Helpsheets ... continued 37 from homepage

The limitations of the form P45.

Employers complete PAYE form P45 for the leaving employee. In HMRC’s ideal world, a new employee presents their P45; the tax code, previous pay and tax and pay are then brought forward from the previous employment. P45 purpose fulfilled! Unfortunately, this Eldorado world and the real world are not aligned. Frequently, an employee does not give a P45; maybe it has not been issued by the previous employer in time for the first pay run. So, employers issue the ‘Starter Checklist’, or at least ask the employee to complete the checklist questions.

Matching employer, employee and HMRC expectations

There are two things employers, employees and HMRC want the first time information is submitted on the employer’s real-time information (RTI) full payment submission (FPS):

1. one employee on our payroll system matching one on HMRC’s systems, and

2. the correct tax code applied.

Employers must focus on point 1, as they do not want to submit data that may not match to an existing taxpayer on HMRC’s systems and maybe create a duplicate employment.

The RTI matching data

Five pieces of employee matching data must be reported on the first FPS:

 • National Insurance number (NINO);

 • full name;

 • address;

 • current gender; and

 • date of birth.

If a piece is missing, HMRC’s systems may not be able to perform the matching exercise and may create another taxpayer record (one taxpayer, but two on HMRC’s systems). Similarly, if the employer changes matching data in a subsequent FPS, HMRC’s systems may create another record. In April 2023’s Employer Bulletin, HMRC stressed the risks of incorrect data, not least for HMRC’s calculation of the monthly PAYE liability and issue of the tax code. Only the NINO is on the P45.

The correct tax code

Employers, employees and HMRC want the correct tax code applied as soon as possible, something the P45 allows providing this is presented in time to process the first payment. An employee starting without a P45 is given the Starter Checklist to complete or, at least, asked these questions (e.g., ‘this is my first job since leaving school’). The checklist estimates the tax code prior to HMRC confirmation.

Expectation conclusion?

Employers do not always get RTI matching data and tax code information correct in the first pay run. If both are important, I wonder if HMRC should be looking at processes in other countries. For example, the Republic of Ireland (ROI) also operates a PAYE system for income tax. Revenue Ireland (Revenue. ie.) abolished the P45 from 1 January 2019. Now, as part of real-time reporting (RTR, like RTI), before an employee is paid, employers must register employments. This additional reporting obligation requires employers to send employee details to Revenue.ie. who will, on receipt, send Revenue Payroll Notifications. This matching exercise tells the employer the tax code to operate. ROI said goodbye to the P45, performed the matching exercise and ensured the right tax code was used – so why can’t HMRC?

In summary

If the P45 is received after the first pay run, this can be used if it is in-date, although not if HMRC has sent a tax code. But it does not provide full matching information. In contrast, the Starter Checklist does provide matching data information. Members of HMRC’s Employment and Payroll Group suggested new starters should be required to complete the checklist. HMRC confirmed they are working to get tax code information to employers quicker. HMRC should look at RTR in the ROI. Coming after RTI in the UK, maybe this enabled Revenue.ie. to learn. The legacy form dustbin already holds forms P9, P14, P30, P35 and soon, P11D. I concede there is an additional reporting obligation on employers; however, let’s give the P45 the P45!

Practical tip

Obtain RTI matching data:

 1. NINO;

 2. full name;

 3. address;

 4. current gender; and

 5. date of birth.

The checklist is not mandatory, so employers can design their own. New employees manage to provide bank details for payday. Why not include the questions on the same form?

Partnerships and companies - which business model might be best.

A sole trader looking to expand their business might be weighing up the ‘pros’ and ‘cons’ of a partnership or a limited company. They are very different, with not only very different tax consequences, but functions as well.

Partnership

A partnership is essentially two or more sole traders coming together for a common venture. It is governed by the Partnership Act 1890, with the tax rules mostly contained within a Statement of Practice (SP D12, dated January 1975). Partnerships are transparent; they do not have their own legal identity, so the individual partners are subject to income tax on their own profit shares (irrespective of drawings, and with Class 4 National Insurance Contributions) and shares of capital profits or losses for CGT. The partnership does not pay tax; however, The partnership does report the business profits on its own tax return, with its own unique tax reference number, but the profits or losses are assigned to the individual partners who record their shares on their own tax returns. However, partnerships can have their own VAT and payroll numbers.

Besides a separate tax return, there are no other reporting requirements for general partnerships, there is no obligation to file accounts nor any reports with Companies House. Unlike with a limited company or a limited liability partnership (LLP; see below), nothing need be made public. One issue with partnerships, just like with sole traders, is that there is no protection from legal claims from third parties – the partnership itself is not sued; it is the individual partners who are subject to potentially unlimited joint and several liability.

Limited companies

A company is a separate entity from its owners (the shareholders); the business is conducted by the company and the profits or gains belong to this body corporate and are subject to corporation tax. Accounts must be submitted to HMRC and Companies House; and the register of shareholders or persons of significant control must be sent to the latter.

If the owners wish to get their hands on the profits, they must declare them through dividends, pay them as salaries or bonuses through a payroll, or perhaps charge the company for the use of personal assets – all of which will have personal tax consequences.

Dividends attract a lower rate of personal income tax (plus a £500 dividend allowance) but are not deductible for the company as they are paid out of taxed income through the company’s distributable reserves. As well as shareholders who own the company, the business is run by directors, who are often also shareholders with smaller businesses, but not necessarily. Directors can receive an officer’s fee, but also a larger salary via an employment contract. The tax impact should be considered between the individual shareholders or directors’ burden and that of the company. Personal tax is only incurred when profits are withdrawn, whereas for partnerships the profits are fully taxed, irrespective of what happens to them.

As well as this different tax treatment, a company offers protection to its owners. The company is a separate person and assumes the risks, sues, and gets sued and insulates the owners from any personal liability. The potential damage to them is ‘limited’ to their investment.

Best of both?

A limited liability partnership (LLP) is treated exactly the same as an ordinary partnership for tax purposes but is a separate legal entity, so it offers the protection of a limited company to its partners (or ‘members’, as they are properly known).

Practical tip

The two deciding factors between companies and partnerships are generally risk and profit extraction. If a business has an increased danger of third-party liabilities, a company or LLP might be a good option from which to operate it. However, for tax purposes, if the bulk of the profits are to be paid out to the owners, operating through a company will lead to double taxation with corporation tax on the profits and income tax on the dividends or salaries; but if the desired drawings are lower than the profits, a company might be preferable as partners are taxed on the profits regardless of what happens to them.

The amount of tax you pay on your salary depends on your tax code. If it’s wrong you’ll pay too much or too little. For many this can be a temporary issue, for others it can be permanent. What’s the problem and what can you do about it?

PAYE - The PAYE system celebrates its 80th birthday this year. Depending on your point of view that may or may not be a cause for celebration. Either way, the PAYE basics are the same today as they were when it was introduced. For example, your tax code tells your employer how much of your salary is tax free and the tables show the rates of tax that apply. The tax code is where trouble can start.

Codes and the end of year review - A key feature of the PAYE system is the end-of-year review carried out by HMRC. These days it’s done automatically by its National Insurance and PAYE Service (NPS) computer. It compares the tax you paid through PAYE with what it expects to see based on the tax code HMRC thinks should have been used. If there’s a discrepancy it marks your record for manual review. Conversely, if the code matches and the PAYE tax paid corresponds with it, the NPS calls it good and moves on even if your tax code was wrongly calculated.

NPS assumptions - The NPS assumes that HMRC officers have calculated your tax code correctly despite there being countless reasons why this might not be so. To be fair, incorrect codes are often not the fault of HMRC as it calculates your code from information about your income and tax-allowable outgoings provided by you and your employer. However, it’s not uncommon for HMRC officers to interpret information incorrectly or simply make a mistake that results in the wrong tax code. The frequency of errors has increased significantly in recent years.

If the information HMRC has about your income and tax reliefs, e.g. job expenses, pension contributions, savings interest etc., is out of date your tax code is likely to be wrong. However, the NPS will not (cannot) identify this. It’s therefore up to you take the lead and notify HMRC of changes needed to your code.

If you’re in self-assessment you needn’t worry too much about tax code errors. These are superseded by your self-assessment tax calculation which will pick up any over or underpayments of PAYE tax. However, it’s sensible to notify HMRC of any significant errors in your code.

HMRC delays - Sadly, over the years HMRC has reduced its number of properly trained officers. The effect is that even if you notify HMRC that you are owed tax or that you owe it, you’ll be told that there is no need for a manual review of your tax and it will be done automatically by the NPS later in the year. This usually takes place in August and September. Frankly, this isn’t acceptable. If you’ve overpaid tax why should you wait months to obtain a refund? What’s more, as we’ve already mentioned, the NPS can’t definitively check if your code is right, consequently it will not pick up over or underpayments caused by coding errors.

Take action - The lesson here is that unless you complete a self-assessment tax return you need to pay special attention to checking your tax code and notify HMRC of any changes needed. If you don’t you might miss out on a tax refund or find yourself landed with an unexpected tax bill.

HMRC officers frequently make mistakes when calculating tax codes. HMRC’s automated annual review system can’t detect these without information provided by you. Always check your code for out of date or unwarranted adjustments and notify HMRC as soon as possible. Use our tax code guide to help identify errors.

You’re making substantial repairs and improvements to your buy-to-let property. You’ve borrowed from the bank to finance the repairs and these loans will wipe out the profit for a few years. What tax relief are you entitled to and how can you claim it?

