one.

The strict application of the rule for allowable expenses would require all expense payments to employees to be treated as employment income, leaving the employee to claim relief for the allowable part separately. In addition, an employer is required to notify HMRC of all expenses paid to an employee, even if the employee incurs the expense on the employer’s behalf.

However, invariably, those expenses will not be taxable on the employee, as being incurred ‘in the performance of the duties’ of the employment and ‘wholly, exclusively and necessarily incurred’.

Dispensations and payrolling

Pre-2016, if it was clear that a particular type of expense would not give rise to any tax liability on the employee (being allowable for tax purposes), the employer applied to HMRC for a ‘dispensation’.

Post-2016, a statutory exemption for reimbursed expenses was enacted such that those expenses were no longer taxable. This saved time applying for a dispensation and reporting those particular expenses on form P11D. Other taxable expenses still required submission of form P11D to HMRC and the tax thereon collected from the employee directly under self-assessment or, more usually, via the next year’s PAYE notice of coding.

Since 2016 and with HMRC’s agreement, employers have been able to choose to ‘informally’ payroll other non-reimbursed expenses and benefits-inkind (BIKs). Once registered, the employer adds the correct cash equivalent value of the payrolled expenses or BIK to the employee’s taxable pay, so that the tax and National Insurance contributions (NICs) for the employee are calculated, collected and paid in real-time spread throughout the tax year. HMRC should then exclude the value from the employee’s tax code. Not all benefits have to be payrolled; the employer can choose. Therefore, form P11Ds will only need to be submitted to declare benefits that cannot be ‘payrolled’ (e.g., accommodation and loans subject to interest at less than the official rate). Employers may still have a Class 1A NICs liability and therefore will still need to submit a form P11D(b).

Since 6 April 2023, HMRC no longer agrees to such ‘informal’ arrangements; instead, new employers or employers wanting to payroll expenses and BIKs for the first time must formalise arrangements. Registration is via HMRC’s online service, and is required by 6 April 2024 for the tax year 2024/25.

As a measure towards simplifying and modernising the tax system as of March 2023, HMRC no longer accepts paper P11D filings; all submissions must be made online. Further, the government has decided to mandate payrolling expenses or BIKs for all employers from April 2026.

Preparing for mandated payrolling of benefits

It is understandable why HMRC wishes to do away with form P11D, especially those still being submitted on paper; however, note that currently employers who payroll on a voluntary (informal) basis can exclude certain benefits or employees. Under mandation, payrolling of all benefits is required.

Although the proposed change is two years away, affected employers may wish to start considering how they will move to payrolling, the steps needed to get there by 2026 and any impact on their employees’ wages. For example, some employees may experience cashflow issues for 2026/27, where payrolling and PAYE code adjustments for prior years overlap, or where the taxable benefits have uncertain values. Explanation of the upcoming changes to all employees will be important.

Practical tip

It is yet to be determined how loans and accommodation benefits will be processed under payrolling. In addition, employers will need to consider how last-minute benefit changes for leavers will be processed before payroll cut-off. This is particularly important for benefits which usually carry a relatively high BIKs implication such as company cars.

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-inkind 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.

VAT was introduced just over 50 years ago as a ‘simple tax’; but anyone familiar with its machinations, particularly its exemptions and exceptions, will know this is a misnomer.

However, before we get to other complications, difficulties can arise from the outset. First, a person (an individual or a company) can choose to register for VAT voluntarily.

While this means that output VAT must be charged on taxable supplies of goods and services, input VAT will generally be recoverable on business purchases. This may be particularly useful if their supplies are liable at the zero rate or if their customers are also VAT registered and can recover this charge. Note that, usually, input VAT would not be recoverable if this relates to supplies that are VAT exempt.

Compulsory registration

As well as voluntary registration, the VATA 1994, Sch 1 states that a person who makes taxable supplies must register if one of two conditions or tests is met.

 • Under the ‘backward look’ test, a person must register if, at the end of any month, the value of taxable supplies in the past year has exceeded the registration threshold (VATA 1994, Sch 1, para 1(1)(a)).

 • Under the ‘forward look’ test, registration is required if, at any time, there are reasonable grounds for believing that the value of taxable supplies in the next 30 days will exceed the registration threshold (VATA 1994, Sch 1, para 1(1)(b)).

Note that the legislation refers to ‘taxable supplies’, suggesting that these will be made on an ongoing basis rather than a single supply with no likelihood of more being made.

Furthermore, these supplies must be made in the course or furtherance of a business. A hobbyist would not have to register, but such a person should review this if it seems that what started as a hobby has turned into a business.

Registration

Having determined that either the forward or backward look tests have been met, the person should register for VAT (this can be done using the Government Gateway) and this will take effect from the end of the month after the month in which they became liable under one of the above tests. An earlier date can be agreed between HMRC and the person.

Delaying notification will not delay registration. If HMRC is not notified at the correct time, a VAT liability may be accruing. Businesses should therefore monitor their turnover; waiting until accounts have been prepared for the first year of trading may be too late. Although the backward look test refers to supplies in the past year, if the threshold is exceeded in a shorter time, registration is required.

Person not business

Although VAT-exempt supplies are not included in taxable turnover, it is a ‘person’ rather than a ‘business’ that is registered, so all taxable income from economic activity must be taken into account.

For example, an individual may carry on a building business and have taxable supplies of £80,000 in their first year. This is less than the threshold, so on its own, registration would not be required. However, if they also had income of £10,000 a year from a holiday home (also subject to VAT), this must be included in their taxable supplies. VAT would then be chargeable on both sources of income.

If, say, the holiday let was in the joint names of spouses or civil partners, or if the building business was carried on by a limited company, these activities would be carried on by different ‘persons’ and the incomes would not need to be aggregated. But beware of splitting businesses artificially because HMRC may invoke the antidisaggregation rules.

Practical tip

Businesses should monitor their turnover on an ongoing monthly basis, to check that the registration limit has not been exceeded.

Partnerships exist in either ordinary format or as limited liability partnerships (LLP).

An ordinary partnership is legally defined by the Partnership Act 1890 and is commonly chosen to set up a business to be owned by two or more sole traders. The partners share all the risks, costs and responsibilities, as well as the profits. The most important consequence is that each partner is jointly liable for the debts and obligations of the partnership as a whole without limit. Liability is joint in the case of contractual obligations (i.e. a claimant can sue the partnership and, if they win, each partner will be liable to pay their share of the debt) and joint and several for non-contractual agreements (meaning a claimant can sue either one or all the partners for the full amount of their claim).

LLPs have similar flexibility and tax status as ordinary partnerships but with the benefits of limited liability for each partner. Under an LLP, members are liable only for the amount of capital they each invested in the partnership and therefore they benefit from the same protection as a limited liability company. LLPs can be tax advantageous in certain circumstances because the withdrawal of capital is more manageable than through a limited company. LLPs have to be registered with Companies House – ordinary partnerships do not.

The difference between the two types of partnership can also be found should one member die, resign or become bankrupt. The remaining partners may not be aware that, should this happen, an ordinary partnership will automatically be dissolved unless there is something in the partnership agreement that states otherwise (if there is one). Therefore, in practice, most partnerships will avoid unwanted termination by drafting their partnership agreement so that the partnership continues. If there is no agreement, the partners will either have to come to an agreement with regard to their exit or apply to the court for dissolution of the partnership. There must be at least two members to make a partnership; therefore, if only one partner remains the partnership is automatically dissolved.

With regard to the carrying back of losses under 'terminal loss relief', the income tax position of the partner's estate will be the same as if a sole trader ceased trading- similarly with overlap relief (relevant for the tax year 2023/24 only).

If no partnership agreement is in place, on the death of a partner, the estate of the deceased person is entitled to the share of the profits made since death attributable to their share of the partnership, or to interest at 5% per annum on the value of their share until the share is paid out. The choice between which of the two the estate receives is down to the personal representatives.

Assets qualifying for capital allowances will be deemed to be disposed of and immediately reacquired at market value by the remaining partner(s). Balancing allowances may be claimed if the written down value exceeds the market value.

Where a partnership owns an asset, on the death of one partner, the asset will pass to the other partners for no consideration (unless there has been a previous revaluation of the assets) when the original base cost of the asset is reallocated to the remaining partners. There will therefore be no disposal for capital gains tax purposes, and consequently no capital gains tax uplift.

For inheritance tax (IHT) purposes, the value of the partnership share forms part of the deceased's estate but there will be no IHT charge as business property relief will apply.

When an unincorporated business stops trading, accounts are prepared to the date of cessation. Where a limited company ceases trading, it is either registered as dormant or its directors can apply for the company to be struck off or go into liquidation, if the company is unlikely to be required again in the future. HMRC states that a business ends when it ‘permanently ceases to carry on a trade’.

Sometimes a business that has stopped operations receives income and incurs expenses after cessation and as such the payment was not included in the final cessation accounts. In cases where the accruals basis is followed, most receipts and expenditure relating to the last business period will have been accounted for. However, some post-cessation expenses or receipts may still arise, e.g. an insurance payment or payment of a debt that was previously treated as a bad debt and written off in the cessation accounts but has suddenly been paid. Where profits are calculated on a cash basis (being the default basis of accounts preparation for unincorporated businesses from 2024/25, post-cessation receipts and expenses are treated as though the business continues using the cash basis.

Any income received after the business has ceased is charged to tax separately from the profits of the original business's trade. Any expenses relating to that income are deducted from that income, i.e. the cessation period is not reopened. Post-cessation expenses are usually of a type that would have been deducted in computing the profits of the trade, had the trade not ceased. Therefore, the expense must satisfy the 'wholly and exclusively' test and be revenue, not capital, expenditure.

