Helpsheets ... continued 36 from homepage

Private residence relief is a valuable capital gains tax relief which means that a person does not have to pay capital gains tax on any gain arising on a property while it was their only or main residence. Where a property has at some point been the taxpayer’s only or main home, the last nine months of ownership are also exempt from capital gains tax (increased to 36 months where the taxpayer leaves their home to go into care). Certain other periods of absence may also qualify for the relief.

If a taxpayer has more than one home, only one can be their ‘main’ residence at any time. Further, married couples and civil partners can only have one ‘main’ residence between them. A property can only be in the running as a main residence if it is lived in as such – properties owned but not owner occupied as a residence do not count (for example, those let out).

Nominating the main residence

Where a taxpayer or a married couple/civil partners have more than one residence, they can choose which residence is their main residence for capital gains tax purposes. This is done by making a nomination. There are strict time limits in which the nomination can be made.

A change in the combination of residences

A notice nominating a residence must be given within two years of the date on which the combination of residences changes. For example, this may be when a second or subsequent property is acquired or a property is sold, leaving the taxpayer(s) with at least two properties after the sale. It is important to note that the date of acquisition will not necessarily be the date that the combination of residences changes. For example, if a property that has previously been let comes to the end of a tenancy and starts to be used as a second home, the date that it first becomes used as a residence is the date that the combination of residences changes.

On marriage or a civil partnership

As married couples and civil partners can only have one main residence between them, where a couple marry or enter into a civil partnership and each had their own main residence prior to the marriage, if they retain those residences, they will need to jointly nominate which is to be the main residence from the date of the marriage/civil partnership.

A nomination is not needed if one party has two or more residences and the other party has none as there is no change in the residences and no nomination is needed. However, if both parties own two or more residences jointly a nomination must be made from the date of the marriage/civil partnership – the couple can now only have one main residence between them whereas previously they could have had one each.

Varying the notice

Once a nomination has been made, it can be varied (often referred to as ‘flipping’). The variation can be backdated by up to two years from the date on which it was given. A variation is often made when one of the properties is to be sold to maximise the main residence relief across the residences by taking advantage of the final period exemption. This provides access to main residence relief for the last nine months of ownership (or 36 months where the taxpayer goes into care) if the property has been the main residence at some point. Where a property is within the final period, it is more beneficial for another residence to be the main residence.

No nomination made

Where no nomination has been made, the question as to which property is the main residence for capital gains tax purposes will be determined by reference to the facts. The property in which the taxpayer resides for most of the time will be the main residence.

In most cases, a higher rate of stamp duty land tax (SDLT) applies to the purchase of second and subsequent residential properties in England and Northern Ireland where the consideration is at least £40,000. The supplement increases the residential rates by 3%.

However, even where a person owns two or more properties, they can replace their ‘main residence’ without having to pay the supplement.

The ‘main’ residence

It will usually be clear which property is a person’s main residence. For example, if a person has one house in which they live plus two investment properties that they rent out, the house in which they live will be their main residence. However, where they split their time between two or more properties, it is necessary to consider the facts as to which is their main home, taking into account where the taxpayer’s family is based, where the children go to school, where the taxpayer is registered to vote, etc. The main residence may not be the place where the taxpayer spends most of their time. For example, if the taxpayer has a city flat in which he lives Monday to Friday and a family home where the family are based full-time and he spends his weekend, the family home will be considered the main residence.

The main residence for SDLT may not necessarily be that nominated as such for capital gains tax purposes.

Exchanging the main home

The SDLT supplement does not apply where the taxpayer exchanges his or her main home. The position is straightforward if the sale of the former home completes before or at the same time as the purchase of the new home. In this situation SDLT is charged at the normal residential rates.

However, if the purchase of the new home completes before the sale of the old home so that the taxpayer owns both the new and old main residences simultaneously, the SDLT supplement must initially be paid on the purchase of the new home on top of the usual residential rates. However, the supplement element can be reclaimed when the former main residence is sold, as long as this is within three years of the date on which the new main residence was purchased. In exceptional circumstances, this period may be extended.

To claim the refund, the SDLT return must be amended using form SDLT 16 to show that the purchase of the new residence is no longer a higher rate transaction. This must be done within 12 months of the sale of the previous residence or, if later, 12 months of the filing date for the SDLT return for the new main residence. It is important to claim the refund as it is not given automatically.

For 2024/25 and later tax years, unless they elect otherwise, unincorporated businesses must prepare their accounts and calculate their taxable profit using the cash basis. This is a reversal of the position applying for 2023/24 and earlier tax years, where the accruals basis was the default, but traders who were eligible to use the cash basis could elect to do so if they preferred. To enable the cash basis to operate by default, the restrictions which applied previously have been lifted.

Cash basis v accruals basis

The cash basis works on a cash in and cash out approach. Income is only taken into account when received, and expenses when paid. Consequently, there is no need to account for debtors and creditors or prepayments and accruals. As income is not recognised until received, relief for bad debts is automatic.

By contrast, the accruals basis matches income and expenditure to the accounting period to which they relate. This necessitates the computation of debtors and creditors and prepayments and accruals.

Removal of cash basis restrictions

For 2023/24 and earlier tax years, traders were only able to elect to use the cash basis if their turnover (as computed under the cash basis) was £150,000 a year or less. Once in the cash basis, they could remain in it until their turnover reached £300,000; once turnover reached this level, the trader had to move to the accruals basis. The turnover limits are removed from 2024/25.

Under the cash basis as it applied for 2023/24 and earlier tax years, traders were only able to deduct interest and finance cost up to a maximum of £500 a year. The cap does not apply from 2024/25, enabling traders to deduct all allowable interest and finance costs.

The cash basis rules as they applied for 2023/24 and earlier tax years also imposed restrictions on the ways in which losses could be used. Prior to 2024/25, where accounts were prepared under the cash basis, it was not possible to relieve the loss sideways against income of the current and previous tax year. The ability to carry a loss back in the early years of a business against income of the previous three years was also denied where the cash basis was used. These restrictions have been lifted from 2024/25.

Accruals basis election

For 2023/24 and earlier tax years, traders who did not elect to use the cash basis simply prepared their accounts using the accruals basis by default. As the cash basis is the default basis from 2024/25, traders who wish to continue to use the accruals basis will need to elect to do so.

Moving between the cash basis and the accruals basis

To prevent some income and expenditure being counted twice and some not being included at all, adjustments are needed when moving between the cash basis and the accruals basis and vice versa. Adjustments may also be needed where capital allowances have been claimed under the accruals basis but the expenditure has not been relieved in full to ensure relief is given for the balance of the expenditure.

HMRC have revealed that every year lots of simple errors are made in tax returns in relation to capital gains tax which result in the taxpayer suffering additional tax, interest and penalties. Here are some common mistakes, and how to avoid them.

Using the correct annual exempt amount

When calculating how much capital gains tax you need to pay, it is important to make sure that you use the annual exempt amount for the correct tax year. This is the capital gains tax equivalent of the personal allowance, and is the amount of gains that you are allowed tax-free for a tax year. The annual exempt amount is applied to net gains (gains for the year less losses for the year), and before using losses brought forward from earlier years. Spouses and civil partners each have their own annual exempt amount.

The annual exempt amount is £3,000 for 2024/25, reduced from £6,000 for 2023/24. It is lost if not used in the tax year to which it relates.

Disposals of UK residential property

Earlier payment and reporting deadlines apply to gains on UK residential property. UK residents who make a chargeable gain on the disposal of a UK residential property must report the gain to HMRC within 60 days of completion and pay the capital gains due on the gain within the same time frame.

If no capital gains tax is due, for example, on the disposal of property which has been the taxpayer’s only or main residence throughout the period of ownership, the reporting requirements do not apply.

If the taxpayer has also made other gains or losses in the year, the capital gains tax for the year is finalised in the Self Assessment tax return.

Private residence relief – final period exemption

Where a property has for some time been the taxpayer’s only or main residence, the gain relating to the final nine months is covered by private residence relief, even if the taxpayer no longer lives in the property. This is increased to the final 36 months where the taxpayer leaves their home to go into care.

Prior to 6 April 2020, the final period exemption was 18 months.

In calculating the amount of private residence relief, it is important that the correct final period exemption is used, and that it is only applied once.

Lettings relief

The scope of lettings relief was drastically reduced from 6 April 2020 and now only applies where the taxpayer lets out part of their home and lives in part of it as their main residence and is eligible for private residence relief on part of the gain. It does not apply if the whole house has been let out, even if this was prior to 6 April 2020 when the old lettings relief rules applied. Now lettings relief is only available to live-in landlords. It is equal to the lower of:

• the amount of private residence relief;
• £40,000; and
• the gain relating to the let part.

It is important that lettings relief is only claimed where due and the relief is calculated correctly.

Business asset disposal relief

Business asset disposal relief (formerly entrepreneurs’ relief) is subject to a lifetime limit of £1 million. The limit includes amounts of entrepreneurs’ relief – the clock did not restart with the name change.

Taxpayers have also mistaken the limit for an annual limit.

The deadline for filing your 2023/24 Self Assessment tax return online is 31 January 2025. An earlier deadline of 30 December 2024 applies if you owe £3,000 or less and wish to pay the tax that you owe through an adjustment to your PAYE code. While these dates are some way off, there can be advantages of filing your 2023/24 tax return early.

Self-employed taxpayers

If you are self-employed and you prepare your accounts other than to 31 March, 5 April or a date in between, there will be more work involved in calculating your taxable profit for 2023/24. This is because the 2023/24 tax year is the transition year between the current year basis which applied for 2022/23 and earlier tax years and the tax year basis applying from 2024/25. The profit for 2023/24 will comprise that for the year to the accounting date ending in 2023/24 (the standard part) and also the profits for the period from the end of that period to 5 April 2024 (the transition part). For example, if you prepare accounts to 30 June, the standard part is the year to 30 June 2023 and the transition part is the period from 1 July 2023 to 5 April 2024. This is found by apportioning the profits for the year to 30 June 2024. The 2023/24 tax year is the last year in which relief can be given for any unrelieved overlap profits that arose on commencement or a change of accounting date.