Repairs and improvements - The basic rules for calculating the taxable profit on a property rental business are straightforward and logical; it’s simply income less expenses. However, things get trickier where the expense relates to repairs, improvements and finance costs. A tax deduction from profit is allowed for the first category but not the others.Where repairs are substantial HMRC may argue that they are in effect improvements. Generally, a like-for-like repair or replacement using similar materials (or more modern equivalents) is deductible from income. This applies to structural work and to equipment that’s fixed to the property such as boilers and water systems.

Finance costs - Tax relief for finance costs is also problematic. When calculating profit or loss on the letting of residential property you’re not allowed a tax deduction for finance costs, e.g. loan interest. Instead, you’re entitled to a limited tax credit (sometimes referred to as a tax reducer). The rules for working out the credit aren’t simple.

Example - In 2023/24 Janelle’s rental income net of tax-deductible expenses was £8,000. Janelle paid financial costs (mortgage interest) of £5,800. She is a higher rate taxpayer and the tax on the rental income is therefore £3,200 (£8,000 x 40%) ignoring the tax credit for the finance costs. The tax credit allowed is the lesser of 20% of:

• the finance costs, in this case £5,800
• the rental profit, in this example £8,000
• Janelle’s adjusted total income.

If your tax-deductible expenses exceed your rental income for the year, i.e. you make a loss, you aren’t entitled to a credit for any finance costs but the good news is that both the loss and the excess tax credit can be carried forward and used to reduce tax on the rental income for later years. The excess tax credit is the difference between 20% of the total finance costs and the amount calculated and the amount allowed for the year.

What finance costs are affected? - A finance cost for the purpose of the restriction doesn’t just mean interest on loans, it includes costs incurred in connection with loans etc. such as arrangement fees and other types of financing, such as overdraft and interest charges etc.

Excess expenses and finance costs - Having worked out your net rental income and the tax credit, the figures will need to be included on your self-assessment tax return on the “UK Property” or the “Foreign” pages, whichever is applicable. Both include spaces specifically to record losses where expenses exceed rental income and excess finance costs.Tip.It’s important to enter the amount of any losses and unused tax credits in the correct place on your tax return. Failing to do so risks losing the right to claim them after four tax years have elapsed.

Where your tax-deductible expenses exceed your rental income, the excess (the loss) is carried forward and used to reduce future profits. No deduction from profit is allowed for interest and finance costs; instead any tax payable of the rental income profit is reduced by a maximum of 20% of the finance cost. Losses and unused finance cost credits must be claimed on your self-assessment tax return or you risk losing them.

As a working parent you probably struggle to balance the needs of your job with those of your children, especially during the long summer holiday. This also poses a problem for employers. How can government childcare schemes help?

Working parents - The perennial problem facing working parents (and their employers) is how to stretch their annual leave to cover the school summer holidays. While informal childcare from doting relatives can be helpful, it’s not always reliable and formal childcare is expensive. The good news is that state support is improving, although finding what’s available isn’t easy.

The government’s Childcare Choices website is a good resource for finding childcare options. As an employer encourage your employees to use the service. If it benefits them it can help you ensure you have staff cover.

What counts as working? - To qualify for the working incentive schemes, each parent needs to be earning the equivalent of £183.04 per week, i.e. 16 hours at the relevant National Minimum Wage rate, from employment or self-employment. Fluctuating earnings are fine as long as the average over the three-month entitlement period is sufficient. At the other end of the scale, neither parent can have adjusted income (including expected bonuses) of more than £100,000 p.a.

Any parent who has recently started self-employment is exempt from the earnings test for the first year.

Support for young children - From September 2024, working parents in England who have children who are at least nine months old can access 570 free nursery hours p.a. (1,140 free hours from September 2025). For the term after a child turns three, most children of UK working parents are entitled to 1,140 hours per year. To access this support, a special code must be acquired online by the deadlines of 31 August, 31 December or 31 March to be valid for the following term.

All children over three are universally entitled to at least 570 hours each year, whether or not either parent is working. This also applies for certain disadvantaged two year olds.

Whilst free hours are often accessed over 38 weeks (otherwise known as term time), some providers allow the entitlement to be accessed over 51 weeks, i.e. stretched funding.

If the online claim deadline is missed, you’ll have to wait an entire term before you can use your entitlement.

Older children - Tax-free childcare (TFC) has been around several years and provides government aided funding. It comprises an online savings account which is used to pay for approved childcare for each child under twelve. The government pays an incentive; for every 80p put in it adds 20p capped at £500 every quarter.

If you receive tax credits or Universal Credit, you can’t have a TFC account and mustn’t apply for it by mistake if claiming an online code for the free hours, otherwise all of your benefits will stop.

In England free nursery care of 570 hours per year for children up to age three is available for working parents. This increases to 1,140 hours from September 2025 to bring it into line with other parts of the UK. All parents can open a tax-free childcare account into which they can save to pay for childcare. The government adds 20p for every 80p saved.

Class 2 refunds - HMRC has issued a warning for anyone who paid voluntary Class 2 NI contributions through their 2022/23 self-assessment and has subsequently received a refund or credit from HMRC. This may have happened if you submitted your 2022/23 tax return before 31 January 2024. You would have paid Class 2 voluntary contributions if your business profit for 2022/23 was less than the small profits threshold of £6,725, and you indicated you wanted to pay them in the self-employed pages of your tax return.

If you’ve received a refund it might cause 2022/23 to be a non-qualifying year for various state benefits, including your state pension.

Action required - ForHMRC to check if your benefits and NI record has been affected you need to call its NI helpline. You can also check by looking at your personal tax account to see if your Class 2 NI credit appears for 2022/23. You may need to pay the contributions again to restore your NI record.

Summary - HMRC is incorrectly refunding or crediting some taxpayers their voluntary Class 2 NI contributions for 2022/23. This can adversely affect entitlement to state benefits including the state pension. If you’ve been affected, call HMRC’s NI helpline.

Many employees are required to wear a uniform or particular type of clothing whilst at work. Even where there is no set uniform, many have clothes that they wear only to work and regard as ‘work clothes’ they would not otherwise wear. Tax relief is available, but only for the cost of cleaning, repairing or replacing where the employee pays the cost themselves and does not receive reimbursement from the employer.

The cost of the initial purchase of ordinary clothing cannot be claimed because a tax deduction is only available for employment expenses under the 'wholly, exclusively and necessarily incurred in the performance of the duties of the employment' rule. As such, general clothing, even if worn at work, is not eligible unless it is clearly distinctive or protective. For example, the criteria would not be met should the company require an employee to wear a suit or tie at work, but would be met if the clothing was a lab coat for scientists as that would be necessary for the performance of their work duties.

Should an employee be able to claim, there are two methods available, either by claiming the actual cost incurred or by using the flat rate expenses method – the latter being the more straightforward calculation (do not confuse this scheme with the VAT flat rate scheme for businesses). If claiming under the actual cost rules, receipts must be retained as proof. In comparison, the flat rate method needs no receipt retention as the claim is a set amount.

HMRC’s Employment Income Manual sets out a table of permissible fixed rate deductions. The amount varies depending upon the industry and job role, from £1,022 a year for airline pilots to £60 a year for various categories of workers. For example, a joiner can claim £140. If an employee does not fit into a specific category, the allowance is £60 per year.

How to claim

There is no need to claim if the expense is already included in the tax code. If the claim is being made for the first time and a self assessment annual return is not submitted, a P87 form should be used. If a self assessment tax return is completed, the claim is made on page E1 of the return. On acceptance, the claim will be carried forward and included in subsequent notices of coding. Claims can be backdated for up to four tax years and in this instance HMRC will either adjust the PAYE code for the current year or provide a tax refund.

Employer-provided clothing

Some businesses provide work clothing and here we are looking to see whether the provision is caught by the benefit in kind rules subject to income tax and NIC and reportable via form P11D by the company. Note that the tax year ending 5 April 2026 will be the last year employers will be required to file P11Ds, instead being required to report and collect income tax and Class 1A National Insurance on benefits through the payroll in real time.

Work clothing provided by an employer is only tax free if the clothing is necessary for the employee’s role and used solely for work purposes and, again, we are looking at such items as safety helmets, overalls and protective gear for construction workers. Uniforms that are clearly distinctive and cannot be worn outside of work are also not taxable including clothing with a permanent and visible logo of the employer (e.g. airline uniforms and branded retail staff uniform showing the logo of the business).

Practical point

Employers can enter into a PAYE Settlement Agreement with HMRC to simplify the reporting of minor, irregular or impracticable benefits, including clothing that might fall into these categories. This allows the employer to settle the tax and NICs on behalf of the employees.

As a landlord, periodically you will need to undertake work on your property. This may simply involve fixing a leaky tap or redecorating, or the work may be more substantial, such as replacing a roof or a kitchen. From a tax perspective, all work on a property is not equal and it is important to determine whether the work undertaken constitutes a repair or an improvement to the property. This will affect if, and how, tax relief is given for the expenditure.

Cash basis or accruals basis?

Landlords are able to deduct allowable revenue expenditure when calculating their taxable profits regardless of whether they prepare their accounts under the cash basis or the accruals basis. However, the rules governing relief for capital expenditure are different. Under the accruals basis, capital expenditure cannot be deducted in calculating taxable rental profits; relief is instead given in the form of capital allowances where available or in calculating the capital gain or loss on the eventual disposal of the property. However, under the cash basis, relief for capital expenditure is given in accordance with the cash basis capital expenditure rules under which a deduction for capital expenditure is permitted unless the expenditure is of a type for which such a deduction is expressly prohibited. The main exclusions are the cost of the land and buildings and cars (but not vans).

The cash basis is the default basis for most landlords with rental receipts of £150,000 a year or less.

Repairs

Expenditure on a repair is revenue in nature and deductible when calculating the profits of the property rental business.