An expense is not allowable if it relates to the cessation itself whether it arises directly or indirectly from the cessation of trade. A claim for post-cessation relief is possible if a taxpayer ceases to carry on a business and within seven years makes a ‘qualifying payment’ or a ‘qualifying event’ occurs in relation to a debt of the business. Expenses likely to come under this heading include the cost in remedying or paying damages for defective work done, goods supplied or services rendered while the business was continuing, insuring against liabilities arising out of any such claim and collecting, or seeking to collect, debts which were taken into account in computing the profits of the trade before cessation.

Legislation sets out the order of priority in which post-cessation expenses must be relieved, initially being deducted from post-cessation receipts arising from the same trade in the same year as incurred. Any subsequent excess/loss (whether a claim is made or not due to nil total income) may be allowed against other net income (known as post-cessation trade relief), or capital gains for the tax year in which they were paid. There is a 'cap' on the amount that can be claimed which is limited to £50,000 or 25% of adjusted total income.

The relief is also restricted by the amount of any debt owed by the trader that remains unpaid at the date of cessation, if any. Any such year’s relief is limited by this outstanding debt and cannot be carried forward to the current year. The repayment can be relieved if the outstanding debt, which restricted the relief, is subsequently paid.

If an expense cannot be fully relieved using any of these methods, it is carried forward to be deducted from any future post-cessation receipts from the same business. Otherwise, it is lost. If post-cessation receipts materialise within six years, the recipient may carry back the receipts to cessation.

Landlords letting residential property are not entitled to a deduction for the cost of the domestic items that they provide in the property. They are not able to claim capital allowances for the cost of those items either. However, relief is available when they replace the items, allowing the landlord to deduct the cost of the replacement, as long as the associated conditions are met. The relief is available regardless of whether the property business is an unincorporated property business or operated through a company. However, it is not available where the property is let as a furnished holiday letting or rent-a-room relief has been claimed.

What counts as a ‘domestic item’?

Domestic items are items for domestic use such as:

• moveable furniture, such as sofas, beds, tables and chairs;
• furnishings, such as curtains, rugs and carpets;
• household appliances, such as fridges, freezers, microwaves and washing machines; and
• kitchenware, such as utensils, crockery and cutlery.

However, ‘fixtures’ do not count as domestic items and do not qualify for the relief. ‘Fixtures’ are items that are installed in or fixed to the residential property so that they become part of it. Boilers or water-filled radiators which become part of a space or water-heating system are also regarded as fixtures.

Conditions

To claim a deduction for the cost of a replacement domestic item, the following four conditions must be met.

The individual or company claiming the relief must be carrying on a property business that includes the letting of a residential property.

An old domestic item which has been provided for use in the property is replaced with the purchase of a new domestic item. The new item must be provided for the exclusive use of the tenant in that residential property, and the old item must no longer be available for their use.

The expenditure must be incurred wholly and exclusively for the purposes of the business and must be capital expenditure for which a deduction would not otherwise be forthcoming.

Capital allowances must not have been claimed in respect of the cost of the new domestic item.

Amount of the deduction

If the new item is broadly a like-for-like replacement of the old item, the landlord can deduct the cost of the new item. However, where the new item is superior to the old item, the deduction is capped at the cost of an equivalent replacement. Any incidental costs are also allowed, such as the cost of installation or delivery, or the cost of disposing of the old item. However, if the landlord sells the old item, the deduction must be reduced by the sale proceeds received. Where the landlord part exchanges the old item for the new one, the deduction is the contribution made by the landlord (i.e. the cost of the new item less the part exchange allowance given for the old item).

Example

Layla lets out a flat on a long-term residential let. She replaces the existing washing machine in the flat with a washer-dryer costing £350. She sells the old washing machine for £30. She also spends £100 on having the new washing-dryer delivered and installed. The cost of an equivalent washing machine is £220.

Layla is able to claim a deduction of £290. This is the cost of the new item capped at the cost of an equivalent washing machine (£220), plus the cost of delivery and installation (£100), less the proceeds from the sale of the old machine (£30).

If you run your business as a personal or family company, you will need to extract your profits in order to use them personally outside your company, for example, to meet your living expenses. There are various ways of doing this, some more tax efficient than others. Although there is no ‘one size fits all’ and your optimal profit extraction strategy will depend on your personal circumstances, a popular approach is to pay a small salary and to extract further profits as dividends.

Salary

There are benefits in paying yourself a salary. Your company will be able to deduct the salary plus any associated employer’s National Insurance in calculating its taxable profits. If the salary does not exceed your personal allowance, you will not have to pay any tax on it. Likewise, as long as it is not more than the Class 1 primary threshold, there is no employee’s National Insurance to pay either.

It is also beneficial to pay a small salary to secure a qualifying year for state pension and benefit purposes. This is advantageous if you do not already have the 35 qualifying years needed for the full state pension. For 2024/25, you need to pay a salary of at least £6,396 (equal to the lower earnings limit for the year). If you pay a salary of between £6,396 and the primary threshold of £12,570, you are deemed to have paid National Insurance contributions at a notional zero rate, which means you get a qualifying year for free.

For 2024/25, assuming that your personal allowance is £12,570 and it is not used elsewhere, the optimal salary is £12,570. This can be paid free of both tax and employee’s National Insurance. However, there will be some employer’s National Insurance to pay if you are not eligible for the Employment Allowance, which will be the case if you operate your business through a personal company and you are the sole employee and a director. For 2024/25, employer’s National Insurance is payable at 13.8% to the extent earnings exceed £9,100 (unless a higher secondary threshold applies, for example, because you are under 21 or an armed forces veteran in the first year of your first civilian employment since leaving the armed forces). On a salary of £12,570, the employer’s National Insurance hit is £478.86. However, like the salary, it is deductible in computing your company’s taxable profits.

If the Employment Allowance is available, as may be the case if you operate a family company or have other employees, there will be no employer National Insurance to pay on a salary of £12,570.

Once a salary of £12,570 has been paid, it is not tax efficient to pay a higher salary or a bonus as the combined tax and National Insurance hit will outweigh the corporation tax savings.

Dividends

Dividends are taxed at a lower rate than salary and bonus payments and also benefit from their own tax-free allowance. Once a salary of £12,570 has been paid, it is more tax efficient to extract further profits as dividends if you have sufficient retained profits to be able to do so. There are some watch points here. Dividends are paid from retained profits and can only be paid if your retained profits are at least equal to the proposed dividend. Further, if there is more than one shareholder for a class of shares, dividends must be paid in proportion to shareholdings. However, this can be overcome by using an alphabet share structure whereby each shareholder has their own class of share, allowing the flexibility to tailor dividends to the shareholder’s personal circumstances.

As dividends are paid from post-tax profits, corporation tax has already been paid at between 19% and 25% depending on the level of the company’s profits. If the dividend allowance is still available, dividends up to the allowance (set at £500 for 2024/25) can be enjoyed tax-free. Once the dividend allowance (and any remaining personal allowance) has been used up, dividends are treated as the top slice of income and taxed at the dividend tax rates, set for 2024/25 at 8.75% where dividends fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.

Other options

Profits can also be extracted in the form of benefits in kind, or rent if the company is run from a home office. It can also be tax efficient for the company to make pension contributions on your behalf.

The VAT registration threshold rose from £85,000 to £90,000 from 1 April 2024. The deregistration threshold increased from £83,000 to £88,000 from the same date. The changes in the thresholds change the trigger points for compulsory registration and optional deregistration.

When must you register?

You must register for VAT if your taxable turnover in the last 12 months was more than the VAT registration threshold of £90,000 or if you expect your turnover to go over £90,000 in the next 30 days.

You must also register if you and your business are based outside the UK and you supply goods and / or services to the UK, or expect to do so in the next 30 days.

Taxable turnover

The key metric here is ‘taxable turnover’ which may be different to your actual turnover. Taxable turnover includes only those supplies that are within the scope of VAT, i.e. supplies that would be liable to VAT at the standard, reduced or zero rate if the business were registered for VAT. There is no need to take account of exempt supplies in determining whether the VAT registration trigger has been reached.

Registration deadline

If your turnover exceeded £90,000 in the last 12 months, you must register within 30 days of the end of the month in which your turnover for the preceding 12 months reached £90,000. Your effective date of registration is the first day of the second month in which your turnover for the previous 12 months exceeded the VAT registration threshold.

Example

In the 12 months to 18 May 2024 your turnover was £92,430. This is the first time in a 12-month period that your turnover has exceeded the VAT registration threshold. You must register for VAT by 30 June 2024. Your effective date of registration will be 1 July 2024.

Where you expect your turnover in the next 30 days to exceed the VAT registration threshold of £90,000, you must register by the end of that 30-day period. Your registration takes effect from the date that you realised that the threshold would be exceeded.

Example

On 2 July 2024 you sign a contract to deliver standard rated goods with a value of £120,000 by 15 July 2024. You will be paid on delivery. You must register by 31 July 2024. Your effective date of registration is 2 July 2024.

Voluntary registration

If your taxable turnover is below the VAT registration threshold, you can opt to register voluntarily. This can be beneficial if you make mostly zero-rated supplies but incur VAT on goods and services that you buy as it will enable you to recover the VAT that you incur.

If you register for VAT and you supply goods and services that are liable to VAT at the standard or reduced rate, you will need to charge VAT to your customers. If your customers are not VAT-registered, they will not be able to recover the associated VAT, and this may make you less competitive than other suppliers who are not VAT-registered. Registering for VAT will also mean that you will need to comply with MTD for VAT, and this will add additional costs.

It is important to assess the pros and cons before opting to register voluntarily.

Deregistration

At £88,000, the deregistration threshold is now more than the VAT registration prior to 1 April 2024. Businesses whose turnover was just over the old £85,000 registration limit but below £88,000 now have the option to deregister. This may be beneficial to make them more competitive against businesses who are not VAT-registered. It will also relieve them of the need to file VAT returns and comply with MTD for VAT. However, if you deregister, you will no longer be able to recover any input VAT suffered.