Where the accounting period does not correspond to the tax year, there will be more than 12 months’ profit to assess in 2023/24. Accounting periods ending on 31 March, 5 April or a date in between are treated as corresponding to the tax year. However, the transition part of the profits less any overlap relief is automatically spread over five years (2023/24 to 2027/28 inclusive) unless you elect for these to be assessed earlier (for example, where your personal allowance is available or they would be taxed at a higher rate). Consequently, your tax bills may be higher than normal for the next five years.

Filing your tax return early will give you more time to ensure that you have the funds available to pay the higher bills, and to make arrangements to pay in instalments where payment might otherwise be difficult.

Employed taxpayers

If you are employed you may need to file a tax return if you have other sources of income, such as rental income or investment income. If you owe less than £3,000, you can elect for the tax to be collected through your PAYE code if you file your return by 30 December 2024. This saves you paying the tax in a lump sum, providing an interest-free instalment option.

Filing the return now the 2023/24 tax year has ended ensures the 30 December 2024 deadline is not missed.

Earlier repayments

If you have overpaid tax for 2023/24, the sooner you file your tax return, the sooner you are able to receive a repayment. The money is arguably better in your bank account that in HMRC’s.

Certainty as to tax bills

Once you have filed your return, you will know what you need to pay by 31 January 2025 and, where you need to make a payment on account for 2024/25, what you need to pay by 31 July 2025. This provides certainty as to future tax bills and allows you to organise your finances to ensure that you have the necessary funds available.

If you know you will struggle to meet your tax bills, you can set up a Time to Pay arrangement to allow you to pay your bill in manageable instalments. You may be able to do this online.

Peace of mind

Filing your tax return ahead of the deadline provides peace of mind that the job has been done and that it has been ticked off the ‘to do’ list.

The concept of the limited liability partnership (LLP) was introduced a little more than 20 years ago, and is governed by the Limited Liability Partnerships Act 2000.

As is evident from the name, a main attraction is ‘limited liability’; this may be why those trading in an ordinary partnership (or indeed sole traders considering entering a partnership) may want to consider an LLP as the format for their business.

Converting to an LLP

Similar to a company, an annual return and accounts must be filed with Companies House, but there is still some of the flexibility of an ordinary partnership. To convert a partnership to an LLP there are several recommended steps.

1. The partners must agree to the conversion. The reason for this should be set out, and any partnership agreement should be reviewed, as should the effect of the change on employees, suppliers, landlords and customers.

2. The LLP must be registered with Companies House. Information on this and related matters can be found on the GOV.UK website (tinyurl.com/GOVLLP).

3. The transfer of the business and any relevant assets and liabilities should be made by a formal transfer agreement.

4. The previous partnership agreement (if there is one) should be replaced by a new comprehensive LLP agreement.

5. The old partnership can be dissolved.

Tax implications

Before agreeing to convert a partnership to an LLP, the partners should be aware of the tax implications.

Generally, LLPs are transparent for tax purposes, so each member is charged to income tax or corporation tax on their share of income or gains as for an ordinary partnership (but see ‘Salaried partners’ below). As long as at least one of the old partners is a member of the LLP, there is a deemed continuation and no balancing events should arise. On an administrative note, the new LLP will be given its own unique taxpayer reference, but either this or the old one can be used.

Unless they change, there will be no disposal of the partners’ interests for capital gains tax purposes.

There may be restrictions to loss and interest relief claims. Similarly, and subject to conditions, no stamp duty land tax will arise on the transfer of chargeable interests to the LLP. There is no disruption of the partner’s interest for inheritance tax purposes.

There is a transfer for VAT, but if the conditions are met, the ‘transfer of going concern’ provisions should prevent a charge from arising, and the old VAT registration can be transferred.

The LLP can take over the PAYE scheme of the old partnership. Alternatively, forms P45 could be issued to the employees and a new scheme opened. Generally, the Transfer of Undertakings (Protection of Employment) Regulations SI 2006/246 (TUPE) will apply so that employment contracts are taken over by the LLP with no break in employment.

Salaried partners

As an aside on the subject of employment above, to combat ‘disguised employment’ salaried partners may be treated as employees unless they meet three conditions relating to the amount they are paid that does not depend on the firm’s profits or losses; their influence over the LLP’s affairs; and their capital contribution to the LLP.

Anyone considering converting a partnership to an LLP should take detailed advice on this issue to ensure that they will not be adversely affected by this rule, particularly as HM Revenue and Customs has recently changed its practice on the capital contribution aspect.

Conclusion

For partnerships that are growing or subject to risk, the LLP rather than a limited company may be a suitable alternative if limited liability is the prime requirement, while still retaining the flexibility of an ordinary partnership.

Practical tip

Note that partnerships considering a transition to an LLP in Scotland and Wales should carefully consider any land and buildings transaction tax (Scotland) or the land transaction tax (Wales) implications.

When HMRC talks of payrolling benefits and expenses (‘payrolling’), it refers to putting the taxable value through the payroll when the employee is paid, thereby avoiding declaring items on form P11D. The benefit is removed from the tax code, but a taxable non-payable value is processed in the payroll. It really could not be easier.

Example: Payrolling medical benefit The payroll department knows at the start of the tax year that Jane’s single-person medical benefit is £1,200 per annum. On a monthly payroll, this is processed as a notional item of £100 per payday (£1,200/12).

Payrolling has been on a voluntary basis for some time, courtesy of provisions in Finance Act 2015. HMRC made regulations allowing this from tax year 2016/17, extending it in 2017/18. Perhaps, the voluntary take-up was not as great as HMRC envisaged, and a ‘simplification update’ on 16 January 2024 announced voluntary will become mandatory from tax year 2026/27. When HMRC makes something voluntary, it will generally become mandatory one day! But what’s the problem with mandation?

An income stream?

Many professional firms make an income from P11D completion and expertise, so two points spring to mind:

 1. Final P11Ds will apply for tax year 2025/26, after which time they can be accurately called legacy forms. If this is an income stream for you, this is going; but

 2. P11D specialism knowledge is still required. However, this expertise is required throughout the tax year, not just in the weeks between 6 April and 6 July.

Case study: Jane marries!

Congratulations, Jane! However, she wants her single cover extended to cover her spouse. This means a change to the taxable benefit and a change to the notional value we are payrolling. For those undertaking payroll work, we cope with changes in payroll. But do we get this information in real time to allow us to accurately process the married cover benefit? If we don’t get it, we will need to get it.

Jane leaves!

Payroll processing means we process final payments all the time (pro-rated salary, holiday pay, etc.). From April 2026, add to the mix the fact we will have to pro-rate taxable benefit changes – and maybe, Jane’s cover extends after the termination date.

Anything else?

I could write a huge list of things that employers and payroll processors need to consider given the mandation from April 2026. However, space only permits me to highlight four:

 1. Class 1A National Insurance contributions will be payable monthly rather than annually. Does this mean cash flow issues – especially in 2026?

 2. What about the benefits we cannot payroll now (accommodation and beneficial loans)? Of course, legislation will allow this in time for April 2026.

 3. Some benefits can be ‘made good’, currently with deadlines after the end of the tax year. Does this mean backdated payroll submissions?

 4. We can only deduct 50% in tax when compared to taxable pay. For an employee, say on statutory sick pay, where payroll cannot collect the tax due on the benefit, does this mean tax code adjustments next year?

Primarily, though

Returning to Jane, taxing a notional value is easy enough – if we get information when we process the payroll. This does not happen now, and we don’t have long to ensure the likes of taxable relocation expenses, medical benefits and company car information are advised as and when the payroll is processed. Payrolling means real-time provision of taxable benefits and expenses, a massive administration hurdle to be jumped. Just imagine if Jane also has a company car and changes it every three months!

Practical tip

We know ‘prior planning prevents poor performance’. Now, change these five ‘Ps’ for payrolling benefits-in-kind and expenses from 2026/27 – preparation, planning, processes and policies. Neglecting any P and we end up with the fifth – palaver!

When considering the tricky matter of remuneration planning, there are two things to consider; the amount of remuneration, and what form it takes.

How much?

The amount employees receive should be commensurate with their employment duties for the employer to claim tax relief on the salary. The payments must have been incurred ‘wholly and exclusively’ for the purposes of the trade, profession or vocation (per ITTOIA 2005, s 34 and CTA 2009, s 54). If the level of salary is higher than the job warrants, HMRC could deem the excess to be an effective gift, a non-business payment, and thus not deductible for the business. This may be more likely to happen in family businesses where family members are employed, and the notion that these bounteous payments might be made is possible.

An employee is subject to income tax and Class 1 National Insurance contributions (NICs) on salaries or bonuses under PAYE, which their employers are obliged to maintain and pass the tax onto HM Revenue and Customs (HMRC). Employers in Scotland need to bear in mind that the Scottish tax bands for employment income (whereas NICs is based upon UK rates) for their Scottish employees. Directors receiving a salary are treated in the same way (although NICs is assessed on an annual basis).

How to be paid?

Salary or bonuses are what employees and directors usually receive – but other possibilities might need to be considered:

 • Benefits-in-kind – whilst subject to the same rates of income tax, employees do not pay NICs on these benefits; employers only pay Class 1A NICs. Some benefits are tax-free (e.g., a phone for private use, extra holidays, extra employer pension contributions, car parking at or near the workplace, workplacebased childcare, Cycle to Work schemes, and cheap loans under £10,000). Benefits provided under a salary sacrifice scheme can save the employee income tax, but there are still NICs savings to consider.

 • Shares – employees might receive shares in their employer’s limited company. Under the employment-related securities rules, those employees will be taxed on the value of the shares, less any amounts paid. For shares which are not ‘readily convertible assets’, there will be no NICs chargeable either. By giving employees a stake in the business, other than the NICs treatment, there is no immediate tax saving. However, once in possession of shares, the employees can receive dividend income going forward, which is subject to lower tax rates and exempt from NICs. In addition, it gives some incentive – employees will feel more than being simply hired help. If they hold sufficient shares and voting rights, then if an employee does decide to leave and sell their shares, they may well qualify for the lower 10% capital gains tax (CGT) rate via business assets disposal relief (BADR).