A repair is the restoration of an asset by replacing part of that asset. A repair will normally put the property back in its original condition. An example of a repair would be replacing a few roof tiles blown off by a storm or repairing a leak in a shower. HMRC cite the following as examples of common repairs that would be deductible in computing the profits of a property rental business:

• exterior and interior painting and decorating;
• stone cleaning;
• damp and rot treatment;
• mending broken windows, doors, furniture and items such as cookers and lifts;
• re-pointing; and
• replacing roof tiles, flashing and guttering.

Anything that results in a significant improvement of the asset beyond its original condition will not be a repair.

Capital expenditure

Capital expenditure can only be deducted in calculating rental profits where the accounts are prepared under the cash basis and the expenditure is not of a type for which a deduction is specifically prohibited. Otherwise, relief is given either as a capital allowance or as a deduction in computing the gain or loss on the disposal of the property.

The cost of land and any buildings on that land is capital expenditure, as is any expenditure which adds to or improves the land or property (such as adding an extension) and the cost of refurbishing or repairing a property bought in a derelict or run-down state.

Telling the difference

It will not always be clear whether expenditure constitutes a repair or an improvement – it is a question of fact or degree in each case whether the expenditure results in an improvement. Where the level of improvement is so small that it is incidental to the repair, HMRC will allow the full amount of the expenditure to be deducted in calculating taxable rental profits.

In some cases, particularly when restoring an old asset, a degree of improvement will arise simply because of the use of modern materials. Where the materials used are broadly equivalent to the old materials, HMRC will accept that the expenditure is revenue in nature. An example here would be the replacement of wooden beams with steel girders, or lead pipes with copper or plastic pipes. Likewise, expenditure on alterations where improvement arises as a result of an advancement in technology but the function and character of the asset is the same will be allowed as revenue expenditure. The example cited here by HMRC is the replacement of single glazed windows with double glazing.

By contrast, rebuilding and extensive alterations will count as capital expenditure.

Where improvements and repairs are undertaken at the same time, the expenditure should be split on a reasonable basis, with the part relating to repairs remaining deductible.

Landlords with furnished holiday lettings (FHLs) are living in uncertain times. At the time of the 2024 Spring Budget, it was announced that the favourable tax regime for FHLs would be abolished from 6 April 2025. However, the legislation has yet to be enacted and it remains unclear if it will see the light of day.

Landlords of FHLs enjoy several benefits which are unavailable to landlords letting residential properties on long-term lets, and these include a number of capital gains tax advantages. A key benefit is the ability to access Business Asset Disposal Relief (BADR), which can reduce the capital gains tax payable on the gain to 10%, regardless of whether income and gains exceed the basic rate band.

With a possible end to the FHL regime looming, landlords may decide it is safer to sell their FHLs before 6 April 2025 to access the existing reliefs, particularly if they are sitting on a substantial capital gain. Landlords attempting to beat the system should note that it was announced that anti-forestalling provisions would apply to landlords who enter into unconditional contracts on or after 6 March 2024 (the date of the Spring Budget).

Nature of BADR

Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) reduces the amount of capital gains tax payable on the disposal of a qualifying business asset, as long as the qualifying conditions are met for the two-year period to the date that the business ceased or the asset was sold.

The relief is only available on the disposal of a business asset where there is a disposal of the whole or part of the business. If the property is disposed of after the business ceased, the disposal must take place within three years of the date of cessation. From a practical perspective, this allows the landlord to stop letting the property as an FHL while it is on the market.

If the landlord only has one FHL, the business will cease if the property is sold and, as long as the qualifying conditions are met, BADR should be available. Where a landlord has more than one FHL, the position is more complicated as there must be a disposal of part of the business to access the relief – relief is not available for the disposal of an asset by a continuing business. However, disposing of one property within an FHL business will result in the disposal of the part of the business associated with that property, so BADR should be forthcoming.

Amount of relief and lifetime limit

Where BADR is available, capital gains tax is charged at the rate of 10%. This can generate significant savings. For example, if a landlord makes a chargeable gain on an FHL of £200,000 and the landlord is a higher rate taxpayer, capital gains tax of £20,000 will be payable. However, the same gain on the sale of a residential property where BADR is not available will trigger a tax bill of £48,000 (2024/25 rate).

However, BADR is subject to a lifetime limit of £1 million. Once relief has been granted on gains of £1 million, normal capital gains tax rates apply.

Before making a decision on whether to sell one or more FHLs to benefit from the 10% rate, landlords should consider the availability of the lifetime limit, and ensure that it remains available to cover the expected gains. Any gains realised in the past on which BADR has been claimed must be taken into account.

The limit applies to the individual, not to the type of gain, and all gains attracting BADR (not just those relating to FHLs) must be taken into account. This may include gains on the disposal of shares in a personal company or the disposal of assets on the cessation of a trade.

Earlier this year, HMRC wrote to wealthy taxpayers who had not submitted tax returns for 2020/21 and/or 2021/22. A letter was sent where the taxpayer had submitted a return for 2020/21 and 2022/23 but not for 2021/22 or where a return had been submitted for 2019/20 and 2022/23 but not for 2020/21 or 2021/22. Taxpayers who received a letter from HMRC had previously been sent a notice to complete a Self Assessment tax return.

The letter asked taxpayers with outstanding returns for the missing year(s) to submit them by 12 July 2024. Where this has not been done, HMRC will issue a determination of the amount of tax that they think is due based on the information that they hold. They will also charge late filing penalties. However, the taxpayer can appeal against the penalties if they have a reasonable excuse for filing late.

Taxpayers who received a letter but who do not think a return is required should contact HMRC on 03000 516640 or email them at response2@hmrc.gov.uk rather than simply ignoring the letter.

When a return is required

Where a taxpayer is wholly within PAYE, it is understandable that they may not realise that they need to file a return as the tax that they owe should be collected through the PAYE system. However, despite this, HMRC have historically required wealthy taxpayers to submit tax returns, even if they are taxed under PAYE. Presumably, this is because wealthy individuals are more likely to have savings and investment income on which tax may be due.

For 2022/23 and earlier tax years, PAYE taxpayers with income or £100,000 or more needed to file a tax return even if they had no other income to declare. This threshold is increased to £150,000 for 2023/24 returns and abolished completely for 2024/25 returns onwards.

However, a wealthy taxpayer within PAYE will still need to file a return if they have other income to declare.

This will be the case if they were also self-employed and had trading income in excess of £1,000, they were also a partner in a partnership, they fell within the scope of the High Income Child Benefit Charge, they have chargeable gains to declare, they had rental income in excess of £1,000 to declare or received taxable foreign income.

A tax return may also be required where the taxpayer has savings and investment income to report. It is important to review this as recent changes may mean that a PAYE taxpayer now has a tax liability on their savings or dividend income for the first time.

The reduction in the additional rate threshold to £125,140 for 2023/24 onwards meant that taxpayers with income of between £125,140 and £150,000 lost their personal savings allowance as the allowance is only available to higher and basic rate taxpayers. Even if the taxpayer remains in the higher rate band, rising interest rates may mean that the interest on their savings now exceeds the personal savings allowance. Similarly, the reduction in the dividend allowance to £1,000 for 2023/24 and to £500 for 2024/25 may mean there is tax to pay on dividends for the first time.

Wealthy taxpayers within PAYE should check whether they need to file a return. If they have received a notice to file and do not think they need to submit a return, they are advised to contact HMRC.

There are three ways in which former students with student or post-graduate loans can make loan repayments:

• from deduction from their wages or salary through the PAYE system;
• to HMRC through the Self Assessment system; or
• direct to the Student Loans Company (SLC).

Students will normally start making repayments from the start of the tax year after that in which they finish or leave their course.

Where an individual is employed, their employer deducts the repayments from their wages or salary and pays them over to HMRC, who pass them on to the SLC. Here, we look at how repayments are made through the Self Assessment system.

Repayment thresholds

Loan repayments are only made where an individual’s income exceeds the repayment threshold for the loan that they have. For 2023/24 and 2024/25, the annual thresholds are as follows:

Loan type                   Annual repayment threshold

                                        2023/24    2024/25

Plan 1 student loan.        £22,015.   £24,990

Plan 2 student loan.        £27,295.   £27,295

Plan 4 student loan.        £27,660.   £31,395

Post-graduate loan.         £21,000.   £21,000

For Plan 1, Plan 2 and Plan 4 student loans, repayments are made at the rate of 9% of income in excess of the relevant threshold; for post-graduate loans, repayments are made at the rate of 6% of income in excess of the relevant threshold.

The repayments are the same regardless of the repayment method.

Repaying through Self Assessment

Taxpayers who are self-employed or who have another source of income (other than one taxed through PAYE) and who need to complete a tax return will make repayments through the Self Assessment system. Where an individual is employed but also has income which they need to declare on a tax return, for example, from a self-employment, they will make repayments both through PAYE and through Self Assessment. However, any amounts repaid through PAYE will be deducted in determining the amount to be paid through the Self Assessment system.

Unearned income

Unearned income is taken into account in calculating student loan repayments if it exceeds £2,000 in the tax year. This would include income from savings (before deducting the personal savings allowance) or rental income (after deducting the property allowance where relevant). However, if unearned income is less than £2,000, it is ignored in calculating student loan repayments.

Example

Martha has a job in 2023/24 in which she earns £30,000. She also has profits of £4,000 after deducting the trading allowance from her freelance knitwear business and interest on savings of £800 a year. She has a Plan 2 student loan.

Her earnings from her job in 2023/24 exceed the Plan 2 threshold of £27,295 by £2,705. Her employer deducts student loan repayments of £243 (9% (£30,000 – £27,295)).