If your turnover is likely to increase beyond the new VAT registration threshold of £90,000 in the near future, arguably, it is not worth deregistering as you will need to re-register once the registration threshold is reached.

A taxable benefit arises where an employee has the private use of a company car. Unless the car is an electric car, a further benefit arises if the employer meets the cost of fuel for private travel.

Car benefit charge

The amount that is charged to tax depends predominantly on the list price of the car and the car’s CO2 emissions. The charge is an ‘appropriate percentage’ of the list price, as adjusted for employee contributions and periods of unavailability.

The list price of the car is the manufacturer’s registered price when the car was new – it is not the price actually paid by the employer. Consequently, the price on which the tax charge is based may be considerably higher than the price paid by the employer, particularly if the car was purchased second-hand. The list price is increased by the list price of any optional accessories, and reduced by any capital contributions made by the employee up to a maximum of £5,000.

The appropriate percentage depends on the car’s CO2 emissions and is unchanged from 2023/24. It ranges from 2% for electric cars to 37% for cars with CO2 emissions of 160g/km and above. Where a car’s emissions fall in the 1 to 50g/km band, the appropriate percentage also depends on the car’s electric range, as shown in the table below.

CO2 emissions   Electric range.            % 24/25

1 to 50g/km.         More than 130 miles.       2%

1 to 50g/km.         70 to 129 miles.               5%

1 to 50g/km.         40 to 69 miles.                 8%

1 to 50g/km.         30 to 39 miles.                12%

1 to 50g/km.         Less than 30 miles         14%

Cars with CO2 emissions of 51 to 54g/km have an appropriate percentage of 15%. The appropriate percentage increases by 1% for every 5g/km increase in CO2 emissions until the maximum charge of 37% is reached. A supplement of 4% applies to diesel cars which do not meet the RDE2 standard, subject to a maximum charge of 37%.

Once the appropriate percentage has been applied to the list price (as adjusted for accessories and capital contributions), it is adjusted to take account of any period at the start of the tax year before the car was made available to the employee, any period in the tax year after the car ceased to be available to the employee and any periods of at least 30 days when the car was not available to the employee. Finally, the charge is reduced for any contribution that the employee is required to make (and actually does make) as a condition of the car being available for his or her private use.

Example

Billy is given a company car on 1 May 2024. It is a petrol car with CO2 emissions of 60g/km. The car has a list price of £35,000.

For 2024/25, the appropriate percentage for a car with CO2 emissions of 60g/km is 17%. Applying this to the list price of £35,000 gives an amount of £5,950. However, as the car was not made available to Billy until 1 May, it is reduced by £408 (25/365 x £5,950) to reflect the period of unavailability.

Consequently, the cash equivalent of the benefit is £5,542 (£5,950 – £408). If Billy is a basic rate taxpayer, he will pay tax of £1,108.40 on the benefit of the car in 2024/25. For a higher rate taxpayer, the tax bill is £2,216.80 and for an additional rate taxpayer, it is £2,493.90. Billy’s employer will pay Class 1A National Insurance of £764.80 (£5,542 @ 13.8%).

Fuel benefit

Unless the car is an electric car, a separate tax charge will arise if the employer also provides fuel for private use. The charge is found by multiplying the appropriate percentage used to calculate the car benefit charge by the multiplier for the year, which for 2024/25 is set at £27,800. The charge can be eliminated if the employee is required to ‘make good’ the full cost of fuel for private travel and actually does so before 1 June after the end of the tax year where the benefit is payrolled and by 6 July after the end of the tax year where the benefit is reported on the P11D. The advisory fuel rates can be used to determine the amount that the employee must pay in order to ‘make good’ the cost of the fuel.

Where a tax charge arises in respect of the provision of free fuel, the employer must pay Class 1A National Insurance on the taxable amount.

No tax charge arises if the employer provides or meets the cost of electricity for private travel in an electric company car.

A look at the national minimum wage for householders, families, and family businesses.

Businesses are generally obliged to pay at least the national minimum wage (NMW) to their workers. Most UK workers over compulsory school age who ordinarily work in the UK are entitled to be paid the NMW. If an employer should have paid the NMW but fails to do so, HM Revenue and Customs (HMRC) can (among other things) issue a notice to pay arrears for up to six years previously, impose fines of up to £20,000 per worker, and ‘name and shame’ offenders. However, the NMW rules contain certain exclusions from the general obligation to pay the NMW, including in relation to family households and family businesses.

In or out?

The NMW rules broadly state that ‘work’ for NMW purposes excludes work done by a worker in relation to an employer’s family household, if certain conditions are all met, i.e., the worker is a member of the employer’s family, resides in the employer’s family home, and shares the tasks and activities of the family. So, if (for example) a family member lives at home and is paid for doing household chores, those payments would be excluded for NMW purposes.

Prior to 1 April 2024, there was another exclusion from the NMW broadly for non-family member workers living in their employer’s family home, where certain conditions were satisfied. However, from 1 April 2024, this exclusion is removed from the NMW rules. This change potentially benefits workers such as nannies or au pairs who live with the families they work for.

Family businesses

For family businesses (i.e., a company, sole trader, or partnership), the NMW rules state that work does not include work done by a worker in relation to an employer’s family business if the worker is a member of the employer’s family, lives in the employer’s family home, and participates in the running of the family business. In a family company, an individual may be an office holder, an employee, or both. Company directors who assume the rights and obligations of a director are office holders, but not necessarily workers. HMRC accepts that the NMW does not apply to company directors unless they have contracts that make them ‘workers’ (see HMRC’s National Minimum Wage Manual at NMWM05140). However, if a director has an employment contract, they will be within the NMW in respect of earnings under that contract.

Family members sometimes work in the family company but are not office holders. Company employees are generally workers and entitled to the NMW, regardless of whether they are family members. Even if no formal written contract exists, HMRC might contend that an implied contract applies, which could result in family members working in the company’s business needing to be paid the NMW.

Family members of a sole trader or partnership may be excluded from payment of the NMW, broadly where the worker is a member of the employer’s family, lives in the employer’s family home, and participates in the running of the family business. HMRC’s guidance (at NMWM05160) confirms that work carried out by the family member in those circumstances falls outside the NMW rules.

Practical tip

A family member director who is solely an officer of the company is not necessarily a worker for NMW purposes. However, watch out for express or implied contracts of employment.

An outline of the changes to the CIS rules in Finance Act 2024 and a recent tribunal case.

Under the construction industry scheme (CIS), contractors and deemed contractors must withhold deductions from payments made to subcontractors who do not hold gross payment status (GPS), at either:

 • 20% (the standard rate); or

 • 30% (if the recipient is not registered for CIS or cannot be verified).

To obtain GPS and therefore receive payments without any deductions, subcontractors must meet certain requirements. One of these requirements (the compliance test) includes that all CIS and direct tax returns and payments (excluding certain income tax and corporation tax self-assessment payments) must be:

 • correct; and

 • submitted by the applicable deadlines.

Once granted, HMRC performs an annual automated compliance check to establish whether the subcontractor still qualifies for GPS, and if the subcontractor is not compliant with its relevant tax obligations, GPS can be withdrawn. It then cannot be reapplied for within 12 months. Recently enacted legislation (FA 2024, s 35) changes the GPS tests.

Changes from 6 April 2024

 1. VAT returns and payments are added to the compliance test for GPS status to be obtained and kept by a subcontractor.

 2. The grounds for immediate removal of GPS in cases of fraud include fraudulent returns or information provided in respect of any VAT, corporation tax self-assessment, income tax self-assessment, or PAYE obligations.

Any VAT failures that occur prior to 6 April 2024 will not be considered as grounds to cancel GPS for existing holders. Other GPS changes that will be implemented include:

 • advancing the first compliance check for GPS holders to six months after application (currently, it is 12 months); and

 • changing how to apply for GPS by introducing digital applications.

Regulation 9

Regulation 9 of the CIS regulations (SI 2005/2045) allows HMRC to issue a direction that relieves a contractor of their CIS liability where certain conditions are met, including where the failure to make a deduction arose from:

 • an error made in good faith; or

 • a genuine belief that the payment was outside the scope of CIS.

However, the contractor must have taken reasonable care to comply with the CIS regulations for this to apply.

The Access Contracting Services Ltd case

In Access Contracting Services Ltd v Revenue and Customs [2023] UKFTT 973 (TC), the appellant provided the labour of tradespeople. In 2011, the person who had overseen compliance (including CIS returns) for the firm retired, handing over duties to the office manager, who had previously assisted him. In 2014/15, the company started work with some new clients. The office manager confirmed the CIS status of each with HMRC. They should have been subject to CIS deductions, but the appellant made payments gross and filed CIS returns on that basis. HMRC sought to recover almost £450,000 of under-deducted CIS tax and imposed penalties of 21.75% (£97,000) based on a careless inaccuracy with prompted disclosure. HMRC did not apply the maximum penalty reduction for ‘telling’ and ‘helping’.

Compliance failures but reduced penalties

There were no checks or controls on the office manager’s CIS compliance for what were substantial payments (over £700,000 in 2015/16). Due to the significant impact that failing to comply with the CIS regulations would have on the company and the lack of controls and checks in that respect, the appellant had not acted with enough reasonable care to comply with the regulations. A regulation 9 direction to relieve it of its liability was therefore inappropriate. However, the appellant had been in regular contact with HMRC and had provided all information that it could, so the maximum penalty reduction for ‘telling, helping and giving’ should have been applied.

Practical tip

Subcontractors who currently hold (or plan to apply for) GPS should review their VAT compliance to check whether they are at risk of having their GPS withdrawn or an application refused.