 • Share options – instead of shares themselves, employees might be given the option to purchase them at a discount; these options may come with strings attached as a further incentive. Exercising unapproved share options will attract income tax in the same way as buying shares, depending on how much they pay for the shares in relation to their value. HMRC-approved share option schemes (e.g., Save As You Earn (SAYE), Company Share Option Plans, and Enterprise Management Incentive (EMI) schemes) provide for greater incentives with tax reliefs. For example, SAYE and EMI schemes allow employees to purchase shares at a fixed price at a future date; if that price is below the market value at the time of exercise, there is no income tax charge on the difference. Any future sale would allow that growth to be taxed under CGT rather than income tax; the BADR regime is also a little more favourable towards EMI shares. Share options often give more flexibility and further incentive than simply providing shares outright – especially if there is some tax advantage.

Practical tip

Whilst shares offer greater long-term tax advantages to employees than salaries, they are potentially more complicated and will give the employee a stake in the businesses; a useful incentive, maybe; but it may be an unwelcome intrusion into smaller family-run companies.

The fall in the dividend allowance in recent years may mean that you now need to pay tax on your dividend income for the first time.

The dividend allowance

The dividend allowance was introduced from 6 April 2016. It is available to all taxpayers regardless of the rate at which they pay tax and in addition to any other allowances that they may receive (such as the personal allowance or the personal savings allowance). Dividends sheltered by the allowance are taxed at a zero rate. However, they use up part of the tax band in which they fall.

The dividend allowance was set at £5,000 for 2016/17 and 2017/18. However, it was reduced to £2,000 for 2018/19, remaining at this level up to and including 2022/23. It was further reduced to £1,000 for 2023/24 and again to £500 for 2024/25.

For years prior to 2016/17, dividends came with a tax credit which matched the dividend ordinary rate of 10% on the gross dividend. This meant that basic rate taxpayers had no further tax to pay on dividend income, regardless of the amount, as long as their total income did not push them into the higher rate tax band.

Taxation of dividends

Where dividends are not sheltered by the dividend allowance or any personal allowance not used elsewhere, they are taxed at 8.75% where they 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. To work out which rate applies, dividends are treated as the top slice of income.

Impact of the falling dividend allowance

The fall in the dividend allowance in recent years may mean that taxpayers who have never previously paid tax on their dividend income now have some dividend tax to pay for the first time.

Example

Barbara has had some privatisation shares for many years. She has increased her holdings by taking advantage of scrip dividends and rights issues. She receives dividend income of around £1,500 a year. She has other income of £30,000 a year from her state pension and an occupational pension. She does not complete a tax return.

For years prior to 2023/24, Barbara’s dividend income was sheltered by the dividend allowance and she had no tax to pay.

However, for 2023/24, her dividend income of £1,500 exceeds the dividend allowance of £1,000 by £500. As her dividend income falls in the basic rate band, she will need to pay tax of £43.75 on her dividend income (£500 @ 8.75%).

For 2024/25, the dividend allowance is only £500, and Barbara’s dividends exceed her dividend allowance by £1,000. As a basic rate taxpayer, she will need to pay tax of £87.50 (£1,000 @ 8.75%) on her dividend income in 2024/25.

Telling HMRC

If you are now liable to pay tax on your dividend income, you will need to tell HMRC. The way in which you do this depends on whether you already complete a tax return and the amount of your dividends.

If you already complete a Self Assessment tax return, as will be the case if you are self-employed or have other income, such as rental income, to declare, you simply include your dividend income on the dividend pages of your return.

If you do not need to complete a tax return, for example, because you are taxed under PAYE, if your taxable dividends are £10,000 or less, you can simply call the HMRC helpline on 0300 200 3300 to tell them about your dividend income. You can ask that they amend your tax code to collect the tax that you owe through PAYE. However, if you have taxable dividend income of more than £10,000, you will need to complete a Self Assessment tax return. You will need to register for Self Assessment no later than 5 October after the end of the tax year in which the need to first report the income arose.

To qualify for a full state pension, you need 35 qualifying years. You can earn these through paying National Insurance contributions or being awarded National Insurance credits. If you will not have sufficient qualifying years for a full state pension when you reach state pension age, you can ‘buy’ additional qualifying years through the payment of voluntary contributions.

Employed earners earn a qualifying year for each year that their earnings exceed the lower earnings limit for the year, which for 2024/25 is £6,396.

For 2023/24 and earlier tax years, self-employed earners earned a qualifying year through the payment of (or award of) Class 2 contributions where profits exceed the small profits threshold, set at £6,725 for 2023/24. For 2024/25onwards the liability to pay Class 2 contributions is abolished and the self-employed build up a qualifying year through the payment of Class 4 contributions where profits exceed the lower profits limit (set at £12,570 for 2024/25). Self-employed earners whose profits fall below the lower profits limit but which are at least equal to the small profits threshold (of £6,725 for 2024/25) receive a National Insurance credit.

National Insurance credits are paid in various circumstances, for example, to those claiming child benefit for a child under the age of 12, regardless of whether they elect to actually receive the benefit. Credits are also awarded to those on certain benefits and to carers in receipt of carer’s allowance.

Check your state pension record

Before paying voluntary National Insurance contributions, it is important to check your state pension record. You can do this by visiting the Gov.uk website at www.gov.uk/check-state-pension. You can also check your state pension record using the HMRC app.

If you do not already have the 35 qualifying years needed for a full state pension or will not do so by the time that you reach state pension age, you can check your National Insurance record by visiting the Gov.uk website at www.gov.uk/check-national-insurance-record. This will show you what years count as qualifying years and where there are gaps in your record.

Paying voluntary contributions

To qualify for a full state pension, you need 35 qualifying years when you reach state pension age, whereas if you have at least ten qualifying years, you will receive a reduced state pension.

If you have less than 35 qualifying years, paying voluntary contributions will increase the state pension that you receive as long as you have at least ten qualifying years when you reach state pension age. If making voluntary contributions will not give you the magic ten qualifying years at state pension age, paying the contributions is not worthwhile. Once you reach 35 qualifying years, there is no benefit in making further additional voluntary contributions. Remember to factor in any National Insurance credits that you will receive.

You can make voluntary contributions by paying Class 3 contributions or, where you have low profits from self-employment, by making voluntary Class 2 contributions.

Class 3 contributions

Class 3 contributions can be paid voluntarily to plug gaps in your National Insurance record. These are weekly contributions, which for 2024/25 are payable at the rate of £17.45 per week. Contributions must normally be paid within six years from the end of the tax year to which they relate. Where the contribution is paid in the current or following tax year, it is payable at the rate for the year to which it applies; however, where it is paid later than this, it is payable at the highest rate prevailing in the period from the year for which they are being paid and the year in which the contributions are actually paid.

An extended time limit applies to fill gaps in the period running from 6 April 2006 to 55 April 2016. Contributions for this period can be made until 5 April 2025. Contributions paid in 2024/25 are payable at the 2022/23 rate of £15.85 per week. The deadline for paying contributions for 2016/17 and 2017/18 has also been extended to 5 April 2015.

Voluntary Class 2

Self-employed earners with profits below the small profits threshold can pay Class 2 contributions voluntarily. This remains the case from 2024/25 following the abolition of the liability to pay Class 2 contributions. Where this option is available, it is much cheaper than paying voluntary Class 3 contributions – for 2024/25, voluntary Class 2 contributions are payable at the rate of £3.45 per week. These are paid through the Self Assessment system. As with Class 3, voluntary Class 2 contributions can normally only be paid for the previous six years; however, an extended deadline of 5 April 2025 applies to contributions for the period from 2006/07 to 2015/16, for which contributions can be made in 2024/25 at the 2022/23 rate of £3.15 per week. The deadline for paying voluntary Class 2 contributions for 2016/17 and 2017/18 has similarly been extended.

Landlords with furnished holiday lettings (FHLs) face an uncertain future. At the time of the Spring 2024 Budget, it was announced that the tax regime for FHLs would be abolished from 6 April 2025. However, no further details were announced before the general election was called, leaving landlords uncertain as to whether the proposals would actually be enacted and, if so, what they would look like.

In a letter to HMRC, the ICAEW called on the Government to consider the introduction of a ‘brightline test’. This had previously been proposed by the former Office of Tax Simplification (OTS) in 2022.

Special rules for FHLs

Under the current regime for FHLs, landlords who meet occupancy and availability tests are treated more like a business and benefit from tax reliefs which are not available to landlords letting residential accommodation on longer-term lets. Broadly, to fall within the regime, the property must be furnished and available for letting for at least 210 days in the tax year and actually let for at least 105 days. However, if the property is let for more than 155 days in the tax year on lets of 31 days or more, the property is not an FHL.

Landlords of FHLs are not subject to the interest restriction rules applying to landlords letting longer-term residential lets. Instead, they can deduct interest and finance costs in full in calculating their taxable profit. They also benefit from valuable capital gains tax business reliefs, such as business asset disposal relief, business asset rollover relief and relief for business gifts. Profits from letting an FHL also count as earnings for pension purposes.

Proposed ‘brightline’ test

In their review of property income in 2022, the former OTS suggested the introduction of a ‘brightline’ test to determine whether the landlord was operating a property business or a trade. The ICAEW called on the Government to consider whether this would make it easier for landlords to ascertain whether they are trading or not. Such a test would help reduce the administrative burden placed on HMRC. It would also be helpful for inheritance tax purposes in determining whether business property relief is due.

At the time of the Budget, the Government also announced that anti-forestalling rules would apply from 6 March 2024 to prevent the use of unconditional contracts to secure the favourable capital gains tax reliefs. The ICAEW also asked for clarification on any transitional rules that might apply.

HMRC’s view

In response to the ICAEW, HMRC rejected the introduction of an objective ‘brightline’ test, preferring instead the application of the usual rules to determine whether a trade exists. In their reply, they also stated that in their view, business property relief is unlikely to be available for furnished holiday lets as they regard the activity as an investment activity whereby income is received in return for the occupation of property.

If you make donations to charity, you can benefit from tax relief on those donations. This can be achieved in various ways.

Gift Aid

If you are a UK taxpayer, you can claim Gift Aid on donations that you make to charity. Where this is the case, the amount donated is treated as made net of basic rate tax and the charity reclaims basic rate tax on the donation. This means that every £1 that you donate is worth £1.25 to the charity.

To donate through Gift Aid, you must make a Gift Aid declaration. The option to make a Gift Aid declaration will usually be included on charitable giving pages. Alternatively, the charity may give you a form to sign.