Martha completes her 2023/24 tax return. Her total income for the year is £34,800. However, as her unearned income of £800 is less than the £2,000 threshold, it is ignored in calculating her student loan repayments for the year, and the repayments are calculated by reference to income of £34,000. Consequently, she is required to pay back £603 (9% (£34,000 – £27,295)). However, she has already paid back £243 through the PAYE system, leaving a balance of £360 to be paid by 31 January 2025 through the Self Assessment system.

Beware payrolled benefits

Last year HMRC were forced to apologise after they miscalculated student loan repayments. The error arose because payrolled benefits were taken into account in calculating the repayments when they should have been ignored. HMRC wrote to those affected, who were offered the choice of a refund or the option to leave the amount as a loan repayment. While HMRC are now aware of this, it is prudent to check that payrolled benefits have not been taken into account is calculating amounts due.

The distinction between legal and beneficial ownership of land and property (in English law) is important. When a dwelling is (say) transferred from one individual to another, the names shown on the conveyance will be the legal owners.

Beneficial ownership

However, they will not necessarily be the beneficial owners. It is beneficial ownership that is normally relevant for capital gains tax (and inheritance tax) purposes. Identifying the beneficial owner of a property can be difficult, as there are several potential factors. HMRC’s Capital Gains Manual (at CG70230) points out that indicators of beneficial ownership include occupation of the property, the receipt of rent for the property, the payment of funds to buy the property and the receipt of proceeds from selling it.

Constructive trust

If the legal owner holds a beneficial interest in a property on behalf of someone else, a ‘constructive trust’ sometimes arises. The parties may have an understanding (or a common intention) about beneficial ownership that differs from the legal ownership. HMRC guidance (in its Trusts, Settlements and Estates Manual at TSEM9710 lists three questions to be addressed in considering whether a common intention constructive trust exists:

1. Was there an agreement or common intention that the parties should share beneficial ownership of the property?

2. If so, did the party claiming act to their detriment (i.e., disadvantage) in reliance on that agreement or common intention or change their position?

3. If so, what is the size of the beneficial interest to which the claimant is entitled?

Establishing whether a constructive trust exists can be difficult but is by no means impossible.

Bought in someone else’s name

For example, in Raveendran v Revenue and Customs [2024] UKFTT 273 (TC), the appellant (R) owned the leasehold of a property in London. His brother (X) used the property to trade from. X wanted to buy the freehold but could not obtain a loan. The property was therefore bought in R’s name for £300,000. Around nine years later, the property was sold to R’s sister-in-law (X’s wife) for £350,000. HM Revenue and Customs (HMRC) obtained a property valuation of £1,080,000. HMRC assessed R to capital gains tax. R argued he was not the beneficial owner of the property. X had paid the mortgage, with amounts coming from X to R and then onto the bank. R had not contributed funds to the purchase, other than by way of a loan. When asked why £350,000 was paid to him for a property he acquired for £300,000, R replied he thought the extra was to compensate for stamp duty. The First-tier Tribunal (FTT) found that all the purchase price of the property was funded by X, either from direct contribution or from servicing the mortgage that was taken out in the appellant’s name. X was very clear that the entire mechanism of the purchase had been arranged by his brother and described the transaction as “my brother using my name”. There was a clear understanding by both parties that the property was held for X. The FTT also found that X had paid for property improvements. The FTT concluded that X was the sole beneficial owner of the property.

Practical tip

Case law might be of some assistance to support a constructive trust claim. However, circumstances differ. Expert professional advice is recommended.

Some consequences of retaining the VAT number when someone buys a business.

When someone buys the trade and assets of a business, they have the option of retaining the VAT number. How is this done, and what are the ‘pros’ and ‘cons’ of doing so?

Buying a business

If someone buys the trade and assets of a VAT registered business, it can be treated as ‘transfer of a going concern’ (TOGC) for VAT purposes. This avoids charging VAT on the sale of the business.

Transferring the VAT number

When someone buys a business as a TOGC, they have the option of taking over the VAT number of the original owners. This can be done by completing a form VAT 68 and submitting it to HMRC along with the VAT 1 application for VAT registration. The previous owner must not submit a VAT 7 application for de-registration.

Once the transfer of the registration has been allowed by HMRC, it cannot be revoked.

Changing the status of someone’s business (e.g., from sole proprietor to a limited company or partnership) is treated as a TOGC for VAT registration purposes, so the person can, if they wish, apply to retain the existing VAT registration number of their old business.

Advantages of retaining VAT number

There are some advantages to retaining the existing VAT number:

 • existing invoices and stationery can be retained;

 • administration during the changeover period is simplified;

 • VAT return periods remain unaltered; and

 • there is no disruption for supplies and customers checking the validity of a new VAT number.

Disadvantages of retaining VAT number

However, there are some potential disadvantages to retaining the VAT number when someone purchases a business. Retaining the vendor’s VAT number can create a potential problem because, in doing so, a business takes on all the VAT liabilities of the existing registration, and could be caught out by an assessment for mistakes made by the vendor. The procedure is, therefore, only suitable when the two parties are closely connected, or when someone is just changing the entity of the business.

A right to reclaim overpaid VAT belongs only to the person who overpaid it. In Shendish Manor Ltd [2004] UKVAT V18474, this was held to be so even if the VAT number had been transferred; the TOGC provisions only transfer the right to repayment of input tax.

However, in Pets Place (UK) Ltd [1996] VATDR 418 ( VTD 14642), the purchaser was held not to be liable for an assessment disallowing input tax to the vendor. Pets Place had taken over the VAT number and signed a VAT 68, but the latter referred only to paying VAT on supplies made by the vendor (i.e., to output tax, not to input tax that had been overclaimed).

Records

The business records remain with the vendor, but they must make them available to the purchaser in order to complete their VAT returns. HMRC can direct the vendor to pass the records over to the purchaser if requested to do so by the purchaser.

Any special scheme (e.g., the flat rate scheme, annual accounting, or a retail scheme) used by the vendor ceases at the date of the transfer, and the purchaser has to reapply to use them.

Paying VAT

The previous owner must cancel any direct debit they have set up to pay their online VAT returns, and the new owner must set up new direct debit instructions.

Practical tip

If someone buys a business or changes the legal entity, they can retain the existing VAT number; this simplifies admin and their relationship with suppliers and customers, but they are liable for any errors made by the previous owners.

A sometimes overlooked provision in the private company loans to shareholders rules, which could give rise to an unexpected ‘loan’ to the Treasury.

HMRC does not like private companies lending money to their owner-managers, and there is a raft of provisions aimed at discouraging such debts – from benefits-in-kind rules to the ‘quasi-distribution’ provisions in CTA 2010, Pt 10, Ch 3, which kicks off with the notorious section 455.

If a loan remains outstanding for more than nine months following the company’s year end, CTA 2010, s 455 requires payment of notional corporation tax but at the dividend upper rate (currently 33.75%) rather than at the corporation tax rate. The tax is, however, repayable as and when the debt is repaid, or (at the expense of an income tax charge) is released or written off.

Closed loophole

Section 455 is extended by section 459 where, under arrangements made by a person (P):

 a. a ‘close’ company makes a loan which otherwise does not give rise to a section 455 charge; and

 b. another person makes a payment, transfers property to or releases a liability of a ‘relevant person’, such as a shareholder of the company or their associate.

Section 455 applies as if the loan had been made to the relevant person.

It would be an obvious loophole if, to avoid section 455, P could arrange for company A to make a loan to a third party (B) who then lends the money to P. Note, however, that section 455 refers only to a ‘payment’, not necessarily a loan, which is relevant to the situation next described. If B were another company in which P is a shareholder, it is conceivable that section 455 could apply to the loan from Company B and also, by virtue of section 459, to the intercompany loan from Company A.

Practical situations

A management buyout usually involves interposing a holding company which receives finance from the target company to buy out the departing shareholders. If the finance takes the form of an intercompany loan, the loan, together with the payments made to the outgoing shareholders, falls within the wording of section 459. The deal should therefore be financed by intercompany dividends as far as possible. HMRC insists that there is no motive test involved and does apply section 459 in practice in this situation (see HMRC’s Company Taxation Manual at CTM61550).

An even more ‘innocent’ scenario which I recently encountered concerned two connected companies, where company A had lent money to company B, and P (who was the major shareholder in both companies) had a substantial credit balance on his director’s loan account (DLA) with company B. P had already made some withdrawals from his DLA and wished to make further withdrawals.

It had also been suggested that company A, which was cash-rich, could make a further advance to company B, which was cash-poor, to enable B to repay P’s DLA. I was comfortable in advising that section 459 did not apply to the earlier withdrawals as these were not part of ‘arrangements’ made by P for A to lend money to B and for B to make a payment to P. But if A made a further loan to B to enable P to withdraw money from his DLA with B, that would fall squarely within the terms of section 459 – albeit that he would simply be withdrawing money lent personally to B.

Practical tip

If it is intended to repay part of a debt owed to a shareholder in two connected companies at a time when there is an intercompany debt between them, as described here, care is needed to identify whether the circumstances are within the wording of section 459, given HMRC’s strict interpretation. In the above scenario, another solution might be to assign the DLA to company A, subject to obtaining specialist advice.

How trusts and inheritance tax interact and how useful they can potentially be.

Trusts can be a very useful planning tool for inheritance tax (IHT) purposes, as well as family and business succession planning. Tax is only one factor, as preservation of the family silver is another potential advantage of trusts; but they are not necessarily always suitable.

What are trusts?

A trust exists broadly when the legal and beneficial ownership of an asset lies with different people – one person (or up to four people) can be the legal owner (‘trustee’) who holds the asset for the ‘beneficiaries’, with the ‘settlor’ having placed the asset into trust. However, the settlor (or their spouse or minor unmarried children) should not benefit, ideally.