Accounts depreciation is not allowed within tax calculations; it’s too subjective, so instead of that capital allowances generally apply for tax purposes. These allowances have been in place for ‘wear and tear’ to plant and machinery since 1878, with a factory and mills allowance allowing for economic depreciation within a trading business.

HMRC provides a useful history in its Capital Allowances Manual at CA10040. The current legislation is contained within the Capital Allowances Act (CAA) 2001.

What are they exactly?

Allowances themselves are given through a ‘written-down allowance’, which is 18% of the cost and subsequent written-down value of assets in a ‘general pool’ and 6% in a ‘special rate’ pool (which contains cars with CO2 emission of more than 50g/km, integral features such as electrical and water systems). An accelerated 100% ‘annual investment allowance’ (AIA) is also available for up to £1m of expenditure, with a further 100% ‘firstyear allowance’ potentially available for new and unused energy-saving plant and machinery.

All business entities claim these allowances, though limited companies can also claim a further 100% first-year allowance known as ‘full expensing’; originally introduced as a temporary measure in 2023 to replace the ‘super allowance’, it was announced in the 2023 autumn statement that it would be made permanent.

The key concept is that capital allowances are available for plant and machinery, not buildings or structures; the divide is whether the item in question has a function in the trade or is the setting in which the trade takes place; a ‘passive or active’ divide may be another way of looking at it. Case law dates back beyond the last century to help define what ‘plant’ or ‘machinery’ actually is, as the legislation does not do so.

The CAA does give a list of those assets which are deemed to be buildings (List A in CAA 2001, s 21), and ‘structures, assets and works’ in List B within section 22. List C under CAA 2001, s 23 contains a list of those assets which are allowable, many consisting of buildings or structures which, under case law, were deemed to be plant. Cases generally go to court to ascertain whether the asset in dispute comes under List C.

Settings as plant

Machinery is essentially anything with a mechanism, but plant is often more difficult to define as many a time it is a setting; they can still be a setting whilst still used as apparatus and as a tool in the trade.

Paintings can be plant, as can grain or potato silos, decorative screens, or room partitions; whilst these may have the characteristics of a structure, they perform a function – so they qualify. The case of Wangaratta Woollen Mills Ltd v Commissioner of Taxation of the Commonwealth of Australia [1969] 43 ALJR 324 concerned a dyehouse which highlighted the concept of the ‘complex whole’, i.e., that each part of the building performs a function which is necessary for the trade as a whole; so whilst it is a building, it still plays an active role, and it has a function beyond being a simple setting. This concept was unsuccessfully argued against HMRC when considering whether a nuclear deconversion faculty was plant. The Urenco case (Urenco Chemplants Ltd v HMRC [2022] EWCA Civ 1587) did produce one change in favour of the appellants; the Court of Appeal held that expenditure on items within List C included ‘provision for’ those items, and not just the items themselves (in List C, only items 23 onward allowed for this wider interpretation of spending).

The Supreme Court held (in HMRC v SSE Generation Limited [2023] UKSC 17) that tunnels carrying water as part of the Glencoe Hydro-electric power station were plant; HMRC argued that they were ‘tunnels’ or ‘aqueducts’ under List B, but the Supreme Court agreed with the Court of Appeal that these definitions are confined to means of transporting people, vehicles or boats.

Practical tip

When considering whether expenditure counts as plant in particular, as opposed to a building, review precisely what that purchased asset actually does. Even if it seems to be part of a building, if it actively performs a function, then it may arguably be plant and qualify for capital allowances

With interest rates falling, business growth should follow. While this is waiting to happen, companies continue to close. The latest statistics published by the Insolvency Service state that 'After seasonal adjustment, the number of registered company insolvencies in England and Wales in April 2024 was 2,177, 18% higher than in March 2024 (1,838) and 18% higher than the same month in the previous year (1,838 in April 2023)'.

As with anything to do with business, there are tax implications when a business fails. The more apparent immediate impact will be a cessation of trade. Generally, this will accelerate the date on which the company pays its tax liability. Any expenses incurred after the cessation of trade (post-cessation expenses) can be offset against post-cessation receipts, or, in limited circumstances, relieved as losses against total income or chargeable gains.

Loss relief

Consideration is needed as to how to deal with losses efficiently. The main reliefs likely to be relevant include offsetting cessation losses:

• against the company's other profits for the same period
• by carrying them back against total profits of the previous period
• by carrying back losses arising in the final 12 months before cessation against total profits within the previous three years on a 'last in first out' basis.

Sale of assets

Although the cessation of trade will give rise to a deemed disposal of any plant and machinery for capital allowances purposes, the sale of a company's chargeable assets could also produce a capital gain which may give rise to a significant tax liability, especially if it is a property being sold. In this situation, tax planning would involve selling the asset before the cessation of trade so that any losses may be offset to reduce the corporation tax bill. Selling before cessation may not be feasible; however, it may be possible to crystalise the gain before trade ceases by arranging for the asset to be sold to the owner-shareholder and rented back to the company (though note that the sale would attract stamp duty land tax (SDLT)).

Another possibility would be for the company to make an 'in-specie distribution' – in effect making a dividend comprising the asset, the actual market value generally being treated as a taxable distribution in the hands of an individual shareholder. In this instance, personal tax will be payable at the shareholder's marginal dividend tax rate but there would be no SDLT.

Note that the asset must not be disposed of at an undervalue. Under the insolvency process, a court has the power to reverse such a transaction if it took place within two years before liquidation unless it was made in the reasonable belief that the company could continue trading.

Distributions

Payments to satisfy directors’ loans must not be made as this would be deemed 'preferential treatment' for the directors, placing them in a better position over other creditors. However, in some instances, although the business itself may have failed (e.g. through closure of premises or a major supplier going bust), a company may have enough surplus funds remaining after all creditors have been paid to make distributions.

Distributions made in the course of dissolving a company are treated as 'capital distributions' and chargeable to capital gains tax, should conditions be satisfied. Broadly, treatment of a distribution as capital taxed at 10% under Business Asset Disposal Relief is only available on a company's closure if the total amount paid to all shareholders is less than £25,000. Where this amount is exceeded, shareholders pay income tax at the dividend tax rates (i.e. 8.75% if a basic rate, 33.75% if a higher rate or 39.35% if an additional rate taxpayer), after taking into account the dividend allowance of £500 for 2024/25, and any available personal allowance. To secure capital treatment, any company needing to distribute more than £25,000 will be required to enter into a formal liquidation.

A look at the workings of the self-billing system and how it can be helpful for businesses.

Usually, it’s the supplier who issues a VAT invoice; but in some circumstances, the customer prepares the invoice instead and gives the supplier a copy. This system is called ‘self-billing’. Any business can use this procedure, so long as certain conditions are met.

Self-billing is an agreement between businesses, which is most commonly found in the building and haulage industries where large businesses often have many smaller sub-contractors.

How do I start using self-billing?

There is no requirement to obtain HMRC’s prior approval before starting to operate self-billing. Any business can use self-billing provided the arrangements meet the legal conditions laid down in SI 1995/2518, reg 13(3) and in VAT Notice 700/62 (September 2014): Self Billing.

HMRC recommend that a self-billing agreement should be reviewed every 12 months. At the end of that period, the business will need to review the agreement so that it can provide HMRC with evidence to show that its supplier has agreed to accept the invoices raised on its behalf and remains VAT-registered.

However, if there is a business contract with the supplier that includes the self-billing agreement in its terms, it may not need to make a separate selfbilling agreement. In these circumstances, the selfbilling agreement would last until the end date of the contract, and it would not need to review the selfbilling agreement until the contract had expired.

Why use self-billing?

The advantages of self-billing are:

• accounting staff will be working with uniform purchase documentation; and
• it may make invoicing easier if the customer (rather than the supplier) determines the value of purchases after the goods have been delivered or the services supplied.

Before a business begins self-billing, it should consider the following points:

• It can only recover the VAT shown on selfbilled invoices if it meets the conditions explained in Notice 700/62.
• It may find it difficult to set up self billing arrangements with its suppliers, or burdensome to maintain them.
• It will be responsible for ensuring that the self-billed invoices it raises carry the correct VAT liability for the goods or services supplied to it.
• If it is raising electronic self-billed invoices to large numbers of suppliers, it will need to ensure that its accounting system is robust and accurate enough to handle the demands that will be placed on it.

How does it work?

If a business self-bills, it must:

• raise self-billed invoices for all transactions with the supplier named on the document for a period of up to 12 months or if it has a contract with its supplier, for the duration of that contract;
• complete self-billed documents showing the supplier’s name, address and VAT registration number, together with all the other details that make up a full VAT invoice;
• set up a new agreement if its supplier transfers its business as a going concern;
• keep the names, addresses and VAT registration numbers of the suppliers who have agreed to be self-billed, and be able to produce them for inspection by HMRC if required. HMRC recommends that a business reviews these details regularly so that it can be sure that it is only claiming VAT on invoices it has issued to suppliers who have valid VAT registration numbers.

A business must not issue self-billed VAT invoices:

• on behalf of suppliers who are not registered for VAT or who have deregistered; or
• to a supplier which changes its VAT registration number, until a new self-billing agreement is drawn up.

Practical tip

Self-billing can make administration easier and reduce disputes with suppliers over the value of supplies received.

Unincorporated trading businesses are going through their biggest tax change for a generation, with the switch to a tax year basis of assessment replacing the ‘basis period’ system for 2024/25. The tax year 2023/24 is a transition year with special rules. Further change is now on the way.

‘Cash basis’ to become the norm

Since 2013/14, smaller unincorporated trading businesses have had the option of preparing their tax computations on a cash basis (i.e., looking at when money is received or paid) rather than the normal accruals basis of accounting.