The tax reclaimed by the charity is funded from the tax that you have paid. It is important therefore that you only make a declaration where you have paid sufficient tax to cover the tax that the charity will claim back. If this is not the case, or you make a Gift Aid declaration but are not a taxpayer, HMRC may recover the tax claimed by the charity from you. If your income falls, it is prudent to review any ongoing Gift Aid declarations so you do not get caught out.

If you are a higher or additional rate taxpayer, you can claim further relief equal to the difference between tax at your marginal rate and tax at the basic rate on your donation. This can be done in your tax return.

Payroll giving

If you are an employee and your employer operates a payroll giving scheme, you can make charitable donations through the payroll. Your employer will deduct your donations from your gross pay before tax. This automatically provides relief at your marginal rate, which means you do not need to claim higher or additional rate relief through your tax return. Your employer will pass the donations to the payroll agency that they use and the agency will pass them on to your chosen charity.

Making a gift in your Will

Donations to charity are exempt from inheritance tax. Also, if you leave at least 10% of your estate to charity, the rate at which your estate pays inheritance tax is reduced from 40% to 36%.

HMRC has not been getting good press lately. Time spent waiting for a tax refund, an answer to a letter or for over an hour on the telephone trying to speak to someone with no success has not gone down well with HMRC's 'customers'. You can complain, but to whom do you complain, and will you get a satisfactory answer or even compensation?

Deciding whether to make a formal complaint to HMRC depends on the specific situation, the nature of the grievance and what you hope to achieve. Valid reasons will include:

• an incorrect tax calculation made even though HMRC has all the information;
• experiencing unfair treatment, such as lack of respect, undue delay or misinformation from HMRC staff;
• poor service including long delays in processing tax returns or responding to queries, lost documents or lack of clarity in communication; or
• error or mistake made by HMRC that has not been corrected despite being informed.

How to complain

The overall process for an HMRC-related complaint has four potential stages, the first of which can now be started online.

Tier 1 – The initial complaint is dealt with internally by the first point of contact whenever possible. HMRC has empowered complaint handlers to make more decisions for themselves.

HMRC noted in a recent webinar on the complaints process that the aim is to respond to complaints within 15 working days. The timeframe might be longer, especially where the issues arising are complex. However, HMRC says it will provide contact details for the officer dealing with the complaint, and keep you informed of progress.

Tier 2 – If the complainant is among the 7% of taxpayers still unhappy with the response from the Tier 1 handler, at Tier 2 a second person will take a fresh look at the complaint.

Adjudicator's Office – In the HMRC's response to the Adjudicator’s Office 2023 annual report June 2023 HMRC states that over 98% of complaints are resolved internally through this first two-tier process. However, if you are one of the 2% who are still unhappy, the next complaint level is to the independent external adjudicator, usually within six months of the Tier 2 review.

The role of the Adjudicator's Office (AO) is to rule on whether HMRC has handled a complaint 'appropriately and given a reasonable decision'. However, their work is restricted as they can only consider and rule on specific types of complaints namely:

• • mistakes
• unreasonable delays
• poor or misleading advice
• inappropriate staff behaviour
• the use of discretion.

The review is limited to considering whether HMRC has handled the complaint correctly by its guidelines and given a reasonable decision.

Parliamentary and Health Service Ombudsman (PHSO) – This is the final stage if the customer is not satisfied with the AO's decision.

This final complaint should usually be made within a year of the taxpayer's first awareness of the problem. A complaint cannot be made directly to the PHSO; it must be raised via the complainant’s MP.

Practical point

A recent 'freedom of information' enquiry discovered that the number of ‘customers’ complaining about HMRC delays was 35,000 in 2022/23, with 4,742 being compensated for delays. This equates to approximately a one-in-eight chance of a complaint generating any compensation and average compensation of £150 per successful complaint. These figures prove that unless the complaint is on a matter of principle, such as challenging unfair treatment or ensuring accountability, a formal complaint to achieve compensation is possibly not worth the time spent.

For small companies, obtaining tax-efficient funding involves leveraging various schemes and incentives that minimise tax liabilities while maximising capital inflow. These schemes are designed to attract investment by offering tax reliefs to investors, making it more appealing for them to invest in small and growing businesses.

There are several government-endorsed tax incentives that have been implemented to encourage private investment into business. These incentives offer income tax reductions, capital gains tax (CGT) deferrals and/or exemptions. Examples of such schemes are outlined below:

Enterprise Investment Scheme (EIS)

The EIS provides tax relief to individual investors who buy shares in smaller, high-risk companies. EIS investments are typically in high-risk companies, with a significant risk of losing the invested capital. Importantly, subject to any future legislation, the relief will cease on 6 April 2023.

Income tax relief is at 30% on the amounts subscribed to qualifying companies and no CGT arises from the disposal of the shares. If the investment fails, the investor can claim loss relief. The shares generally have to be held for three years, and there are stringent conditions concerning the type of 'qualifying company', who is deemed a 'qualifying investor' and the mechanics of the investment itself. For example, the investor must not be 'connected' to the company and the shares must be new shares usually paid for in cash and retained for at least three years. There is a restriction to the amount that can be raised by an issuing company through all venture capital  schemes to include EIS of £5 million per year (£10 million per year for 'knowledge-intensive’ companies). The number of companies that can raise finance in this way has shrunk due to the introduction of conditions concerning the company's age as the investment must be made within seven years of the company’s  first commercial sale (ten years for 'knowledge-intensive' companies).

Seed Enterprise Investment Scheme (SEIS)

This scheme is broadly similar to the EIS, but is aimed at start-up companies (with less than 25 employees and assets of less than £350,000) whose trade is less than three years old. The main difference is that the income tax relief is 50%, but the maximum permitted investment is far smaller (£200,000 per tax year). The issuing company is also limited to how much funding it can raise – to just £250,000. The investor can claim 50% income tax relief on the amount invested, up to £100,000 per tax year and shares are exempt from CGT if held for at least three years. A loss can be offset against the investor's income  and should an investor dispose of an asset, reinvesting the gain in SEIS shares, up to 50% of the reinvested gain is exempt from CGT.

Equity crowdfunding

As detailed above, the main entry routes into investment in individual companies typically involve significant investment, often £100,000 or more. Equity crowdfunding investors typically put £1,500 to £4,000 into a single business, and sometimes much less.

Equity crowdfunding offers tax relief via SEIS and EIS. CGT or income tax loss relief is claimable if the equity shares report a loss or become devalued.

Platform examples include Seedrs and Crowdcube.

Practical point

For start-ups and SMEs seeking external funding, utilising tax-efficient investment schemes can be advantageous. These schemes make a company more attractive to potential investors and provide a vital source of funding at a cheaper cost than asking the bank for a loan.

The change in the basis of income tax assessment for self-employed individuals.

An individual carrying on a trade, profession or vocation (either alone or in partnership) is subject to income tax (and Class 4 National Insurance contributions) on their profits but can prepare accounts to any date they choose, not necessarily to coincide with the tax year ending on 5 April.

Until 2022/23, the general rule for determining the profit or loss for the tax year was by reference to the accounts for the year ending in the tax year. Special rules applied for the opening and closing tax years. However, the rules have been reformed from 2024/25 and the basis period for an unincorporated business is now the relevant profits and losses arising within the tax year itself (6 April to 5 April). If the business’s accounting year differs from the tax year (or from the year to 31 March), the results must be apportioned.

The rules in practice

The contrast between the ‘old’ and ‘new’ basis period rules may best be illustrated with an example.

Example: The ‘old’ rules

Mr Smith started his business on 1 July 2020. He prepares his accounts to 30 June each year and profits are as follows:

Year ended 30 June 2021 £12,000

Year ended 30 June 2022 £14,000

Year ended 30 June 2023 £16,000

Year ended 30 June 2024 £24,000

Year ended 30 June 2025 £30,000

The taxable profit for 2020/21 (the year ended 5 April 2021) is £9,000 (£12,000 x 9/12 months). For 2021/22, the taxable profit would be £12,000 (for the year ended 30 June 2021, the accounting year ending in the tax year). We can see that £9,000 of the first accounting year’s profit has been taxed twice, and this amount could be deducted from taxable profits as ‘overlap relief’ when the business ceased or perhaps when the accounting date changed. The tax liability for 2022/23 would be £16,000 (the profit for the year ended 30 June 2022).

The ‘new’ basis and the transition

In the Example, the first full year of the new basis of assessment, 2024/25, will be calculated by reference to the tax year itself. This would be £28,000 (i.e., y/e 30 June 2024, £24,000 x 3/12 months plus y/e 30 June 2025, £30,000 x 9/12 months). Strictly, the apportionment should be made on a daily basis, but an alternative method (say monthly, as here) can be used, if this is done consistently.

The new rules will apply to any business that starts from 6 April 2023. For those trading before that date, transitional rules apply for 2023/24. For that tax year, Mr Smith’s profit will be calculated by reference to the accounting period that started from the day after the accounting year end in 2022/23 up to 5 April 2024. This would be £34,000, being the profit for the year ended 30 June 2023 (£16,000) plus the ‘transition profit’ for the period 1 July 2023 to 5 April 2024 of £18,000 (being £24,000 for the year ended 30 June 2024 x 9/12 months).

This represents 21 months’ worth of profit, but the profit for the transition period can be reduced by the overlap relief of £9,000 which was the profit for the nine-month period that was taxed twice when the business started. So, nominally, the net taxable profit of £25,000 does represent 12 months’ worth of profits, although this is still more than the amount (£16,000) that would have been taxed under the old rules. The £9,000 difference is the amount by which the transition profit of £18,000 exceeds the overlap relief of £9,000. To mitigate the immediate effect of a larger-than-normal liability, one-fifth of the excess (£1,800) can be taxed in each of the 2023/24 tax years and the following four years.

This is a very brief summary of the rules relating to the changing basis of assessment for business profits, and detailed advice may be required in individual circumstances, particularly if losses are involved.

Practical tip

Businesses may wish to consider changing their accounting years to 31 March or 5 April in the future to facilitate the early calculation of forthcoming income tax liabilities.

A person who buys a new home from a property developer does not have to pay VAT on it as the sale is zero-rated. However, a person who builds their own home does not benefit from the zero rating. The VAT DIY housebuilders scheme aims to level the playing field by allowing people who build their own houses to claim back VAT on building materials purchased in the course of the build.