In its purest form, a bare or nominee trust exists where the beneficiaries have an absolute right to income and capital, so HMRC taxes such beneficiaries as if they owned the asset themselves.

With discretionary trusts, as the name implies, trustees have complete discretion as to what happens to income and capital. Trustees are subject to additional rates of income tax (i.e., 45% or 39.35% for dividends), though distributions to beneficiaries come with a 45% tax credit, which is usually refundable; this essentially recycles the income tax paid by the trustees. The tax pool tracks tax paid by the trustees and that reclaimed by the beneficiaries. Not distributing income will prevent those credits from being refunded and after five years, the undistributed income will count as capital for the trustees’ IHT. If income is to be accumulated, limited companies might be a preferable option.

Interest in possession (IIP) trusts exist when (usually) a single beneficiary (the ‘life tenant’) has a right to enjoy the trust asset(s) for life. This can be in the form of income arising from the asset or a right to reside in a property. Once the life tenant dies, the trust usually dissolves, and the asset moves into the absolute ownership of a ‘remainderman’. Income received by IIP trustees is generally subject to a blanket basic rate of income tax (i.e. 20%, or 8.75% for dividends).

What does IHT have to do with trusts?

IHT is potentially chargeable when assets are placed into trust (or, more precisely, when assets become subject to the ‘relevant property’ regime). Chargeable lifetime transfers and ‘exit charges’ apply when assets go into and out of trusts respectively, and exit charges are at a maximum rate of 6%. Capital gains tax (CGT) need not be paid as ‘holdover relief’ is normally available. These trusts are also subject to IHT charges every ten years.

Relevant property trusts consist of discretionary and those IIP trusts settled in lifetime; IIP trusts set up before 22 March 2006, or in a will, are not subject to these charges; rather, their assets are treated as being owned by the life tenant for IHT purposes, so transfers in are potentially exempt transfers (PETs).

The fact that relevant property trusts have their own nil rate band (NRB) means they are another person as far as IHT is concerned. After seven years, an asset placed into trust is generally outside a settlor’s personal estate for IHT purposes – this means they can gift an asset but (if they are a trustee) not completely lose control of what happens to the assets.

Other benefits of a trust

As well as the benefit of another NRB for IHT and of holdover relief for CGT purposes, insulating the beneficiaries from legal ownership of the asset can potentially provide protection from divorce settlements, care assessments, beneficiaries’ own financial profligacy or inexperience, or family disputes as to who gets what. As well as being another person with an NRB to assist with estate planning, a trust can be a secure ‘cupboard’ for the family silver, ensuring it stays in the family and survives multiple generations.

Practical tip Families should consider what their overall aims are: asset protection, saving tax, or a bit of both. Trusts can potentially be very useful but are not always appropriate, so the family’s wishes would need to be considered carefully.

The tax implications of shares in a family company being awarded or gifted to family members of employees.

The employment-related securities legislation deals with arrangements involving shares and securities provided by reason of employment where the full value of the employment reward provided to the employee is not included in the salary package and is charged to tax.

The basic rule is that should an employee or director be given shares for free or pay less than the market value of the shares at the time of the award, a charge to income tax (and possibly National Insurance contributions (NICs)) will arise (under ITEPA 2003, s 62). The tax charge will be the difference between the market value and the price paid by the employee.

However, various tax-efficient share option schemes are available, which are intended to encourage employees and directors to participate in their employment companies. Such schemes permit shares to be awarded income tax-free and sometimes capital gains tax-free.

Anti-avoidance

There are wide-ranging anti-avoidance provisions relevant to these arrangements, which encompass when shares and other securities are awarded not just to employees, but also to what HMRC terms ‘associates’. Associated persons include persons connected with the employee and members of the same household as the employee.

The rules broadly state that even if the person receiving the shares is not an employee, they are deemed to be in certain circumstances. For example, should a company issue shares to an employee who requests the shares be given to their spouse instead, the spouse would have acquired the shares from an ‘opportunity made available by reason of the employee’s employment’ (ITEPA 2003, s 471(1)). The shares would be deemed employment-related securities, and any tax would be chargeable to the employee’s spouse.

Should the employee wish the spouse to take ownership of the shares, the shares will have to be registered in the employee’s name first, taxed on the value and then transferred under the interspousal rules. Transfers of assets between spouses are normally at a no gain, no loss value for capital gains tax purposes.

Exception to the rule

There is supposedly an exception from the tax charge where the shares are acquired for family reasons. ITEPA 2003, s 471 states that there will be no tax charge where:

‘A right or opportunity to acquire securities or an interest in securities made available by a person’s employer, or by a person connected with a person’s employer, is to be regarded ... as available by reason of an employment of that person unless -

 a. the person by whom the right or opportunity is made available is an individual, and

 b. the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.’

This is confirmed in HMRC’s Employment Related Securities Manual at ERSM20220 (‘Employmentrelated securities and options: ‘by reason of employment’ – exception for family or personal relationships’), which states:

‘We take a common-sense view of this exception. It would clearly apply if a father, on reaching retirement, hands over all the shares in his family company to his son and daughter simply because they are his children, even if they are both also employees of the family company’.

Practical tip

In most cases, the transfer of shares to a family member who works in the family company will be covered by this exception, but it would be more difficult to prove where the individual concerned is an unrelated close friend or ‘associate’. If a company owner wishes to give shares to a child who does not work in the company as part of any succession planning, this should be undertaken by way of a gift.

If you’re a sole trader or in partnership you may need to show extra information when completing your 2023/24 tax return. What’s required and how might it affect your self-assessment payment due on 31 July?

Transitional year - 2023/24 is the basis period transition year for businesses operating as sole traders and partnerships (including LLPs). Depending on your business accounting period end date this may require you to use different self-assessment pages to report your profits.

If your accounting period for 2022/23 ended between 31 March and 5 April 2023 (inclusive) you aren’t affected by the transitional changes and can therefore complete your tax return as usual.

Reporting profits - There are two versions of the self-employment and partnership pages which can be used to report your business profits. The short versions are SA103S and SA104S respectively for sole traders and partnerships, and the full versions SA103F and SA104F. If the transitional rule applies to your business, you must use the full version even if you’ve used the short version previously.

Additional information - When completing the SA103F or SA104F you need to enter details of the transitional profit and how you want it to be taxed (it can be spread over five years). Also, if you changed the end date of your accounting period in 2023/24 you’ll need to enter the details of this and may need to complete a second SA103F or SA104F depending on your new accounting date.

July payment - The second self-assessment payment on account (POA) is due on 31 July 2024. The standard amount payable is equal to 50% of your 2022/23 self-assessment tax. If your 2023/24 tax is greater, the POA due on 31 July won’t change. However, if it’s lower you can ask HMRC to reduce your POA. If you’ve already done so you should review whether the reduced amount is now sufficient taking account of the tax on your transitional profits.

If the basis period transition rules apply you must use the full version of the self-employed or partnership pages of your 2023/24 tax return. Include the tax on transition profits when checking if you can reduce your 31 July payment.

You’re a shareholder and director of three companies. You currently take a low salary from each company topped up with dividends. But is this really the most tax-efficient option?

Salary plus dividends - As a rule of thumb, the most tax-efficient strategy for taking income from a company is a modest salary plus dividends. Generally, salary should be no more than either £9,100 (the NI secondary threshold) or £12,570 (the NI primary threshold). Which of these is best depends on whether your company is entitled to reduce its NI bill with the employment allowance (EA).

If it’s not possible or desirable to pay dividends or you have directorships with more than one company, a salary of more than £9,100 can be marginally more tax efficient.

Usually, a separate NI primary and secondary threshold applies for each directorship. This means a director can earn £9,100 from numerous companies without any NI being payable. However, there’s a potential catch.

For NI purposes companies that are related share one secondary NI threshold and the directors, one primary.

Example - Ava is a director of three companies. She’s paid a salary of £9,100 from each. If the companies are not related no NI is payable on any of the £27,300 earnings. By contrast, if the companies are related only £9,100 is NI free. The NI payable on the balance is £2,512 (£18,200 x 13.8%) for the companies plus £1,178 ((£27,300 - £12,570) x 8%) for Ava.

Advantages of benefits - By taking benefits in kind instead of some salary,Ava can reduce the overall NI liability while keeping the same advantages of salary. This is possible because employees, including directors, don’t have to pay NI on benefits in kind.

Example - Jane is a director of three related companies. In 2024/25 between them they pay her a salary of £9,100. This means there’s no employers’ or employees’ Class 1 NI payable. The companies also contract for and pay for Jane’s health club membership, various streaming entertainment services and a range of other perks that she would normally pay from her net income. The total cost of these benefits is £13,000; the Class 1A NI is £1,794 (£13,000 x 13.8%). Had the £13,000 been paid as salary, Jane would have had to pay £1,040 (£13,000 x 8%) NI, but as a benefit in kind she pays nothing.

Remuneration planning with benefits - The same strategy that’s typically used for maximising tax and NI efficiency when paying a combination of salary and dividends should be used for salary and benefits. That’s to say, you should take a salary at least equal to the secondary threshold (£9,100 for 2024/25) divided between your various directorships however you see fit. Additional remuneration is taken as benefits.

Example - If Gill takes all her income from her three directorships, say £27,000, as benefits in kind, the companies would pay Class 1A NI at 13.8%, i.e. £3,726 (£27,000 x 13.8%). Instead, the companies should between them pay Gill a salary of £9,100, plus benefits of up to £17,900. There’s no Class 1 NI for the companies or Gill to pay on the salary but the Class 1A NI bill is £2,470.