The cash basis has been expanded for such taxpayers (by FA 2024, Sch 10), including those in partnerships, from the tax year 2024/25. The changes will not apply to property businesses or those entities already excluded from the current cash basis regime (such as farmers and creative artists making a profits averaging election).

The cash basis will become the default method of calculating profits, with businesses able to opt to use the accruals basis instead if they wish. This reverses the current position for those eligible to use the cash basis. The accruals basis election (under new ITTOIA 2005, s 25C) has effect for the tax year for which it is made and every subsequent tax year until an election is made to move back into the cash basis.

Trading businesses can currently elect to use the cash basis if their turnover is below £150,000 p.a. and must leave the cash basis when their turnover exceeds £300,000. These restrictions are being removed completely.

Deductions for interest

Where the cash basis is used, there is currently a limit of £500 on the amount of interest that the business can deduct against the profits for the year.

This limit is being abolished, allowing tax relief for full interest costs if they are ‘wholly and exclusively’ for the purposes of the trade.

Trading losses

The current restrictions on the utilisation of losses under the cash basis, which only allow for the carry forward of losses against the first available profits of the same trade, will be removed. As under the accruals basis, losses will be available to be:

 • set against total income or gains of the same or previous year (ITA 2007, s 64); or

 • (for losses arising in the first four tax years of trade) carried back three years against total income (ITA 2007, s 72).

Capital allowances

Under the cash basis, most capital expenditure on plant and machinery is treated as an allowable expense. On transition to the cash basis, any pool that contains only items of capital that can be deducted in full in the year of expenditure under the cash basis will come to an end; a full deduction for the remaining pool balance is taken in the year of transition. Note that, due to the availability of the annual investment allowance, many businesses will not have such a balance on their pools.

However, if there are also items that had been purchased that are not cash-deductible (e.g., cars), they must remain in the pool on a just and reasonable basis.

Private use adjustments

The cash basis requires complex adjustments for capital assets used for both business and private purposes.

For example, a reduction in business use is treated as the sale of part of the asset at market value. Accounting for private use of capital assets is therefore more straightforward under the accruals basis.

Practical tip

This change will be significant for all unincorporated trading businesses, particularly as regards whether to elect to stay with accruals accounting in 2024/25. The transition between accruals and cash accounting avoids double counting (and omission) of income and expenses, so be careful when analysing the profits you want to be taxed on in 2024/25.

A look at which vehicle an investor should use.

When considering making an investment, two of the main issues are a good return and an exit strategy. As well as the performance of the investment itself, how to hold it is another matter. Personal income tax rates and those on subsequent capital gains tax (CGT) on disposal, and potentially inheritance tax (IHT), may make holding something personally an unattractive option.

So, what about trusts and companies?

What do they have in common?

By placing an asset into either vehicle, you are technically giving the asset away. A limited company is a separate legal entity from the individual investor; whilst that investor may own all the shares (and thus indirectly the asset), the income and returns belong to the company in the first instance.

By placing an asset into trust, you are giving it away – the beneficial ownership (which is the only type of ownership that matters in reality) has left the original owner. People who create trusts (‘settlors’) can benefit from their own trust, but for tax purposes they will generally be deemed to own the asset still. Trusts are created to give one’s descendants (usually) the use of the asset, whilst the legal ownership is held by trustees (which can consist of the settlor in their lifetime).

Limited companies

A limited company is a separate legal person that can hold assets for the owner, even though the owner technically gave them away, though the shares are still in the owner’s estate for IHT purposes. Unless the asset is cash or used in a trade, capital gains tax (CGT) will be payable when the asset goes into the company, possibly stamp duty land tax (SDLT) too (in England or Northern Ireland), if land or buildings are placed therein.

Once in the company, the corporation tax on any income or capital gain rate will never be more than 25% – and possibly only 19% if below £50,000 in a year. The owner will only suffer personal taxation if they withdraw that income – which they can control carefully by declaring dividends or taking a salary or officer’s fee. Income can therefore accumulate within the company with no personal tax if nothing is withdrawn.

Another useful aspect of being a separate entity is that the risk, inherent with investment, is limited (hence the name!). The owner would only ever lose what they invested; there would be no personal liability beyond that. Also, companies can last in perpetuity, so the company’s shares can be gifted and passed onto other family members ad infinitum.

Trusts

By placing an asset into trust, a settlor is giving away the legal ownership to a trustee to hold for someone else, or a group of people, to enjoy the beneficial ownership. The settlor can declare themselves trustees too, but they no longer hold the asset for themselves.

Depending on the type of trust, income tax rates range from a blanket basic rate (interest in possession trusts – where the beneficiary has a right to the asset’s income with tax paid by trustees as a credit) or a blanket additional rate for discretionary trusts from April 2024 (where the trustees have complete discretion over the capital and income and beneficiaries can reclaim a 45% tax credit on income distributions). Trustees are charged the higher rate of CGT (for 2023/24) (i.e., 18% on disposals, or 28% for residential properties and with only half the annual exemption of an individual). Depending on the circumstances, income tax and CGT burdens may render trusts prohibitive.

However, their great advantage over companies is that after seven years, the asset is out of the settlor’s personal estate for IHT purposes, but they still retain some control over the capital via the trustees. Trusts have their own nil-rate band for IHT purposes (currently £325,000), and will suffer no IHT consequences on values below that. There is no CGT on assets going into trust, nor SDLT if land or buildings are settled.

Practical tip

Whether a company or trust is used will depend upon the investor, their circumstances, their priorities, and for whom the investment is held. If IHT is an important factor, with long-term succession in mind, a trust might be better, but to manage a purely personal investment, the tax benefits of a company might be more attractive.

Which VAT and tax breaks are available for businesses and owners of electric and hybrid cars?

There are some commonly held misconceptions about the VAT breaks for businesses buying electric and hybrid cars, even by car dealers trying to sell a new car.

Common misconceptions

For example, it is not uncommon for car dealers to tell buyers that their businesses can recover the VAT on the purchase of an electric car. This is not the case; the block on input recovery on internal combustion cars applies equally to electric and hybrid cars.

The first point is that HMRC has no special tax breaks for electric cars and hybrids. The VAT recovery position is that VAT can only be recovered on the purchase of the car if there is no private use at all, and that includes home-to-work journeys. So, a business can only reclaim the VAT on the purchase of the car if it is for 100% business use only. If a business leases the car, it can recover 50% of the VAT on the hire charges and all the VAT on any additional charges such as maintenance or roadside assistance.

Scale charges

The main tax break is on the motoring scale charges. The rules are exactly the same for electric and hybrid cars as for cars powered by fossil fuels; however, the savings come from the fact that the scale charges are based on CO2 emissions and as electric cars produce no CO2, they do not pay the scale charge, although the VAT they can reclaim on electricity used to charge the cars will be minimal.

On the plus side, hybrids will pay a scale charge, but because of the lower CO2 emissions, the charge will be lower than for conventional cars.

Excise duty

For cars registered since 1 March 2001, Vehicle Excise Duty (often known as road tax or car tax) is based on CO2 emissions.

Due to their lower tailpipe CO2 emissions, car tax for hybrid cars is generally lower than it would be for a non-hybrid model. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed three to four tax bands lower than would otherwise be the case.

Company car tax

When a company car is made available for private use, a ‘benefit-in-kind’ rate is calculated based on the car’s value and its tailpipe CO2 emissions.

As hybrid cars have lower tailpipe CO2 due to their improved fuel economy, company car tax for hybrid cars is generally lower than it would be for a nonhybrid equivalent car. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed many tax bands lower than would otherwise be the case.

Capital allowances

For some green technologies, businesses can claim an enhanced capital allowance (ECA) intended to allow a company or organisation to set the whole cost of the asset (used for business-related activities) against its taxable profits in the first year following purchase.

New cars with tailpipe C02 emissions of less than 95g/km are eligible for an ECA. While any technology can qualify, several hybrid models have CO2 emissions under the relevant threshold. Business-owned hybrids, therefore, can lead to significant savings in corporation tax within the year of purchase.

Congestion charge

The ultra-low emissions discount scheme was introduced in July 2013.

Under the scheme, all vehicles that emit less than or equal to 75g CO2/km and meet Euro 5 emissions standards qualify for 100% discount on the London congestion charge (subject to a £10 annual registration fee).

Practical tip

There are some tax breaks for the use of electric and hybrid cars, but there is a block on the recovery of VAT on their purchase unless there is 100% business use.

When operating a business or deciding how to operate one, there are several ways that a business can be operated.

Sole trader and partnership

A sole trader is the simplest model – the one-man band, with the individual and business being one and the same. In this case, the individual is taxed on their profits as earned income at their marginal income tax rate, irrespective of what is drawn.

There are no accounts to file, nothing to tell Companies House, no dividends or salary to declare – all they need to do is tell HMRC and file a self-assessment tax return. From 2026, a turnover of £50,000+ will require taxpayers to file those returns through Making Tax Digital. From 2027, a turnover of £30,000 will attract such an obligation.

A partnership is an extension of the sole trade; multiple sole traders coming together with a view to making a profit (per PA 1890, s 1(1)). Partnerships are transparent for tax purposes (i.e., the partners hold the underlying assets and are subject to income tax and capital gains tax on their individual profit or capital shares).

They are generally not separate legal entities either – they are essentially bare trusts. The profit shares, being shared amongst multiple people, means the income tax burden can be spread in a more efficient manner. The flexibility and simplicity of a partnership make it a very popular vehicle.

The same applies if the business (usually professions such as law and accountancy) becomes a limited liability partnership (LLP) – introduced into Great Britain in 2001 and Northern Ireland a year later; these are treated as ordinary partnerships for tax purposes but are body corporates (i.e., separate legal entities) and give their ‘members’ (as partners of LLPs are called) the same protection of limited liability as enjoyed by company shareholders. Which brings us nicely to…

Limited company

At the other end of the spectrum is the limited company, a body corporate which can hold property in its own name, enter contracts, and sue and be sued. The shareholders are the owners with directors managing the business; with small businesses, the two are usually one and the same.