A DIY housebuilder can benefit from the scheme if they have planning permission to:

• construct a new dwelling to be used as a family home for residential or holiday purposes by the DIY builder or his or her relatives;
• buy a new building as a shell from a developer and fit it out to completion for use by the DIY builder or their relatives as a family home for residential or holiday purposes.

Refunds under the scheme cannot be claimed if the property has been constructed under a planning condition or similar and cannot be sold or used separately or where the property is to be sold, let or used as a business rather than lived in by the DIY housebuilder or their relatives.

Evidence of planning permission

To claim a VAT refund, it is necessary to provide evidence that the works are lawful. To this end, the claimant must send a copy of full planning permission, outline planning permission and approval of reserved matters or permitted development rights, such as a local development or neighbourhood development order. Where the planning permission is in two parts, both parts must be supplied. If it is subject to a Section 106 Agreement, this too must be sent. As documents are not returned, copies should be sent, not originals.

No need to do all the work yourself

To benefit from the scheme, the DIY housebuilder does not need to do all, or indeed any, of the work themselves – they can employ builders and other tradespeople. The refund can be claimed on the eligible goods that the DIY housebuilder buys and gives to the builder/tradespeople to do the work.

Rate of VAT

VAT is charged at the standard rate of 20% on most building materials by suppliers. However, contractors will charge VAT at the same rate as the services they supply. As the zero rate of VAT applies to the construction of a new qualifying property, building materials supplied by the contractor will also be zero-rated.

Claim limited to building materials

A refund claim can only be made in respect of the VAT on building materials. The VAT on items such as fitted furniture, most electrical and gas appliances, carpets, underlay and tiles, garden sheds, greenhouses and ornaments, plant, tools and equipment, consumables not incorporated in the building (such as sandpaper and white spirit) and building land cannot be reclaimed.

Amount of the claim

It is important that only the VAT actually incurred is reclaimed. This will normally be shown on the invoice. Where VAT has been charged at the standard rate, the VAT element is one-sixth of the total amount. There will be no VAT to reclaim on items where VAT is charged at the zero rate or where the supplier is not VAT-registered.

A record must be kept of all invoices, bills, credit notes and other documents which support the claim. These must be recorded using the schedule of invoices template (see further guidance at www.gov.uk/guidance/vat-refunds-for-new-builds-if-youre-a-diy-housebuilder).

Making the claim

For builds completed on or after 5 December 2023, only a single claim can be made under the scheme and this must be made within six months of completion. The claim can be made using HMRC’s online service or using form VAT431NB.

For online claims, HMRC should supply a claim reference number within two weeks and process the claim within three weeks from the date on which all information was received. Postal claims will take slightly longer. HMRC will write and let the claimant know if the claim was successful and when the refund will be paid or if it has been rejected or not paid in full, and why. Where this is the case, the taxpayer can ask HMRC to review the decision or they can appeal to the tribunal.

The UK government supports households with children by paying a childcare amount to the parents or guardians.

The benefit

This amount is paid after every four weeks, into the account of the person making the claim for the childcare benefit. It is paid according to the following rates:

Child                         Weekly rate

Eldest or only child      £25.60

Any other children       £16.95

Eligibility

An online claim can be made by UK residents or persons with settled status, who are looking after children of their own, of someone else, or adopted or foster children. While the claim can be made by only one guardian, it can be made for any number of children, provided the dependents are:

  • below 16 years of age; or

  • below 20 years of age but involved in full-time education.

The impact

The children for whom the claim is made are provided with a National Insurance number and the guardian is provided with National Insurance credits, which ensures that their National Insurance record remains active, even if no actual contributions are being made. Generally, the benefit amount itself is a tax-free support that goes towards childcare expenses, but it could become taxable if the adjusted net income of the sole or either of the guardians totals more than £60,000 per annum (previously £50,000).

Adjusted net income

Adjusted net income (ANI) is the sum of the individual’s taxable income in a tax year, which could include:

  • gross salary (including bonus, taxable benefits, etc.);

  • taxable profits;

  • rental income; or

  • interest income or dividends.

It is adjusted by:

  • pension contributions – the amount actually paid; and

  • gift aid donations made in the same tax year.

The ANI is calculated for the individual who earns taxable income in a tax year, which could be both the parents or guardians as well. If the individual ANI of the income earners is less than or equal to £60,000 in the year, the childcare benefit will be tax-free. However, if the ANI of even one guardian is more than the set threshold, the government will start clawing back the benefit by imposing a tax charge.

The tax charge

The application of the tax charge can be summarised as follows:

ANI amount                            Tax charge

Less than equal to £60,000         None

Between £60,000 - £80,000.      % of the child benefit amount

More than £80,000                      The total child benefit amount

In the extreme case where the ANI of one or both guardians individually is greater than £80,000, the entire child benefit amount received in the year is treated as the tax charge. In a dual guardian scenario, the tax charge is paid by the individual who earns the most, irrespective of who made the claim.

Example 1: High-income earner

If Adrian and Beth have received a total of £2,300 childcare benefit in a year and have ANI of £54,000 and £81,000, respectively, then Beth, being the higherincome earner, will add £2,300 to her tax payable amount as the tax charge. Beth will have to include this in the self-assessment tax return or pay a fine of 10%-30% of the tax owed plus any interest charged by the tax authorities in the case of non-payment.

Example 2: Tapering of the child benefit

If Cara has received a total of £1,500 childcare benefit in a year and has ANI of £68,000, she will have to pay back 1% of the benefit amount for every £200 earned over £60,000. This is calculated as: [(£68,000 - £60,000)/£200] x 1% x £1,500 = £600. Cara will add the £600 to her tax payable amount for the year. High-income earners should still make a claim for the childcare benefit so that the National Insurance credits linked to the benefit can help ensure their eligibility for government benefits such as the state pension.

Practical tip Increasing pension contributions or gift aid charitable donations in a tax year can help reduce or avoid the tax charge.

Up to certain limits, it is possible to enjoy some savings income tax-free. The extent to which this is possible depends on the rate at which you pay tax; not all routes are open to all.

Personal allowance

If you do not fully use your personal allowance elsewhere, any balance not otherwise used can be set against your savings income, allowing it to be received tax-free.

Savings allowance

Basic and higher rate taxpayers are entitled to a savings allowance. This is in addition to their personal allowance.

For 2024/25, the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. The allowance is available in addition to the personal allowance and also the dividend allowance.

Rising interest rates in recent years may mean that basic and higher rate taxpayers now receive interest in excess of their savings allowance on which tax is payable and which must be notified to HMRC on their Self Assessment tax return. This may mean that they need to file a tax return where previously they were not required to. Where this is the case, it is important to register for Self Assessment.

Taxpayers who pay tax at the additional rate (which applies to taxable income in excess of £125,140) do not benefit from a personal savings allowance and must pay tax on any savings income unless it is otherwise exempt. They will also not receive a personal allowance, as the personal allowance is fully abated at this level.

Savings starting rate

Savings income which falls within the savings starting rate band is taxed at the savings starting rate of 0%. Depending on the individual’s personal circumstances, they may be able to enjoy up to a further £5,000 of savings income tax-free.

The savings starting rate band is set at £5,000, but is reduced by any taxable non-savings income. This is other taxable income in excess of the personal allowance (but excluding any dividends which are treated as the top slice of income). Consequently, the full £5,000 savings starting rate band is available where other taxable income is less than the individual’s personal allowance. The standard personal allowance is £12,570 for 2024/25. The savings starting rate is eroded once taxable income in excess of the personal allowance reaches £5,000.

The savings starting rate is applied before the personal savings allowance.

Tax-free savings accounts

If savings are held within a tax-free wrapper such as an Individual Savings Account (ISA), the associated savings income is tax-free. A taxpayer can invest up to £20,000 in an ISA in 2024/25.

Maximum tax-free savings income

Where a person has the personal allowance available in full to set against their savings income, they can enjoy tax-free interest in 2024/25 of £18,570 (personal allowance of £12,570 plus savings starting rate band of £5,000 plus savings allowance of £1,000), plus that from tax-free savings accounts.

The nil rate band is the amount that a person may leave free of inheritance tax. Each person has their own nil rate band, which for 2024/25 is set at £325,000. A person’s estate may also benefit from a further nil rate band – the residence nil rate band (RNRB) – where they leave a residence to a direct descendant or descendants.

The nil rate band is available regardless of the amount of a person’s estate. However, the RNRB is reduced where the value of the estate exceeds £2 million, being abated by £1 for every £2 by which the value of the estate exceeds £2 million. This means that the RNRB is not available for estates valued at more than £2.35 million, while a reduced RNRB is available for estates valued at between £2 million and £2.35 million.

Spouses and civil partners

The inter-spouse exemption means that there is no inheritance tax to pay on anything that a person leaves to their spouse or civil partner. This means where a person leaves their entire estate to their spouse or civil partner, they will not use their own nil rate band or RNRB. However, this is not a problem as the bands are transferable, allowing the surviving spouse or civil partner’s estate to benefit from their spouse or civil partner’s unused nil rate bands on their death. Consequently, it is not necessary to leave bequests to the value of an individual’s nil rate bands to someone other than their spouse to prevent their own nil rate bands from being wasted.

Claiming the transferable nil rate band

On the death of the surviving spouse or civil partner, their estate can claim the unused portion of their spouse or civil partner’s nil rate band, which can be set against the value of the surviving spouse/civil partner’s estate.

It is the unused percentage that is claimed, rather than the absolute amount. This provides an automatic adjustment for changes in the nil rate band, so that the amount that is available for transfer is at current rather than historical amounts. If the first spouse or civil partner to die left everything to their spouse/civil partner, the surviving partner’s estate will benefit from 100% of the nil rate band at the value at the time of the surviving partner’s death.

It should be noted that the transferable nil rate band can only be claimed, usually by the surviving partner’s personal representative, on or after their death. The claim must be made within two years from the end of the month in which the surviving partner dies (or, if later, within three months from the date on which the personal representatives first act). The surviving partner is not able to claim the transferable nil rate band during their lifetime, and as such, it is not available to shelter chargeable lifetime transfers. If the surviving partner remarries or enters a new civil partnership and is again widowed, their estate can only benefit from one transferable nil rate band.