If you have multiple directorships, taking a salary up to the secondary NI threshold (£9,100 for 2024/25) from each is slightly more tax efficient than dividends. However, if the companies are related for NI purposes then take a salary up to the secondary NI threshold and top up with benefits in kind.

As an employer you don’t want to waste valuable time on avoidable admin tasks such as processing scores of expenses claims for employees’ subsistence claims. Might benchmark rates be a viable alternative?

Subsistence - As an alternative to reimbursing your employees’ subsistence costs, which might run into a long catalogue of snacks, caffeine, congestion charges etc., you can instead pay them tax and NI-free amounts at HMRC’s benchmark rates of up to £25 per day. This avoids the need to obtain receipts for tiny amounts of expenditure and can even be a useful tax-free perk to offer employees.Tip.You don’t have to use benchmark rates for every employee or for each business trip and the payments don’t have to be declared onForm P11D.Trap.Benchmark payments can’t be used with a salary sacrifice arrangement, i.e. paying employees the tax and NI-free benchmark payments in lieu of salary.

Conditions - The benchmark rates can be paid in respect of an allowable business journey during the day only, when the following qualifying conditions are met:

• the travel is in the performance of an employee’s duties or to a temporary place of work
• the employee is absent from the normal place of work or home for a continuous period of at least five hours; and
• the employee incurs the cost of a meal (meaning food and drink) after starting the journey.

There is no minimum spend for the meal and the employer doesn’t have to verify how the whole subsistence payment is spent.Trap.The benchmark rates don’t cover meals consumed at home, ingredients purchased to make a meal, or meals provided on a training course or at a conference. The benchmark rates are:

• £5 where the business trip lasts at least five hours in a day
• £10 if it lasts at least ten hours
• £25 if it lasts at least 15 hours and ends after 8.00pm
• £10 supplementary rate where either the £5 or £10 rate is paid and the trip ends later than 8.00pm.

Valid expense? - Rather than having to check all the details, you are only required to ensure that qualifying travel is undertaken and be certain that no one could have reasonably suspected otherwise, i.e. there is an implicit level of trust involved. Typical supporting evidence that a meal expense has actually been incurred might include a diary of establishments visited or a credit card statement.

Example - Ken is meeting a client over 100 miles away at 6.00pm, so he leaves the office at 3.30pm. He arrives home, direct from the meeting, at 10.00pm. You can pay him £15 tax and NI free, as the trip exceeds five hours and ends after 8.00pm.Tip.An employer may choose to pay blanket higher rates, but the excess will be liable to tax and NI unless covered by a bespoke arrangement with HMRC or an industry-wide working agreement.

Is it enough? - As these rates haven’t been increased since their introduction years ago, they don’t cover very much given the recent inflationary pressures. Employees can make a specific claim to HMRC for any shortfall where they keep receipts (seeThe next step), although they will be better off if you make full reimbursement, which of course is deductible against profits.

There’s no need to ask for HMRC’s permission before paying the benchmark rates. However, as they’re not exactly generous, it might be fairer to reimburse your employees’ actual costs where the rates are inadequate as long as the necessary evidence is retained.

When a VAT-registered business sells an asset, the VAT treatment depends on several factors, including what type of asset is sold. In this article we’re only looking at the sale of equipment, e.g. an item of machinery.

Output tax - Generally, where you’ve used an item of machinery for your business you must charge VAT (output tax) if you sell it, whether or not you reclaimed VAT when you bought it. It’s a common misconception that you don’t need to charge VAT on the sale if you didn’t reclaim it on the purchase.

However, there is a limited exemption which applies where the input tax is specifically blocked by the rules.

Blocked VAT - Input tax paid on the types of goods or services listed below is not reclaimable (blocked). For some other types of purchase input tax is not fully blocked, instead the VAT recoverable is limited to the difference between purchase and sale cost, i.e. the margin or profit. If you sell an item on which the VAT was blocked the sale is VAT exempt. The list below shows items where input tax is blocked:

• cars - purchased or leased
• goods installed in dwellings in the course of construction
• private imports
• services and goods acquired by tour operators
• goods related to the supply of accommodation to a company director
• goods and services acquired under a margin scheme, such as the second hand goods scheme
• business entertainment.

Example - pre-registration asset.Acom Ltd purchased a brand new van several years before it registered for VAT. The input tax could not be reclaimed at the time of purchase nor when Acom registered for VAT (because such a claim is time limited to four years). The input tax was not blocked, it’s simply that Acom was not entitled to reclaim it, therefore the exemption doesn’t apply and so when Acom sells the van it must charge VAT.

Example - used for exempt supplies.Bcom Ltd bought a yacht solely to provide business entertainment and so the VAT input tax is not deductible (it’s blocked). Note, it does not hire out the yacht for customers to use for entertainment purposes. That would be a VATable supply and would mean Bcom could reclaim the input tax. The sale of the yacht by Bcom is exempt.

Example - used for mixed supplies.Ccom Ltd purchased a piece of machinery and has not reclaimed the input tax it paid as it expects it to be used for exempt supplies. In practice the machine is used for both exempt and VATable supplies. Ccom now intends to sell the machinery. Because the machinery was used for both taxable and exempt supplies the input VAT was not entirely blocked. Therefore, Ccom must charge VAT on the full sale price.

Summary - VAT must usually be charged on assets sold after registration even if they were bought previously. There are exceptions to this rule. Where the VAT was not deductible, e.g. for a car available for private use so that VAT recovery is blocked, the subsequent sale of the asset is VAT exempt.

Although suppliers such as mobile phone providers are VAT registered, a careful look at the invoices issued to customers shows the words 'this is not a VAT invoice' – why is that?

A valid VAT invoice is a crucial document for reclaiming VAT on purchases. It can be full, simplified or modified, depending on the value of supply and the information it includes. A full VAT invoice is issued for costs exceeding £250 and includes the date and time of supply, the supplier’s name and address, and VAT registration number, as well as the recipient’s name and delivery address. Omitting these details can result in an invalid document for VAT purposes.

Simplified invoices include the same information as a full invoice, excluding the date, the customer’s details, subtotal, total VAT amount and the price and quantity of each item. It shows the total VAT inclusive amount to be paid by the customer and can only be issued for purchases up to £250. A modified invoice must be agreed upon with the customer to include the same information found on a full invoice, but the product prices and total amounts will be VAT inclusive. Modified invoices are only issued for sales exceeding £250 that include taxable products.

Whichever of these VAT invoices is used, each confirms the tax point. In most cases, the basic tax point for a supply of goods occurs on their removal, usually the time of delivery by the supplier or collection by the buyer. The basic tax point for a supply of services is when the services are performed. However, the actual tax point overrides the basic tax point, which will happen if the supplier issues a VAT invoice or receives a payment in advance of the basic tax point. A later tax point can also arise where the supplier issues a VAT invoice within 14 days after the basic tax point.

An invoice which shows the words 'this is not a VAT invoice' does not create a tax point because it is not a VAT invoice. The tax point is created when the invoice is paid or is the date of the supplier’s invoice, if within 14 days following the basic tax point. Once paid, the supplier must issue a proper VAT invoice to the customer (usually on request). The issue of a 'not a VAT invoice' is therefore a means for the supplier to potentially shift the tax point to a later date so that the supplier has the payment from a customer before having to pay HMRC. The benefit for the supplier is cashflow.

This approach is also seen with pro forma invoices. A pro forma invoice is a preliminary bill of sale sent to buyers in advance of a shipment or delivery of goods or services. It often includes a quotation or estimate and does not serve as a demand for payment. Issuing a pro forma invoice does not create a (basic) tax point. Once the customer pays, whether in part or in full, this creates an actual tax point, and the supplier issues a proper VAT invoice.

The phrase 'this is not a VAT invoice' is commonly found with mobile phone contracts, often taken out in the personal name of a director or employee who then reclaims via expenses. To the mobile phone network, the customer is the individual, not a business. By issuing a 'not a VAT invoice' document, the output is declared when the customer pays.

Practical point

Strictly, the VAT should not be reclaimed if a director claims the personal mobile invoice through the business because the documentation will state 'this is not a VAT invoice’. However, HMRC rarely takes issue with such invoices, although it may if the claim is for another type of supply, depending on the amounts of VAT involved.

For many businesses, initial set-up costs are low with just an internet connection, smartphone and a laptop. Invariably, funding for expansion or to purchase specific items will come from the owner's resources or those of family or friends.

If an individual makes a gift either to a business owner or to the business itself, it is generally not considered as taxable income for the business. However, there are inheritance tax (IHT) implications for the individual, as gifts made by an individual can be subject to IHT if the donor passes away within seven years of making the gift. Where a director lends money to their company, the company may repay this amount without tax implications and interest can be paid on the loan.

The gift may be of an asset and, if the donor is a ‘partner' company (i.e. a business entity collaborating with another to achieve mutual benefits, such as sharing resources), the recipient business is treated as acquiring the equipment at market value’. For the donor business, capital gains tax on the disposal may be payable.

The government provides non-repayable grants and subsidies but these come with specific eligibility criteria. Unless the funding relates to business-led innovation, such as research and development projects, the more likely application will be to Local Enterprise Partnerships, supporting businesses in specific regions. Most grants and subsidies are considered taxable income for the business, except those specifically exempted.

Other government funding is available via the Seed Enterprise Investment Scheme and Enterprise Investment Scheme but the conditions are restrictive, being aimed at companies rather than smaller individual start-ups. Incentives come in the form of income tax reductions, capital gains tax deferrals and/or exemptions for the investor.