For owners, dividends can be withdrawn from the company with directors usually taking an officer’s fee; directors of owner-managed businesses will often be employees of their company, allowing a larger salary to be drawn and a tax-efficient pension.

Whilst the company’s profits are subject to corporation tax, personal tax is only chargeable on shareholder-directors on those withdrawals made, which can be controlled and done so in a tax-efficient manner with some planning.

Which one?

Tax will be a major factor in deciding whether to set up as a sole trader, or ‘incorporate’ as a company. Deciding whether the tax burden of a sole trader is more than that combined of a company and shareholder-director will often depend on how much profit is taken out of a company and exposed to that double taxation.

However, tax will not be the only factor; for example, only limited companies can qualify for research and development relief, or segregation of a business for regulatory, commercial or succession planning purposes may also point to a limited company being the preferred choice.

Practical tip

Whilst the tax tail must never wag the dog when making business decisions, clearly, tax will still be a major factor. The needs and circumstances of the business and owners should be carefully considered in the round, but as a very rough rule of thumb, the decision whether to move from sole trade or partnership to a limited company tends to start from asking ‘how much profit will be retained?'

The 'tax gap' is a phrase that has been around for almost twenty years and refers to the difference between HMRC’s expected tax revenue and the total tax received from all taxpayers. Notably, it is an estimated figure compiled on an annual basis and, although there has been a decline in the 'tax gap' amount since first recorded in 2005, when it stood at 7.5%, the reduction to 4.8% in 2021/22 still equates to £35.8 billion in absolute terms.

HMRC uses various methods to compile information on taxpayers from various sources which is loaded into HMRC's sophisticated computer system named 'Connect'. 'Connect' analyses the information and estimates where any taxpayer may be underdeclaring.

One method can be found on HMRC's website, being a form that can be completed anonymously should an individual believe another is not paying enough tax or is committing another type of fraud against HMRC. If this information leads to a successful conviction or outcome for HMRC, HMRC may pay a 'reward'. In 2022/23 HMRC paid out over £509,000 to individuals providing evidence about tax fraud, up from £495,000 in 2021/22 and up 75% from the £290,000 paid out five years ago. The number of 'whistle-blowers' recorded in 2022/23 was 14,145. However, the number of qualifying disclosures requiring no further action was 9,839 – this equates to a 'reward' of £35.98 for each claimant.

It is arguable that these 'whistle-blowers' contact HMRC for the financial reward. Many who reported fraudulent activities were ex-spouses but the vast majority were or are disgruntled employees or ex-employees. Information from individuals often proves invaluable for launching in-depth investigations providing first-hand accounts and sometimes documents that would otherwise be difficult for HMRC to obtain.

Valuable though such 'whistle-blowers' may be, even more useful is information coming from sources such as banks, building societies or other financial institutions, with the remainder from tax advisers, accountants, lawyers, estate agents and others, as they are part of the regulated sector under the Proceeds of Crime Act 2002 and the Terrorism Act 2000. Should any of these sources suspect a customer/client might be involved in money laundering or terrorist financing, they are obliged to alert the Financial Intelligence Unit (FIU).

The FIU receives more than 850,000 'suspicious activity reports' (SARs) a year which are stored on a secure central database, currently holding over two million SARs. Unsurprisingly approximately 65% of SARs were filed by banks in the tax year 2022/23, with only 5,961 (0.69%) being submitted by accountants.. SARs data is automatically transferred to HMRC’s Connect database every month which uses a mathematical technique known as 'social network analysis' to analyse previously unrelated information to detect networks of relationships and it has been estimated that one in four HMRC investigation cases have been triggered by a SAR.

One of the more recent changes aimed at strengthening HMRC's work in this area is the tightening of regulations, centring on trade via digital platforms. It is reported that Google Street View is used to identify property renovations and extensions which may not tally with the individual's level of income, for example.

As of 1 January 2024, apps and websites such as Etsy, Airbnb and Uber are required to record details of their users’ income (amongst other data) and report to HMRC on a regular basis as part of a global effort to clamp down on tax evaders. HMRC will be reviewing data going back to 2017/18.

Despite the increase in sources being obliged to report, it is data held by other government departments such as the Land Registry and DVLA that remain the most important and lucrative source of HMRC's information, e.g. in 2022/23 it was discovered that 5,429 landlords had not declared or had underdeclared rental income.

In 2023, HMRC wrote to some taxpayers with property income asking them to check that the information provided in the property pages of their 2021/22 Self Assessment tax return was correct. The letter advised that the cost of ‘upgrading a central heating boiler from an older, less efficient model’ was not allowable in calculating the profits of the property business. However, HMRC have now revised their position and sent a correction letter to taxpayers who were sent the original letter admitting that the advice that they gave was wrong. The correction letter informs taxpayers that where they upgrade an item due to an advance in technology and the new item does broadly the same job as the old one, they will generally accept that the replacement is an allowable repair, the cost of which can be deducted in computing the taxable profits of the property business. Consequently, they now accept that replacing a boiler with a more efficient one is a repair not an improvement.

Repair or improvement?

The distinction between a repair and an improvement is an important one. This is because the former is treated as revenue expenditure and the latter as capital expenditure. This may affect the way in which tax relief is given for the associated expenditure.

A repair is something which restores an asset to its previous condition whereas an improvement enhances that asset. HMRC generally accept that where any improvement arises solely as a result of advancements in technology, the expenditure is regarded as an allowable repair rather than an improvement, as long as the functionality and character of the asset is broadly the same. The example that they quote to illustrate this is the replacement of single glazing with double glazing.

The cash basis is the default basis of accounts preparation for landlords who meet the associated conditions and who have not elected to prepare their accounts under the accruals basis. Under the cash basis, capital expenditure can be deducted in calculating profits unless it is of a type for which such a deduction is specifically disallowed.

By contrast, where accounts are prepared under the accruals basis, only revenue expenditure can be deducted in calculating profits. Relief for qualifying capital expenditure is given in the form of capital allowances.

Action

If you have not claimed relief for a boiler upgrade or relief has been disallowed and you now think that you are entitled to relief, you are advised to email HMRC at responseteam5@hmrc.gov.uk. It is important to include the disclaimer as advised in the letter as, unless the email contains the words ‘I accept the risks associated with using email and I am happy to proceed’, HMRC will not reply by email, and this may lead to a delay. You can also call HMRC on 03000 516640 to discuss the matter.

Furnished holiday lettings (FHLs) enjoy tax advantages not available to landlords letting residential property on long-term lets. The advantages are particularly beneficial when it comes to capital gains tax as landlords disposing of an FHL are able to benefit from a range of reliefs, including business asset rollover relief, business asset disposal relief and gift-holdover relief. However, the special tax regime for FHLs is to come to an end on 5 April 2025. From 6 April 2025 onwards, FHLs will be taxed in the same way as other lets, with gains chargeable at the relevant residential rate. Consequently, if you are thinking of selling or giving away your FHL, or if the property is pregnant with gain, you may wish to consider making the disposal prior to 6 April 2025 to take advantage of the existing capital gains tax reliefs.

Business asset rollover relief

Business asset rollover relief allows any tax due on the sale of an FHL to be deferred where the proceeds are invested in a business asset, for example, another holiday let. Where the full proceeds are reinvested, the gain arising on the disposal is deducted from the base cost of the new asset, increasing the gain when that asset is sold. If only part of the proceeds is reinvested, the gain attributable to the reinvested portion is rolled over and the remainder (relating to the proceeds not reinvested) is immediately chargeable.

To qualify for the relief the new property must be purchased in the period spanning 12 months before and three years after the sale of the old property. The relief must be claimed within four years from the end of the tax year in which the new asset was purchased. The claim is made on form HS290.

Business asset rollover relief is beneficial where the landlord wishes to reinvest as the sale proceeds are not reduced by capital gains tax, leaving more funds available to fund the reinvestment.

Example

Joe bought a holiday let in 2016 for £200,000. He sells it in May 2024 for £350,000, reinvesting the proceeds in full in another holiday let in another part of the country. The new property costs £400,000. Joe claims business asset rollover relief. The base cost of the new property is reduced by the gain of £150,000 on the old property to £250,000. The capital gains tax bill is deferred until the new property is sold.

Business asset disposal relief

Business asset disposal relief (BADR), which was previously known as Entrepreneurs’ relief, allows a gain to be taxed at the preferential rate of 10% up to the lifetime limit of £1 million. The relief is available to an unincorporated landlord where the business is sold and the landlord had owned the business for at least two years previously. It also applies if the business is closed down and the business assets are sold within three years following the date on which the business ceased.

Example

Julia purchased a holiday let a number of years ago and ran it as a holiday let business, managing all aspects of the business herself. She decides to retire and sells the property in June 2024, realising a gain of £400,000. She has used her 2024/25 annual exempt amount and is a higher rate taxpayer.

As BADR is available, capital gains tax is payable at the rate of 10% on the gain – a tax hit of £40,000.

If Julia had waited until after the end of the FHL regime to make the disposal, assuming the higher residential capital gains tax rate remains at 24%, she would pay capital gains tax of £96,000 (£400,000 @ 24%). Selling before the end of the FHL regime saves her £56,000.

Gift holdover relief

The final capital gains tax relief which is available to FHL landlords is gift holdover relief, which is beneficial if the landlord wishes to give the property away or sell it for less than it is worth, for example, in order to pass it on to his or her children.