Transferable RNRB

As with the nil rate band, the unused portion of a person’s RNRB can be transferred to the estate of their surviving spouse or civil partner. The RNRB is only available where a residence is left to a direct descendant.

As noted above, the RNRB is subject to a taper and, when planning ahead, consideration should be given to the likely value of the estate on each spouse’s/civil partner’s death. For example, if a person has an estate of £1.5 million which includes their share in a residence and they leave it to their spouse, there will be no tax to pay and the taper will not apply. However, on the death of the surviving spouse/civil partner, having inherited everything on their partner’s death, their estate may exceed £2 million, such that the RNRB may be fully or partially lost. If this is likely, it may be better for each spouse to leave their share of a residence to a direct descendant rather than to each other to preserve the availability of the RNRB.

As long as the value of neither estate exceeds £2 million, a married couple or civil partners can leave £1 million free of inheritance tax as long as they leave a residence worth (or funds from a former residence having downsized of) at least £350,000 to one or more direct descendants.

A company purchase of its own shares from a shareholder is a popular ‘exit’ strategy when an individual shareholder is retiring, or a dissenting shareholder is departing.

Income vs capital

When a company buys back its own shares from an individual shareholder, amounts above the capital originally subscribed generally constitute a distribution of income (i.e., like a dividend). However, if certain conditions are satisfied, the vendor is normally treated as receiving a capital payment instead. This can be tax-efficient if capital gains tax (CGT) business asset disposal relief (BADR) is available and the CGT rate is only 10%. This ‘capital treatment’ is subject to various conditions (in CTA 2010, Pt 23, Ch 3). There is a natural tendency to focus on those conditions often considered the most difficult, such as whether a ‘trade benefit test’ is satisfied, or the extent (if any) to which the shareholder will remain connected with the company. However, it is essential not to overlook probably the most fundamental rule – the ‘trading company’ requirement.

Trading company?

Broadly, the company must be an unquoted trading company (or the ‘holding company’ of a ‘trading group’). A ‘trading company’ for these purposes is a company whose business consists ‘wholly or mainly’ (i.e., more than 50%) of carrying on one or more trades.

Unfortunately, there is little guidance on the meaning of ‘trade’ in the tax legislation. This has resulted in extensive case law over the years. The characteristics of a ‘trade’ are beyond the scope of this article. However, the ‘badges of trade’ can sometimes be helpful. These were first established in 1955, using case law about what constitutes a trade. Subsequently, in Marson v Morton Ch D 1986, 59 TC 381, nine badges were identified (e.g., profit-seeking motive, number of transactions). For HM Revenue and Customs (HMRC) guidance on the badges of trade, see its Business Income Manual at BIM20205. The company must carry on the ‘right’ trade; capital treatment on a company purchase of own shares does not apply to certain activities, namely dealing in shares, securities, land, or futures.

More generous?

The definition of ‘trading company’ under the company purchase of own shares rules differs from the BADR definition for CGT purposes, which requires that the company’s activities do not include to a substantial extent activities other than trading activities. HMRC guidance (in its Capital Gains Manual at CG64090) indicates that considering whether non-trading activities are ‘substantial’ for BADR purposes involves measuring various indicators, and states: “For practical purposes it is likely that from accounts submitted some consideration can be given to the level of non-trading income and the asset base of the company. Where neither of these suggest the non-trading element exceeds 20% the case is unlikely to warrant any more detailed review.” Hence, it is possible that a company may satisfy the ‘wholly or mainly’ test of trading status on a purchase of its own shares, but a gain on the disposal of those shares may be denied BADR in the hands of an individual shareholder because the company’s non-trading activities are ‘substantial’.

Practical tip

In HMRC’s view, it is not enough that the company was formerly trading or intends trading in the future; it must be a trading company when the company purchase of own shares takes place (Tax Bulletin, Issue 21).

A look at the effects of the increases in the VAT registration and deregistration thresholds.

In the Chancellor’s recent budget, he announced an increase in the VAT registration threshold on 1 April 2024 from £85,000 per annum to £90,000 per annum. The deregistration threshold has also increased from £83,000 per annum to £88,000 per annum. These thresholds have remained frozen since 1 April 2017 and are among the highest worldwide with an average of £44,000 in the EU, therefore keeping many small businesses out of the ‘VAT club’.

With this increase in the threshold, some businesses will now to able to deregister from VAT; but is this necessarily a good idea, and can there be some circumstances when registering for VAT voluntarily might be a good idea?

Why register early?

If the sales of a business are below the limit, or if the business has not yet made any sales, it can apply to register voluntarily, thus enabling it to reclaim any input tax incurred.

A business would want to register for VAT if it makes sales to other registered businesses, which are fully taxable. They can recover the VAT charged to them. The costs of the business are reduced by the input tax, which it can recover.

Voluntary registration is not intended to allow a business to recover input tax without ever making any taxable supplies. A business is entitled to registration at the start of a project, even if it may be several years before it produces taxable outputs, provided it can show that it has genuinely started a business.

Things to take into account when considering deregistration

A business has to account for VAT on assets held at the date of deregistration if the tax exceeds £1,000. The assets in question include:

 • stock;

 • plant and machinery, office equipment and furniture;

 • commercial vehicles - and on any car on which the business recovered VAT because, for example, it was being used as a taxi; and

 • land and property if the business recovered VAT on it when it was acquired, and the commercial property is either less than three years old or they have opted to tax it.

A business does not have to account for VAT on services, so if it has had a property refurbished, the building work counts as a service, and it does not have to account for any VAT on the value of the building work when it deregisters from VAT.

Although no output tax is due at deregistration where there is land and property on hand on which no input tax was recovered, but the option to tax has subsequently been made, any future sale of the property in the 20 years following the date the option to tax was made will be standard-rated and constitute turnover for VAT registration purposes, causing the business to have to re-register for VAT and account for VAT on the sale.

There is also a problem with VAT on deregistration for partly exempt businesses. If they have had partial recovery of VAT on any asset, they will have to account for output tax on the full value of the asset at the time of deregistration, even though they did not initially recover all the VAT.

These factors need to be taken into account when considering deregistration, but if a business is selling to the public and does not incur significant VAT on its costs (e.g., a shop in the catering industry will have mainly zero-rated inputs but standard-rated outputs), deregistration would be appropriate in such circumstances.

Practical tip It is important to work out any potential costs and potential savings before deciding to deregister for VAT following the increase in the deregistration threshold.

Some alternatives to rewarding an employee with a pay rise or a bonus.

Despite the reduction in National Insurance contributions (NICs) in Spring Budget 2024, more employees are paying tax at higher rates on their earnings due to the freezing of tax thresholds. Some may find that any pay rise or bonus attracts additional tax and NICs such that the net pay increase is minimal.

Benefits packages

However, it is possible to put together a package of non-cash tax-efficient benefits to reward employees, so that they are better off. Such benefits can include employee parking, staff discounts, holiday buy back, birthday vouchers, Christmas gifts, help with additional homeworking costs, employee suggestion schemes (where tax and NICsfree cash rewards are given to employees to share their ideas, suggestions and solutions to enhance the operations, processes, products or services of a company), and interest-free loans.

Although the tax and NICs advantages of salary sacrifice schemes were largely withdrawn from 6 April 2017, such arrangements can also prove taxefficient in certain circumstances.

Salary sacrifice schemes

Salary sacrifice schemes are arrangements between an employer and an employee where the employee agrees to give up part of their salary in exchange for specific non-cash benefits. Most arrangements fall within the rules whereby the benefit’s taxable value is calculated as greater than the cash given up and the taxable value under the usual benefitin-kind rules.

The only salary sacrifice arrangements that can be provided with no tax implications are:

 • employer pension contributions to registered plans;

 • employer-supported childcare (only if the employee joined the relevant scheme before 4 October 2018); and

 • cycle to work schemes.

Since April 2017, employees have been required to pay tax and NICs on salary given up under any other salary sacrifice schemes or flexible benefit schemes.

However, salary sacrifice arrangements for the leasing of electric vehicle cars (EVs) are becoming increasingly popular. These arrangements are tax and cost-effective because EVs attract a low benefit-in-kind charge – the rate for EVs is 2%, and the government has outlined that it will not increase above 5% until after 2028.  In addition, most agreements include road tax insurance, roadside assistance and maintenance, so the employee will only have to pay for the day-to-day fuel or charging running costs.

Share incentive plans

Share incentive plans are often used as part of an overall compensation package made available to employees of limited companies, and provide employees with an ownership stake in the company.

These plans are increasingly being used in place of a pay rise or bonus to reward employees by offering free shares or opportunities to purchase shares at favourable terms. Free shares can be awarded to all employees in any tax year valued at up to £3,600 per employee at the time of the award. They either all receive the same number of shares, or the allocation can be set by reference to objective criteria such as remuneration, length of service or performance. Employees can also be invited to buy shares via deductions from salary of up to £1,800 or, if lower, 10% of salary each year.

The shares must be retained within the plan for five years to ensure no income tax or NICs is payable on their value; capital gains tax will also not be payable if kept within the plan until sold. The company saves employer’s NICs on this amount.

Practical tip

Non-monetary rewards can produce more significant advantages for the employee than cash payments; they have an immediate impact and are not reduced, with up to 57% going to the government in tax and NICs. Extra leave, time to do volunteer work and opportunities to attend courses and workshops (whether work-related or not) are all benefits-in-kind that can make the employee feel valued in the workplace at a low cost to the employer.

Many taxpayers are unfamiliar with the term ‘interest in possession’ (IIP). However, the existence of an IIP has various tax implications; this article focuses on inheritance tax (IHT) implications.

IIPs and IHT

The IHT treatment of an IIP mainly depends on whether it is ‘new’ (i.e., created from 22 March 2006) or ‘old’ (i.e., created before 22 March 2006). For example:

 • An individual beneficiary of a ‘new’ IIP is not normally treated as owning the underlying asset. Thus, the value of the interest does not generally form part of the beneficiary’s estate (NB there are exceptions for ‘special’ IIPs, such as an ‘immediate post-death interest’, a ‘disabled person’s interest’, or a ‘transitional serial interest’; these are not considered here).

 • The beneficiary of an ‘old’ IIP is generally treated as owning the underlying asset, so its value forms part of their estate.