Should government funding or personal funding not be possible, the business will need to look at loans. Banks have certain criteria to be fulfilled before lending. Starting with smaller loans helps build a positive relationship with the bank and establishes a track record of repayment. Interest charged on any business loan or overdraft is tax deductible, with the capital amount being shown as a creditor on the balance sheet.

Alternative lenders and financing options including venture capital, angel investors, crowdfunding or peer-to-peer lending may be possible. Venture capital and business angels refer to an individual or group willing to invest money in a new or growing business in exchange for an agreed share of the profits. Crowdfunding (also known as peer-to-peer lending) has tax implications if a 'reward' is expected in return for funding. For the business, the funds are considered taxable revenue. VAT may also apply if the rewards constitute taxable supplies. There are no tax implications for the donor, as the payment is made in exchange for goods or services, similar to a purchase.

Other financing

Assets purchased under a hire purchase agreement usually include an option to purchase at the end of an initial period. The expenditure is treated as being incurred as soon as the asset comes into use, even though not owned until the option is exercised. Finance charges are a business expense with VAT payable with the initial instalment (although not fully recoverable should the asset be a car).

A lease may be in the form of a short-funding finance lease or an operating lease – the difference being that the lessee cannot claim capital allowances on a finance lease as the lessor retains ownership. Payments are apportioned between the finance charge and the reduction of the outstanding liability, the finance charge being tax deductible with any VAT attached reclaimed on each payment.

Practical point

Gifts to a business can have varying tax implications, requiring careful consideration and accurate record-keeping. If a business borrows, it needs to ensure that the interest rates are manageable, comparing rates from different lenders. Equity funding may require surrendering ownership and control over the business – the TV programme Dragons’ Den being an example.

Expenses will be incurred in running a property business. To ensure that tax is not paid unnecessarily, it is important that all allowable expenses are deducted in calculating the profits for that business. However, to avoid unwanted attention from HMRC, it is important to understand which expenses can be deducted, and which cannot.

An expense is revenue in nature. Different rules apply to capital expenditure and these vary depending on whether accounts are prepared using the cash basis or the accruals basis.

The ‘wholly and exclusively’ rule

In the main, the tax rules for property income borrow from those applying for trading purposes, and this includes the rules which determine whether an expense is deductible in calculating taxable profits.

The key rule here is the ‘wholly and exclusively’ rule which states that an expense cannot be deducted unless it is incurred wholly and exclusively for the purposes of the business. A deduction is not allowed for personal expenses.

To ensure that only business expenses are deducted, it is important to keep things separate so that it is clear when an expense relates to the property business and when it is a personal expense. Separate bank accounts should be maintained, receipts and invoices retained and accurate records kept.

Dual purpose expenditure

Where an expense is incurred for both a personal and a business reason, unless the business element can be identified and the expenditure split, a deduction is not allowed. An example here is everyday clothing worn only for work. Unless the clothing has the company name or logo displayed as part of a uniform, a deduction is not allowed as the clothing also provides the personal benefits of warmth and decency.

Apportionment

Where it is clear that part of an expense relates to the business and part is personal, the expense can be split and the business element will be allowed as a deduction in calculating profits. The apportionment must be done on a ‘just and reasonable’ basis.

Examples of expenditure which may comprise both a personal and business element include the use of a car or van or a mobile phone. For example, if a landlord uses their car both personally and for the purposes of their property business and 25% of their mileage relates to the property business, 25% of the running costs can be deducted in calculating the profits of the business.

Common expenses

Although the exact nature of the expenses incurred will vary from landlord to landlord, common expenses which may be deducted include advertising expenses, bad and doubtful debts, insurance, repairs, council tax, salaries and wages of employees (and employer’s National Insurance and pension payments), travelling expenses, accountancy costs, cleaning costs and gardening costs. Legal and professional fees are only deductible if revenue in nature. This may include fees incurred in evicting an unsuitable tenant. However, fees relating to the purchase or sale of the property are capital in nature and are not deductible as expenses.

Interest and finance costs relating to a commercial property or a furnished holiday let can be deducted. However, an unincorporated landlord cannot deduct interest and finance costs relating to residential lets; instead, relief is given for up to 20% of the costs as a tax deduction. This restriction does not apply to corporate landlords.

Children may have their own income. This may be in the form of savings income on accounts that they hold or, for older children, income from a paper round or a Saturday job. Like adults, children have their own set of allowances, including a personal allowance and savings and dividend allowances. However, anti-avoidance provisions apply to prevent parents effectively using their children’s tax-free allowances to reduce the tax that they pay.

Earned income

For tax purposes, the same rules apply to income earned by children as apply to adults. Children have their own personal allowance, and income sheltered by the allowance will be tax-free. Where a child has trading income, for example, selling items on eBay, they too will benefit from the £1,000 trading allowance. However, a child under the age of 16 is not liable to pay National Insurance contributions.

Savings income

Unless it is significant, it is unlikely that a child will need to pay tax on their savings income. The same rules apply as apply to adults, and their savings income will be tax-free where it is sheltered by the savings allowance, the personal allowance and, where available, the savings starting rate band.

The exception to this rule is where the child receives interest of more than £100 on income given to them by a parent. At an interest rate of 5%, this would be the case where the child has received income of £2,000 or more from their parent. Where a child receives interest of more than £100 on money given to them by a parent, the interest is treated as that of the parent rather than of the child, and to the extent that it is not sheltered by the savings allowance or any unused personal allowance, it will be taxed at the parent’s marginal rate of tax. The gift from the parent is treated as constituting a settlement. It is important to keep an eye on the interest received – rising interest rates may take the annual interest, previously less than £100, over the £100 limit, triggering the anti-avoidance rules.

This rule does not apply to money given to a child by grandparents, other relatives or friends – the income is taxed as that of the child, regardless of the amount.

Example

Hannah is 11. Her mother Louise inherits some money and puts £10,000 into an account for Hannah. Interest is paid at the rate of 5% per annum – a total of £500 a year. As the interest exceeds £100 a year, it is taxed as Louise’s rather than as Hannah’s, and if Louise has used up her personal and savings allowances, she will pay tax on it at her marginal rate of tax.

Hamish is also 11. His grandfather downsizes and from the cash released from the sale of his home puts £10,000 in an account for Hamish, on which interest is paid at the rate of 5% per annum, earning Hamish £500 a year. However, in this case, the money is treated as Hamish’s and, as it is covered by his personal savings allowance, it is tax-free.

To overcome the tax trap where the money is given by a parent, consideration could be given to investing in a Junior ISA. Parents or guardians with parental responsibility can open a Junior ISA, but the money in the account belongs to the child. There are two sorts of Junior ISA – a cash ISA and a stocks and shares ISA. A child can only have one of each. Money can be added to the account(s) each year up to the Junior ISA limit, set at £9,000 for 2024/25. The limit applies across both types of account rather than per account. Income earned on money in a Junior ISA is tax-free, as are dividends on stocks and shares in a stocks and shares Junior ISA.

The VAT flat rate scheme is a simple VAT scheme for smaller VAT-registered businesses. Rather than pay the difference between the VAT charged to customers and that incurred on business purchases over to HMRC, traders using the flat rate scheme instead pay a fixed percentage of their VAT-inclusive turnover to HMRC. The percentage depends on the sector in which the business operates and contains an allowance for VAT incurred on purchases, as under the scheme traders cannot deduct this from what they pay. The record-keeping requirements are less onerous too.

Eligibility

The scheme is open to traders who are eligible to be registered for VAT or who are already registered and whose annual turnover excluding VAT is not more than £150,000. The business must not be associated with another business.

Once within the scheme, a trader can remain in it as long as their annual turnover does not exceed £230,000. However, if turnover exceeds this limit temporarily, HMRC may allow the trader to remain in the scheme if they are satisfied that the trader’s turnover in the next 12 months will not exceed £191,500.

Traders using another VAT scheme cannot join the flat rate scheme. If a trader leaves the scheme, they cannot rejoin until 12 months have elapsed.

Traders can either join the scheme online when they register for VAT or, if they are already VAT-registered, by completing form VAT600FRS.

The flat rate percentage

The flat rate percentage that is used to determine the VAT payable to HMRC for a quarter depends on the business sector in which the business operates. The percentages can be found on the Gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay.

A flat rate percentage of 16.5% applies to businesses that meet the definition of a ‘limited-cost business’, regardless of the sector in which they operate. This is the case where goods cost less than 2% of turnover or less than £1,000 (where costs are more than 2% of turnover). Money spent on services is not taken into account in working out whether a business is a limited-cost business.

A business receives a 1% discount on their flat rate percentage for the first year in which they are in the scheme.

Calculating the VAT due

The VAT due to HMRC for the quarter is found by applying the flat rate percentage to the VAT-inclusive turnover for the period.

Example 1

Diana runs a ladies’ clothes shop. In the quarter to 31 July 2024 her turnover including VAT is £36,000. Her flat rate percentage is 7.5% (retailing not listed elsewhere). She must therefore pay over VAT of £2,700 to HMRC (£36,000 @ 7.5%).

Example 2

Eve is a bookkeeper. In the quarter to 31 July 2024, her VAT-inclusive turnover is £12,000 and her relevant costs are £175. As her costs are less than 2% of her turnover, she is a limited-cost business. The VAT for the quarter is calculated using the flat rate percentage of 16.5% applying to limited-cost businesses rather than that for her sector of 14.5%. She must therefore pay VAT of £1,980over to HMRC.

Is it worthwhile?