For capital gains tax purposes, where an asset is disposed of to a connected person the gain is calculated by reference to the market value of the asset, rather than the amount that the recipient pays for it, if anything. Where a property is given away, this may mean that there is a hefty tax bill to pay but no proceeds from which to pay it. Gift holdover relief overcomes this by allowing the gain to be deferred by reducing the recipient’s base cost.

Example

James has a holiday let that he bought for £150,000. In July 2024 he gives it to his daughter, Jade. At that time, the property has a market value of £325,000. James and his daughter claim gift holdover relief. As a result, Jade’s base cost is £150,000 – the market value at the date of the gift of £325,000 less the heldover gain of £175,000.

Gift holdover relief is useful where the landlord wants to give the property away as it removes the need to find additional funds the pay the associated capital gains tax bill.

Beyond April 2025

The reliefs will cease to apply to FHLs once the favourable tax regime comes to an end in April 2025. Disposals made after that date will be subject to the normal capital gains tax rules for residential property and the usual rates of 18% and 24% will apply.

Residential property gains must be reported to HMRC and the tax paid within 60 days of the completion date.

Disposing of a holiday let prior to the end of the FHL regime may be worthwhile.

Many people earn small amounts of money from self-employment, often as a side hustle. For example, this may be from craft or baking activities, tuition or the provision of services, such as babysitting. If you earn money in this way, it is important to understand the associated tax and National Insurance implications.

Tax consequences

A separate trading allowance of £1,000 allows you to earn up to £1,000 of self-employed profits tax-free. If your profits from all self-employments in a tax year are £1,000 or less, you do not need to report the income to HMRC and there is no tax to pay. However, it is important to remember that you need to take account of your total profits from all self-employments – the trading allowance applies across all self-employments rather than on a business-by-business basis.

If your profits from self-employment are more than £1,000, you will need to complete a tax return. If you are not registered for Self Assessment, you will need to register by 5 October after the end of the tax year for which you first need to report your income. You can do this online (see www.gov.uk/register-for-self-assessment). You will need to complete your tax return and file it online by 31 January after the end of the tax year, so by 31 January 2026 for your 2024/25 tax return. You must also pay any tax and National Insurance that you owe by this date too.

You can still benefit from the trading allowance if your profits from self-employment are more than £1,000 by deducting the £1,000 trading allowance rather than your actual expenses where it is beneficial to do so. This will be the case if your actual expenses are less than £1,000.

If you make a loss, even though there is no tax to pay, you may want to complete a return so that the loss is available to use against any future profits.

National Insurance

For 2024/25, the self-employed only pay Class 4 contributions where their profits exceed the lower profits limit, set at £12,570. The liability to Class 2 contributions has been abolished for 2024/25 and later tax years. If your profits from self-employment are less than £12,570, there will be no National Insurance for you to pay.

However, if your profits are between the small profits threshold, set at £6,725 for 2024/25, and the Class 4 lower profits limit of £12,570, you will receive a National Insurance credit which will provide you with a qualifying year for state pension and contributory benefit purposes for zero cost.

If your profits from self-employment are below the small profits level of £6,725, you will not be able to benefit from the National Insurance credit. However, you will have the option of paying voluntary contributions at the Class 2 rate of £3.45 per week. If you do not already have the 35 qualifying years needed for the full state pension and will not otherwise secure this by the time that you reach state pension age, this can be a cheap option -- paying voluntary Class 2 contributions of £3.45 per week is much cheaper than paying voluntary Class 3 contributions of £17.45 per week.

Partner note: ITTOIA 2005, Pt. 2.

If you are registered for VAT, you will need to keep normal business records. The records must be complete, up to date and sufficient to enable you to calculate the VAT due to or due from HMRC. You will also need to maintain a VAT account and keep copies of your VAT invoices.

Business records

HMRC take a wide view of what constitutes ‘business records’ and their list includes:

• annual accounts, including a profit and loss account;
• bank statements and paying-in slips;
• cash books and other account books;
• purchase invoices;
• copy sales invoices;
• credit or debit notes issued or received;
• orders and delivery notes;
• purchase and sales books;
• records of daily takings, such as till rolls;
• import and export documents;
• relevant business correspondence; and
• any documents or certificates supporting special VAT treatment.

The precise records that need to be kept will depend on the type of business. However, all businesses will need to maintain a VAT account and keep copies of invoices.

If your business is registered in Northern Ireland, you must also keep any documentation relating to dispatches and acquisitions of goods to or from the UK or an EU member state.

VAT account

The VAT account forms the link between the business records and the VAT return and all VAT-registered businesses must keep a VAT account. To comply with MTD, it must be kept digitally; either within a software package or on a spreadsheet.

To show the link between the output tax in your records and the output tax shown on your VAT return, you must keep a record of:

• the output tax owed on sales;

if your business is registered in Northern Ireland, the output tax owed on acquisitions from EU member states;

• the tax required to be paid on behalf of a supplier under a reverse charge procedure;
• tax that must be paid following a correction or adjustment for an error; and
• any other adjustments required by the VAT rules.

You must also keep a record of the following in order to show the link between the input tax in your records and the input tax shown on your VAT return:

• the input tax claimed on business purchases;

if your business is registered in Northern Ireland, the input tax allowable on acquisitions from EU member states;

• any tax that can be recovered following a correction or an adjustment for an error; and
• any other necessary adjustments.

Need to keep digital records

To comply with the requirements of MTD for VAT, VAT-registered businesses must maintain certain records digitally and keep their accounts within ‘functional compatible software’. This is a software program or set of software programs, a product or set of products or an application or set of applications which are able to:

• record and preserve digital records;
• provide HMRC with information and returns from data held in those digital records via an API (application programming interface) platform; and
• receive information from HMRC using the API platform.

Where data is transferred between software, applications or products (for example, from a spreadsheet to the VAT return software), this must be via a digital link.

VAT invoices

VAT invoices issued are an important part of the business records, while VAT invoices received are the primary evidence for recovering VAT. Copies must be kept of all VAT invoices issued and received.

Maintaining records

The general rule is that business records for VAT purposes should be kept for at least six years.

Whether employing family members can be a useful strategy to reduce the tax liability for an owner-managed business.

With an owner-managed company, a family member could be a shareholder as well as an employee, and payments from the company can be a mixture of salary, bonus, benefits (including the £300 employee ‘trivial ’gifts’ allowance) and dividends, thereby not only reducing the company’s tax bill but enabling withdrawals at potentially a lower personal tax rate than if a sole director-shareholder runs the company.

Other non-tax reasons for employing a family member include enabling that employee to be given National Insurance contributions (NICs) credit towards their state pension entitlement. In addition, an employee’s salary counts as relevant earnings for private pension contributions purposes – making the family member a director (even with just the secondary NICs threshold salary of £758) and tax relief for payments made through the company up to the annual limit of £60,000 are possible. Employing a family member can ensure that the administration or core business services are being dealt with, thereby freeing up the main earner to maximise company income and grow the business. However, care needs to be taken for the payments not to fall foul of the ‘settlement’ rules. The relationship must be a commercial one, with proof that work has been done at a fair price.

‘Settlements’ rules

The settlements legislation is an anti-avoidance provision available to HMRC to counter income being diverted from directors to family members who pay tax at a lower marginal rate than the director (often termed ‘income splitting’). The question here is whether, by allowing the family member income from the business, they are actually earning a PAYE salary or whether the owner-director has created a settlement and retained an interest in the business.

Should a settlement be created, that income is treated as still belonging to the settlor (in this instance, the director).

Note: The last tax case brought by HMRC under this heading was over ten years ago, so the settlement rules are possibly low on their list of priorities.

How much to pay?

HMRC will want to establish that the family member actually works and is not being paid just to take money out of the business. HMRC will then assess whether the work justifies the amount being paid. If no or little work is undertaken, HMRC could refuse the company a tax deduction and treat the payment as a distribution to the director. However, a small salary could be considered by appointing the family member as a director, even if little actual work is undertaken.

Otherwise, the market rate is used, although this could be adjusted if the family member works weekends and evenings, which an ordinary employee may not be inclined to do without being paid additional for overtime.

How to pay

HMRC is not averse to business owners employing family members; it is more interested in any benefit derived by the business. Payments must be made ‘wholly and exclusively’ for the trade and not simply because the individual is a family member. Most importantly, a tax tribunal case in 2018 confirmed that any payment must be paid into the family member’s personal bank account and recorded in the accounts as payment as with any other employee; the company should also comply with the Real Time Information requirements of a payroll scheme.

The tribunal case confirmed that even if there had been one payment per month from the business’s bank account and a matching invoice from the son, this could have gone a long way to support the appeal, but there were no such records to reconcile with the business’s bank statements. A written agreement between the two would have helped, as would a formal job description.

Practical tip

HMRC is more likely to query situations where a family member’s name suddenly appears on the payroll showing payment above the going rate for the work undertaken. Where that person is the only employee or has a unique role in the business, determining the right pay level may be difficult.

A look at the income tax implications of withdrawals from a personal pension plan.

Attractive tax reliefs are available on contributions to a personal pension plan and to the plan itself, but the focus here is on the basic income tax implications when the saver wishes to draw money from that pension.

The past 20 years or so have seen the introduction of more flexibility, and since 2015 flexi-access drawdown has meant that savers can generally draw from their pensions without restriction if they are aged 55 or over.

The lump sum

Up to 25% of the value of the accumulated value of a personal pension plan can be withdrawn as a tax free lump sum. This does not have to be taken as a single payment and it could be taken over a period of years.

A lump sum could be a useful resource if cash is required to meet unexpected expenses without incurring a tax liability.

Annuities

Taking an annuity from a pension still exists. The saver gives up the right to the capital in return for an annual amount (often paid monthly) for the rest of their life or perhaps the life of their spouse or partner.