Furthermore, the lifetime creation of a ‘new’ IIP for the beneficiary is normally treated as an immediately chargeable transfer by the settlor for IHT purposes. By contrast, the lifetime creation of an ‘old’ IIP was generally a potentially exempt transfer, which became exempt from IHT if the settlor survived at least seven years.

What is an IIP?

‘Interest in possession’ is not defined in the IHT legislation, but case law offers some guidance. For example, in Pearson and Ors v IRC [1981] AC 753, a House of Lords judge considered its ordinary and natural meaning to be a “present right of present enjoyment”. Furthermore, in Statement of Practice 10/79, HM Revenue and Customs (HMRC) explains its position where wills (and trusts) contain a power to allow a beneficiary to occupy a dwelling house (tinyurl.com/HMRC-SP10-79), albeit HMRC’s guidance is not legally binding.

Word it carefully!

The wording of trust documents (including will trusts) can sometimes inadvertently result in an IIP. For example, in IRC v Lloyds Private Banking Ltd [1998] 2 FCR 41, a wife’s will left her share in the matrimonial home upon the following terms: “While my husband remains alive and desires to reside in the property… my Trustee shall not make any objection to such residence and shall not disturb or restrict it in any way and shall not take any steps to enforce the trust for sale on which the property is held or to realise my share therein or to obtain any rent or profit from the property.”

The High Court considered that the wife’s will conferred on her husband an IIP in the half-share in the property, so it formed part of his estate. By contrast, in Judge (PRs of Walden deceased) v RCC [2005] SpC 506, a husband’s will included the following provision about the matrimonial home he owned: “And I declare my Trustees during the lifetime of my Wife to permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit pending postponement of sale…” (emphasis added). The Special Commissioner held that the wife did not have an IIP of the house, because her husband’s trustees had absolute discretion over whether to permit her to occupy the property.

Practical tip

Every case must be considered on its own merits. For a more recent case where no IIP was held to arise, see Trustees of the Carolina Raboni Estate v HMRC (www.bailii.org/uk/cases/UKFTT/TC/2023/TC08691.html).

For many people, there will come a time when it becomes sensible or necessary to sell the family home, either to downsize or because of a move to live with a relative or into care. This may result in funds being released, which may be considerable. Thoughts may turn to whether now is the time to pass wealth down to subsequent generations. However, this must be balanced against the needs of retaining sufficient funds to meet one’s own lifestyle and also to meet any current and future care costs.

From an inheritance tax perspective, it is possible to take action to minimise any future tax bills.

Subject to available exemptions, inheritance tax is payable to the extent that the deceased’s estate exceeds their available nil rate bands. This may include the deceased’s own nil rate band and, where the main residence or funds released from the sale of it are passed to a direct descendant, the residence nil rate band. Currently, these are set at £325,000 and £175,000 respectively. Where the deceased is widowed, their estate can also use any unused nil rate bands of their spouse or civil partner.

Rather than giving away the proceeds from the sale of the home, a decision may be taken instead to invest the proceeds. Increases in interest rates in recent years provide a greater opportunity to earn investment income than in the past. Where the income generated is not needed to maintain living costs, it can be given away. This can be advantageous from an inheritance tax perspective as an exemption exists for gifts out of income.

Gifts out of income exemption

An inheritance tax exemption is available for normal expenditure out of income. To benefit from the exemption, gifts must:

 • form part of the transferor’s normal expenditure;

 • be made out of income; and

 • leave the transferor with enough income to maintain their standard of living.

To utilise this exemption, income not needed to maintain the transferor’s standard of living could instead be used to help a child with rent, pay a grandchild’s school fees or pay part of a son or daughter’s monthly mortgage payments. What is key here is that there is a regular pattern of spending, rather than ad hoc cash gifts, such that the payment of the rent or the school fees becomes part of the transferor’s normal monthly expenditure. Where this is the case, the gifts are not treated as potentially exempt transfer (so there is no IHT charge if the transferor dies within seven years); rather they are exempt from inheritance tax and fall outside the transferor’s estate.

Case study

Betty is a widow in her eighties. She feels that she can no longer manage on her own at home. Her son invites her to live with him and his wife and she moves in with them.

Betty sells her home for £900,000. On her death, her estate will benefit from both her and her late husband’s nil rate bands and residence nil rate bands (totalling £1 million). She has savings and investments of £80,000, which generate an income of £4,000 a year. Betty receives pensions of £30,000 a year which are more than sufficient to meet her living costs.

Betty invests the proceeds from the sale of her home, receiving interest of £54,000 a year. Her savings allowance of £500 is already used against the income from her existing investments. At 2024/25 rates, she will pay tax of £18,346 ((£16,270 @ 20%) + (£37,730 @ 40%)), leaving her with £35,654 after tax. As her estate is already close to her available nil rate bands, from a tax perspective, if she retains the income, and passes it on at death, it will suffer a further charge of 40%, reducing the amount available to her family.

However, if instead she decides to take advantage of the exemption for normal expenditure out of income and meet, say, rent of £1,200 a month for each of her two grandchildren, she can pass on £28,800 a year free of inheritance tax, allowing her family to benefit from more of her estate. Had she instead left the £28,800 in the bank passing it on at her death, it would have suffered IHT at 40%, reducing the amount available to her family by £11,520 a year to £17,280. Any lost interest on her savings income is more than outweighed by the IHT savings.

The way in which you operate your business determines the taxes that you pay and also your reporting obligations.

If you work for yourself and run your business on your own as an individual other than through a limited company, you are a sole trader. By contrast, if you operate your business through a personal company, even if you are the sole employee and director, the company has its own legal identity.

As a sole trader, you will pay income tax and Class 4 National Insurance contributions on your profits. For 2023/24 and earlier years, Class 2 National Insurance contributions were also payable.

Registering as a sole trader

Your registration obligations depend on whether you are already registered for Self Assessment, which may be the case, for example, if you have rental income to report to HMRC, and where you are not already registered, the level of your gross trading income.

If you are not already registered for Self Assessment and have trading income for a tax year of more than £1,000, you will need to register for Self Assessment by 5 October following the end of the tax year (so by 5 October 2025if you start self-employment in 2024/25 and have gross trading income of more than £1,000). You can register online on the Gov.uk website.

If you are already registered for Self Assessment for another reason, you will need to register as a sole trader for Self Assessment as this will register you for Class 4 National Insurance contributions. You can also register if you have low profits but want to pay voluntary Class 2 National Insurance contributions.

Gross trading income of £1,000 or less

If your gross trading income (i.e. before the deduction of expenses) is £1,000 or less, you can take advantage of the trading allowance. This allows you to enjoy your profits tax-free and without any need to tell HMRC about them.

You can still benefit from the trading allowance if your gross trading income is more than £1,000 by deducting the £1,000 allowance rather than your actual expenses. This will be worthwhile where your expenses are less than the allowance. However, in this instance, you will need to be registered as a sole trader for Self Assessment.

If your income is £1,000 or less, but you have made a loss, it is worth registering and filing a tax return so that you can claim relief for the loss.

Records

You will need to keep records of your business income and expenses. You can find guidance on the records that you will need to keep by visiting the Gov.uk website at www.gov.uk/self-employed-records.

Income tax and National Insurance

If you are self-employed, you will pay income tax on your profits. From 2024/25 onwards, the profits that are taxed for the tax year are those for the tax year (i.e. 6 April to the following 5 April) regardless of the date to which you prepare accounts. An accounting date of 31 March to 5 April inclusive is treated as corresponding to the tax year.

Your income tax liability is calculated by reference to your total income for the tax year, including your profits from self-employment. You will need to file a tax return by 31 January after the end of the tax year (so by 31 January 2026 for 2024/25). You will also need to pay Class 4 National Insurance on your profits if they exceed £12,570. For 2024/25, this is payable at 6% on profits between £12,570 and £50,270 and at 2% on profits in excess of £50,270.

Your tax and Class 4 liability must be paid in full by 31 January after the end of the tax year. Where your total tax and Class 4 liability for a tax year is £1,000 or more, you will need to make payments on account for the following tax year on 31 January in the tax year and 31 July after the tax year, unless 80% of your tax is collected at source, for example through PAYE. Each payment is 50% of the previous year’s liability.

VAT

You will also need to register for VAT if your VAT taxable turnover reaches the VAT registration threshold of £90,000.

The interest restriction for landlords letting residential property on long lets, the proposed abolition of the favourable furnished holiday letting rules and lower rates of corporation tax led many landlords to question whether it would be preferable to let property through a company instead. Like most things, there are pros and cons.

Advantages

As for any company, a property company has its own legal identity separate from those who own and run it. It also benefits from limited liability.

From a tax perspective, rental profits are charged to corporation tax rather than to income tax. Depending on the level of the company’s profits, this will be at a rate of between 19% and 25%. As the corporation tax rates are lower than the income tax rates for the same levels of taxable income, the tax hit on rental profits will often be lower.

The restrictions on interest relief for residential lets do not apply to property companies. Consequently, interest and finance costs can be deducted in full in calculating the rental profits, even where they relate to long-term residential lets. Further, such a deduction is permitted even where it results in or increases a loss. For individuals letting residential property on long lets, relief for interest and finance costs is given as a basic rate reduction from the tax due on the rental profits, and where the costs cannot be relieved in this way, they are carried forward for relief in later years.

Where a gain is made on the sale of a property by a company, it is charged to corporation tax rather than capital gains tax. This may result in a lower bill if the company’s corporation tax rate is less than 24%, but the property would be taxable on an individual at the higher residential rate of capital gains tax.

Disadvantages

The main disadvantage of operating a letting business through a company is that the profits need to be extracted if they are to be used outside the company. This is likely to trigger further tax bills. Consequently, it is not enough to look at the company in isolation – any tax and National Insurance payable on profits extracted from the company must also be taken into account.

Unlike an individual, a company does not benefit from a personal allowance, and will pay corporation tax on the first £1 of taxable profit. By contrast, individuals with adjusted net income of less than £125,140 will receive a personal allowance of up to £12,570.

Likewise, individuals benefit from an annual exempt amount for capital gains tax; something not available to a company. However, with the reduction in the annual exempt amount to £3,000 for 2024/25, this is less of a benefit than in the past.

Further charges can apply if a landlord wishes to move property owned individually into the company. Where an existing business is incorporated, SDLT will be payable again. As the company is connected to the landlord, this will be based on the market value of the property, and for a residential property, it will be payable at the additional property rates.