Various options are available, including (for example) the annuity being guaranteed for a set period, for a fixed or increasing amount. The annuity is subject to income tax at the appropriate rate.

Drawdown

As mentioned, funds can be drawn from a personal pension plan as required. Once the tax-free element has been taken, any other withdrawals are taxed as income. Income tax will be charged at the appropriate rate (i.e., 20%, 40% or 45% - the same rates that would apply to annuity income) on total income above the annual personal allowance (£12,570 for 2023/24). Note that different rates apply for Scotland.

Other sources of income – state or work pensions, other earnings, and savings income, etc – should be taken into account when calculating the liability likely to arise on the drawn down money.

For example, if Mr Smith had a pension plan worth £100,000, he could take £25,000 as a tax-free lump sum. If the whole pension fund was withdrawn, the other £75,000 would be taxed as income in that year. Let’s assume that he has a state pension and some part-time earnings that are the same as his personal allowances of £12,570.

For 2024/25, the first £37,700 of the pension would be taxed at 20% and the balance of £37,300 would be liable at 40%. The total tax due would be £22,460. However, if he drew it in two payments over two tax years, £37,500 would be taxed in the first year at 20% and the same in the following year. Assuming his circumstances remain the same, the two taxable amounts of £37,500 would both be taxed at 20% – a total income tax liability of £15,000, so a tax saving of £7,460. Of course, the payments do not need to be a year apart, simply in two tax years.

As an aside, the operation of the PAYE system (often involving the use of the ‘emergency’ tax code) means that higher amounts of tax may initially be deducted from individual drawn down funds. Repayments may be claimed through the HMRC website (www.gov.uk/claim-tax-refund).

Conclusion

There are numerous other tax implications to pension withdrawals, and advice should be taken.

For example, withdrawals from a pension other than the tax-free element will reduce the maximum amount that can be paid into a pension in future. This may be important if future employment or self-employment is being considered. Entitlement to personal allowances may also be affected.

Practical tip

The tax liability on pension withdrawals is only one element. Consideration should be given to annual financial requirements, likely life expectancy and other factors. Professional financial advice is highly recommended.

Various ways employers can help employees through the cost of living crisis.

Given this challenging economic environment, many employers are looking to see how they can help employees financially. Pay increases may not be an option, bearing in mind the additional tax and National Insurance contributions (NICs) implications for employers and employees.

For some employees, tax-free, non-cash vouchers to assist with rising bills and food prices may be an alternative, as may proactive measures such as providing subsidised meals at work or facilitating car-share arrangements. Staff could be allowed to sell back unused holiday entitlement (subject to the minimum 5.6 weeks paid annual leave, which cannot be paid in lieu).

Advances for expenses

Some types of loan are exempt from these rules, so no benefit-in-kind arises. Such payments will usually be in the form of advances made to pay for necessary expenses or incidental overnight expenses on business trips. The amount must be less than £1,000 and be spent within six months. The employee must also account to the company regularly.

However, HMRC will allow payments of more than this amount if there is a good reason for exceeding the limit (e.g., an advance to cover a lengthy business trip).

Cheap or interest-free loans

In addition, there is the option of providing cheap or interest-free loans. Should an employer lend an employee money interest-free or at a rate below the official rate of 2.25%, the employee is charged to tax as a benefit-in-kind on an amount equal to interest at the official rate less any interest paid.

The employer is also subject to Class 1A NICs at 13.8%. However, there is no charge should the loans be on commercial terms by employers who lend or supply goods on credit to the general public despite the interest paid being less than the official rate.

There is also no charge if all beneficial loans to an employee are less than £10,000. The amount is a de minimis limit in that if the amount an employee borrows exceeds the limit, even by just £1 for one day in a tax year, the whole loan is taxable and not just the excess over the limit.

Therefore, all loans to the same employee must be aggregated to check whether the limit has been exceeded. As beneficial loans cannot be payrolled, they must be reported on forms P11D by 6 July following the tax year end.

Waiving an employee loan

There may be instances where the loan is written off or the balance outstanding is waived. Such a situation includes the employee stopping work and loan recovery will not be possible. Loans waived always count as taxable income for the employee, even if the loan was not a taxable benefit-in-kind when first granted.

The exceptions are where the loan was to an employee’s relative and the employee gained no personal benefit from the loan being waived, or the loan is waived following the death of an employee. The exception does not apply if a loan is waived because an employee is critically ill and it is known that they will not be returning to work.

Practical tip

Should the loan be taxable, the taxable amount is calculated either by using the average loan balance by adding together the loan balances at the beginning and end of the year and dividing by two, or by using the precise method which tracks the amount outstanding each day if this produces a better (lower tax and NICs) result.

Just because an employee receives a lump sum on leaving does not necessarily mean the payment is exempt from tax under the £30,000 exemption for termination payments rules.

The exemption generally only applies if the payment is compensation for the termination of employment or a change in the duties of a person's employment. It does not apply for any other reason including for or in anticipation of retirement. Therefore, to be exempt, the payment must not be made under any obligation on the part of the company, but wholly as a goodwill gesture. Providing that a payment or benefit is not a distribution or part of a capital transaction, the first £30,000 of any 'goodwill gesture' is exempt from income tax and NIC with only the balance being chargeable. 'Golden handshakes' made to an employee or director as a reward for past service are taxable as earnings and treated in the same way as salary chargeable to PAYE tax and employee’s and employer’s NIC. In virtually all circumstances, the £30,000 exemption would not apply to golden handshakes.

When determining the overall tax position of any leaving package, each element needs to be considered separately. Payments may comprise different elements, e.g. accrued holiday pay, bonus, payment in lieu of notice (PILON), continuing private medical insurance and compensation. Non-cash benefits are also considered when calculating the exempt amount where the value used is the cash equivalent or 'money’s worth' if higher, e.g. the market value of a car will be considered towards the exempt amount if an employee keeps a company car. Some benefits in kind are exempt from tax in any event, e.g. the provision of a mobile phone.

If the employee is not being made redundant but leaving on a date of their choosing, a PILON payment will probably not form part of the package. Should this not be the case and a PILON clause is included in the employee's contract, the employer must make payment of all monies the employee would have received during the notice period and tax this amount as earnings, including NIC. If there is no PILON clause, there is a complex statutory formula known as 'post-employment notice pay' (PENP) used to calculate the amount of a payment that should be taxed as earnings.

Should an employee have an outstanding loan that the company may wish to write off as part of the package, any amount written off is taxable as earnings. Rather than this happening, should the total termination payment be less than £30,000, it would be tax efficient to increase the payment to enable the employee to repay the loan and so utilise the full exemption.

HMRC's stance

HMRC tends to look closely at claims for the £30,000 exemption following any termination of employment. The Employment Income Manual states: ‘It’s vital to identify redundancy payments properly because…what people call redundancy payments may not be within the special definition of redundancy…’. To reduce the likelihood of any HMRC enquiry, there needs to be a paper trail and any documents approving the payment must not refer to the payment as a 'golden handshake’ or 'reward for past work'.

Practical point

A 'golden handshake' can be tax and NI-free if, instead of being a cash payment, a payment is made as an employer’s contribution to a registered pension scheme. If the employee is over 55 years (or when they reach 55 years), they can withdraw up to 25% of the total pension fund tax and NI-free and only the balance will be taxable as income.

Many directors believe they have an absolute right to monies deposited in a company's bank accounts. However, payment cannot just be withdrawn as there are set procedures to follow to be legally compliant.

'Illegal' dividend

A dividend is a distribution of post-tax profits and it can only be paid if the company has sufficient retained profits from which to make payment. Therefore, before declaring a dividend, it is necessary to check this. If a dividend is paid without a sufficient amount of profit to substantiate the payment, this effectively means that the company is insolvent and considered to be breaking (company) law. Even if the bank account is in credit as of the withdrawal date, it does not necessarily mean that sufficient profit has been made to cover the payment and it is the retained profit that needs to be considered. Therefore, a dividend could be paid in a loss-making period providing there are sufficient 'distributable'/retained profits brought forward to make an overall profit. Conversely, a dividend cannot be paid if a profit had been made in an accounting period but retained losses brought forward mean that the overall result is a loss.

Preferences

Where a dividend payment has been made out of retained profits, there may be instances where a shareholder would prefer not to receive payment of all or part of the dividend or where it would be tax advantageous for that particular shareholder not to do so.

Such a situation may arise where one or more shareholders is a higher rate taxpayer and the others are either basic rate taxpayers or do not pay tax. A shareholder may also prefer not to receive a dividend payment if they claim Child Tax Credit, as inclusion of a dividend in the calculation may take the total income over the limit, or if by taking the payment the shareholder is affected by the High Income Child Benefit charge. All shareholders with the same class of share receive payment in proportion to their individual shareholdings and so, unless 'alphabet' shares are in place, the shareholder will have to consider 'waiving' (deferring) payment. 'Alphabet' shares are different classes of shares denominated by a letter which allow for dividends to be paid at different rates for each class of share.

Should a shareholder not wish to receive a dividend, they may voluntarily ‘waive’ (give up entitlement to) payment, such that none is received; the remaining shareholders still receive their allocation. The waived dividend remains in the company's bank account.

HMRC's stance

The amount of dividend waived remains within the company resulting in additional funds available to the remaining shareholders. The question is – is there anything to stop the directors from increasing the dividend for the remaining shareholders in this situation? The answer will depend on the reason for the waiver. HMRC may argue that the waiver has indirectly provided funds for an ‘arrangement’ or ‘settlement’ and should be denied. The 'settlement' rules are anti-avoidance provisions which apply where the settlor (i.e. the person gifting an asset) retains an interest in the asset given away and the settlor or the settlor’s spouse benefits from the gifted asset – an element of ‘bounty’ being required. The dividend will remain with the original shareholder, if the settlement rules are found to apply.