Transferring the property to a company may also trigger a capital gains tax bill on the landlord personally, again based on the market value of the property. However, where the landlord receives shares in exchange for the business, incorporation relief may be available, deferring the gain until the shares are sold. If the property company is set up from scratch and the property is bought by the company, this will avoid a double SDLT charge; although if the property is a residential property, the 3% supplement will apply, even if the company only owns one property.

Do the sums

The extent to which operating a rental business through a company is beneficial will depend on personal circumstances and whether the intention is to extract profits or to leave them in the company to fund further property purchases. There is no substitute for doing the sums.

If you have room on your drive, you may be able to earn additional income by letting out one or more parking spaces. This can be done through the various apps that exist for this purpose. You can make your drive available on an ad hoc basis, for example to provide parking near an event or for day trippers to the seaside, or regularly, for example, to commuters if you live near a station.

The tax implications will depend on the rental income that you generate.

Rental income of less than £1,000

Where the rental income received in the tax year is less than £1,000, the income is not charged to tax (unless you elect otherwise). The income does not need to be reported to HMRC and can simply be ignored for tax purposes.

Example

Mable lives near a popular sporting venue and lets out a parking space on her drive. She earns rental income for the tax year of £720. As this is less than the property allowance, it is not charged to income tax and she does not need to report it to HMRC.

Rental income of more than £1,000

Where rental income exceeds £1,000, you can choose how you want to be taxed. You can deduct either your actual expenses or the £1,000 allowance from your rental income to arrive at your taxable profit. Claiming the allowance will be beneficial if your actual expenses are less than £1,000.

If you decide to deduct the allowance, you must elect for this treatment to apply; otherwise, you should deduct actual expenses when calculating your profit. You can choose which gives the best result.

Example

David lives near the station and lets his drive to a commuter. He receives rental income from the letting of £2,000 a year. He incurs admin expenses of £120.

Calculating his profit in the usual way by deducting expenses would result in a taxable profit of £1,880. However, if he elects instead to deduct the property allowance, his taxable profit is reduced to £1,000. In this case, an election is worthwhile.

Losses

If actual expenses exceed the rental receipts, it is better not to claim the allowance and preserve the loss, which you can carry forward to set against future profits. This will however mean that you need to report the income to HMRC.

VAT applies to taxable supplies made by a VAT-registered person whether an individual or a company. VAT-exempt supplies in the UK are goods and services that are not subject to VAT at any rate, including the standard rate (20%), reduced rate (5%) or zero rate (0%). Businesses making only VAT-exempt supplies do not charge VAT on their sales and cannot usually reclaim VAT on their purchases.

Many business owners are unaware that if they claim input tax based on an intention to make future taxable supplies, this claim may need to be reduced or repaid if there is a change in a taxpayer’s business to exempt or partial exempt or if the item is taken out of the business for private use. This situation typically arises where developers have been unable to sell but have had to let out the property instead. VAT on lettings is exempt, therefore in this situation none of the VAT paid can be reclaimed as the builders are deemed to be operating as investors rather than developers. If VAT has already been reclaimed, that amount must be repaid to HMRC ('clawback'). For example, the VAT charged on land purchase can be reclaimed if the intention was to build and sell houses, i.e. generating zero-rated sales. If the houses are built but then let rather than sold, rental income is exempt from VAT, so the input tax claimed on the land purchase, plus input tax on all other expenses, such as building materials claimed in the previous six years, must be repaid to HMRC in the VAT period when the change in intention takes place.

However, not all of the VAT may need to be repaid if the rental arrangement is short-term. There is scope to make a clawback adjustment based on the ten-year life of the property. For example, if the rental agreement was for two years, then only 20% of the input tax claimed on the project costs needs to be repaid (subject to de minimis limits).

The 'payback' rules work the other way round – where an expense was intended for exempt purposes (so input tax was not claimed), but a taxpayer’s business plans change such that it becomes relevant to a taxable activity (so input tax can be claimed). In this instance, input tax not previously claimed in the previous six years can be claimed in the VAT period when the change in intention takes place.

The clawback rules also apply to any change in intention from a business purpose to a private or non-business purpose. For example, VAT is reclaimed at the standard rate on the purchase of a computer by a VAT-registered business but then taken out of the business for private use. In this case, the input tax claimed should usually be repaid under the clawback provisions.

Practical point

Any input tax that needs to be adjusted under the payback and clawback rules may still be claimable in many cases under the partial exemption de minimis rules. Such rules allow a claim on input tax on exempt supplies if the amount is less than £625 a month on average and not more than 50% of the total input tax in the relevant period.

A look at whether a taxpayer can find out if an HMRC enquiry has been opened as the result of an accusation made by a third party.

When HM Revenue and Customs (HMRC) opens a tax return enquiry, the natural reaction of most taxpayers is to speculate about the reason why their tax return has been selected. In fact, HMRC does not need an excuse to open a tax return enquiry; a small proportion of tax returns are simply selected at random.

Random or targeted?

However, HMRC normally opens an enquiry due to information that there is something wrong with the return. For example, HMRC’s ‘Connect’ computer system collates information from a multitude of sources (e.g., council tax, DVLA) to assist in identifying undisclosed or fraudulent activity. In addition, HMRC sometimes receives ‘tip-offs’ from third parties (e.g., disgruntled ex-employees, dissatisfied customers, jealous competitors and malicious gossips). The taxpayer might consider it in their best interests to source the informant and the information or allegations. Does HMRC have an obligation or discretion to disclose ‘tipoffs’ to taxpayers?

The Freedom of Information Act 2000 (FOIA 2000) (and equivalent Act in Scotland) provides a public ‘right of access’ to information held by public authorities. Members of the public are entitled to request information without needing to explain the reason. However, information requests can be refused in certain circumstances (e.g., if they would be too costly or time-consuming), and are subject to various exemptions allowing information to be withheld (e.g., on prejudice or public interest grounds). Furthermore, the Commissioners for Revenue and Customs Act 2005 (CRCA 2005) imposes on HMRC a general duty of confidentiality. This includes an exemption from disclosure under FOIA 2000 of any information relating to identifiable HMRC ‘customers’ (CRCA 2005, s 23).

Tax tribunal to the rescue?

In First-tier Tribunal (FTT) cases, the FTT may make a direction requiring the provision of information to the tribunal or a party to the hearing. However, it does not necessarily follow that the FTT will require HMRC to tip off the taxpayer. For example, In Hayes v Revenue and Customs [2024] UKFTT 118 (TC), HMRC opened an enquiry into the taxpayer’s tax return for 2019/20. The taxpayer applied to the FTT for a direction that HMRC should issue a closure notice, on several grounds. These included that HMRC should disclose why they picked her return for an enquiry, due to concern that the taxpayer had been selected for enquiry because of an approach by a third party who had been subjecting her to online harassment and made complaints against her to various bodies.

The FTT noted that HMRC had a general duty of confidentiality (under CRCA 2005, s 18), but this could be overridden by a disclosure order. However, the FTT decided not to order disclosure, for the following reasons: (a) Knowledge of whether a third-party tip-off to HMRC was the source of the enquiry did not further the hearing, but concerned the taxpayer’s wider issues relating to harassment; (b) HMRC had a legitimate public interest in defending its right to confidentiality of this nature of information, which enabled HMRC to meet its obligations of collecting the right amount of tax from all taxpayers. The taxpayer’s appeal was dismissed.

Practical tip

If someone wants to see information that a public authority holds about them, they should consider making a data protection subject access request under the Data Protection Act 2018.

The Import One-Stop Shop system introduced by the EU from July 2021.

Business-to-customer (‘B2C’) sales of goods to the EU can be dealt with in one of two ways, which are at the choice of the supplier.

Under the first method, the supplier can zero-rate their supply to their customer, and the customer accounts for VAT at the time of importation. This is simple for the supplier, but the customer has increased complications and may end up with an unexpected cost of additional VAT or duty on top of the purchase price.

Some postal operators and couriers also charge a handling fee to cover the costs of dealing with import documentation, etc. The goods are also not released to the customer until all the fees are paid. This can result in the customer refusing to accept the package in question because of the additional costs.

The second method is a simplification measure introduced by the EU called the Import One-Stop Shop (IOSS), which is similar to the ‘MOSS’ system for supplying digital services. The new scheme came into force on 1 July 2021.

This new scheme applies to B2C imports of goods costing less than 150 Euros. The 150 Euro limit applies to the total VAT of the consignment not the individual items. The EU is also removing the 22 Euro import VAT exemption, so from 1 July 2021, domestic VAT will be due on goods being imported into the EU. Under IOSS, a business can register in one Member State of its choice and account for VAT on all qualifying sales in all EU Member States on one VAT return.

Advantages of using the IOSS

The IOSS allows suppliers and online marketplaces selling imported goods to buyers in the EU to collect, declare and pay the VAT to the tax authorities instead of making the buyer pay the VAT when the goods are imported into the EU, as was previously the case.

The IOSS facilitates the collection, declaration, and payment of VAT for sellers that are making distance sales of imported goods to buyers in the EU. The IOSS also makes the process easier for the buyer, who is only postal charged at the time of purchase and therefore does not face any surprise fees when the goods are delivered. If the seller is not registered in the IOSS, the buyer must pay the VAT and usually a customs clearance fee charged by the transporter.

Where the goods are sold through an online marketplace, it is the marketplace that can register for IOSS and account for VAT on the sales rather than the individual business. This can be a great advantage to small sellers as all the administration is carried out by the online marketplace.

Non-EU sellers or facilitating marketplaces from countries without a ‘mutual assistance’ EU agreement opting to use IOSS will have to appoint an intermediary (a fiscal representative). The intermediary shares the responsibilities for the supplier under the IOSS regime – submissions of returns and VAT payments.

An intermediary should be registered with the tax authorities of their country of establishment to obtain their unique identification number to use with customs clearance processes. The intermediary also registers the name of all sellers or marketplaces they represent with their home tax office, and will receive in return an IOSS VAT identification number for each seller.

The new IOSS system is likely to prove popular with businesses, as it simplifies the process of selling online into the EU.

Practical tip

If a business is selling low-value consignments of goods to the EU, they can deal with all of their sales through one VAT registration covering all their EU B2C sales.