The scheme will save work. Traders using the scheme do not need to keep detailed records of sales and purchases. However, while the flat rate percentages are all lower than 20% (the standard rate of VAT), the scheme will not necessarily save money. Before signing up, it is useful to compare the amount payable under the scheme with that payable under the traditional method to see whether the scheme works for you. Limited-cost traders can end up worse off. The flat rate percentage for limited-cost traders at 16.5% of VAT-inclusive turnover is equivalent to 19.8% of VAT-exclusive turnover, leaving a very narrow margin to recover VAT on purchases. As services are not taken into account in determining whether a business is a limited-cost business, if the trader incurs a lot of VAT on services, the flat rate scheme may leave them out of pocket.

There is no substitute for doing the sums.

Class 2 National Insurance contributions are flat rate contributions which for 2023/24 and earlier tax years are payable by the self-employed where their profits exceed the relevant trigger threshold.

For 2023/24 and 2022/23, the liability to pay Class 2 contributions arose where profits exceeded the lower profits threshold (set at £12,570 for 2023/24). For those years, self-employed earners whose profits were between the small profits threshold (set at £6,725 for 2023/24) and the lower profits threshold were treated as having paid Class 2 National Insurance at a zero rate, giving them a qualifying year for state pension purposes for zero contribution cost. For years prior to 2022/23, self-employed earners whose profits exceeded the small profits threshold were liable to pay Class 2 contributions.

Self-employed earners whose profits from self-employment are below the small profits threshold can opt to pay Class 2 contributions voluntarily to secure a qualifying year. This is a cheaper option than paying voluntary Class 3 contributions.

The liability to pay Class 2 contributions was abolished from 2024/25. However, self-employed earners with profits below the small profits threshold remain eligible to pay Class 2 contributions voluntarily.

Collection through Self Assessment

Class 2 National Insurance contributions are collected through the Self Assessment system, as for income tax and Class 4 National Insurance contributions. They are payable by 31 January after the end of the tax year to which they relate. However, unlike Class 4 contributions, they are not taken into account in calculating payments on account.

The collection of Class 2 contributions has not been without problems, and there have been reports of HMRC reversing the Class 2 charge in the Self Assessment calculation because the self-employment has not been recorded correctly on HMRC’s National Insurance computer system. Further problems arose in respect of Class 2 contributions paid voluntarily for 2022/23 where the payment was made on or slightly before the due date of 31 January 2024.

Repayment of 2022/23 voluntary contributions

As a result of a delay by HMRC in processing payments, voluntary contributions paid on time for 2022/23 were treated as having been paid late, with HMRC reversing the voluntary Class 2 charge. As a result, the self-employed earner may have received a refund from HMRC. If they have not received a refund, the payment will either be showing as a credit in their Self Assessment account or have been allocated to a different Self Assessment liability.

If you are self-employed and you paid Class 2 contributions voluntarily for 2022/23, you can check on the HMRC app to see if the contributions paid for that year are showing on your National Insurance record. If the contributions have been refunded, held as a credit or allocated elsewhere, the year will not be a qualifying year, and this may affect your state pension entitlement. You can call HMRC on 0300 200 3500 for assistance.

The professional bodies have been pressing HMRC to resolve this issue. However, HMRC have now advised that they are unable to do so. The need for individuals to call HMRC for help will place further pressure on HMRC helplines which are already struggling to cope.

It is important that individuals check their National Insurance record and state pension forecast regularly so that errors can be rectified before it is too late.

Substantial increases in tax charges over the years have removed much of the attraction of company cars; employees will often, instead, use their own car for employment purposes.

The tax legislation (in ITEPA 2003, s 336) provides a general rule that a deduction can be claimed for expenses that are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. However, section 359 states that this rule does not apply if mileage allowance payments are made to the employee for the use of their own vehicle, or if mileage allowance relief is available.

Mileage allowances

Instead of the general rule for the deduction of expenses as above, ITEPA 2003, s 229 et seq provides the mileage allowance regime for the costs of business travel in an employee’s own vehicle.

In brief, an employee can claim, or an employer can pay, an allowance for the use of the employee’s vehicle at a rate approved by HMRC. This is based on mileage when carrying out the duties of their employment, so a distinction must be drawn between (for example) the normal costs of commuting (which would be seen as simply putting the employee in a position to perform their duties) and the costs of actually carrying out their duties.

The rates per business mile set by HMRC are as follows:

                             First 10,000 miles       Above 10,000 miles

Cars and vans                 45p                               25p

Motorcycles                     24p                               24p

Bicycles                           20p                               20p

These allowances will cover a proportion of the costs of depreciation and fixed costs such as insurance, vehicle excise duty, MOT tests, servicing and the like, as well as an element for fuel. Payments made at these rates will be exempt from income tax and National Insurance contributions (NICs).

For example, if Ms Smith travels 15,000 miles a year in her role as a sales representative and uses her own car, she could be paid £5,750 (i.e., 10,000 miles at 45p per mile and 5,000 miles at 25p per mile) in addition to her normal salary.

Sufficient records should be kept by the employee and employer to justify the amounts paid. If HMRC were to enquire into the payments and find that evidence of business mileage was lacking, substantial income tax and NICs liabilities may accrue. Note also that payments for expenses such as parking, congestion and clean air charges can be reimbursed by the employer or claimed as a deduction separately from the mileage allowance.

Mileage allowance relief

If the employer pays less than the rates above (or indeed nothing), the employee can claim a deduction for the difference from their salary.

For example, if Ms Smith was reimbursed by her employer for the use of her car at a fixed rate of 25p per mile, regardless of the total mileage, she would receive £3,750. She could claim a mileage allowance relief deduction of £2,000 (i.e., £5,750 less £3,750) from her salary. If her pay had been taxed at the basic rate, she would then receive a tax repayment of £400 (i.e., £2,000 at 20%).

If, on the other hand, the relevant motoring expenses paid to an employee exceed the qualifying amount based on the above rates, the excess is added to the employee’s other earnings for that period when calculating income tax and Class 1 NICs under the PAYE system.

Conclusion

While the ability of an employee to claim a tax deduction based on their business mileage at the above rates is beneficial, it would, of course, be better to persuade the employer to increase the mileage rate that they pay. Reimbursement recovers the full cost, while tax relief recovers only part.

Practical tip

As well as the normal mileage rates above, if an employee has another employee as a passenger in their own vehicle on a business journey, ‘passenger payments’ can be paid. The HMRC approved rate is 5p per mile paid to the car owning employee free from income tax and Class 1 NICs.

A look at employment law and payroll developments affecting employers.

Before the general election, the previous government passed five pieces of employment primary legislation that apply where the employee is ordinarily resident in Great Britain. So keep an eye on the commencement of the following:

1. The Employment (Allocation of Tips) Act 2023 (the ‘Tipping Act’) The Tipping Act provides that employers must ensure workers are allocated tips and service charges fairly and transparently. Employers will be supported by a non-statutory Code of Practice (CoP) to help them develop allocation policies and procedures. This was approved by the UK Parliament on 24 May 2024 (the day the session was prorogued before the general election). However, ‘commencement regulations’ have not been passed to bring the CoP or the provisions of the Act into force. This was expected on 1 July 2024; it is now expected on 1 October 2024.

2. The Workers (Predictable Terms and Conditions) Act 2023 This Act allows workers to ask their employer for a revised contract if their current one contains an unpredictable work pattern (e.g., the type of work, the hours of work and the days of work). Employers will be able to develop policies, practices and procedures in accordance with a statutory CoP that was open for consultation; it is now closed. So, we await the approved CoP and, again, commencement regulations to bring this into force; it is expected in September 2024.

3. Worker Protection (Amendment of Equality Act 2010) Act 2023 This Act received Royal Assent on 26 October 2023 and is due to come into force one year after that date, pending commencement regulations. There is no CoP to aid employers in developing suitable policies and procedures to take ‘reasonable steps’ to prevent sexual harassment of employees in the course of their employment.

4. Statutory Neonatal Leave and Pay Act 2023 This Act provides an employee with the unconditional right to leave (and a conditional right to pay) where a child receives neonatal care in the first 28 days of life. Where the employee meets all the eligibility conditions, they will be entitled to an additional 12 weeks of leave (and pay) on top of any entitlement to other statutory leave such as maternity, paternity, etc. HMRC confirms this will be effective from April 2025; however, it has not issued guidance for software developers. There is not much time left for such an important new statutory payment, and we are very much dependent on having this facilitated by payroll software.

5. The Paternity Leave (Bereavement) Act 2024 This Act was saved during the short parliamentary wash-up period. In birth and adoptions, it allows the ‘father’ or secondary adopter the immediate right to paternity leave where the mother, primary adopter or child dies. So, previously, the employee would not be entitled to take paternity leave, as there was no primary carer or child to support; the Act disregards this. Yet, the Act is nothing without commencement regulations, which may or may not make changes to it.

Practical tip Employment law and payroll are intrinsically linked – think maternity. The right to leave is an employment right, but the right to be paid requires other legislation. And employment law is a devolved responsibility in Northern Ireland. Employment rights and the right to payment do not apply UK-wide.

The timing and tax implications of common methods of payment of directors.

For directors, remuneration is typically assessed on an annual earnings period basis; all earnings for the tax year are considered, rather than looking at each pay period individually. This approach recognises that directors often have irregular payment patterns and bonuses rather than a set amount per month.

The payment date is broadly deemed to be:

 • when earnings are credited in the company’s accounts;

 • the date when the period ends where the amount of the earnings is determined before the end of the period to which they relate; or

 • where the amount of the earnings is determined after the end of the period to which they relate, the date is when the amount is determined.

However, if the company enters into a service contract with the director, the terms of which make the director an employee, that director is taxed under PAYE, with the same rules as any other employee.

Bonuses

A bonus will invariably depend upon the company’s results for the previous year, with payment deemed to be:

 • the same as for a salary payment;

 • when a payment is made; or

 • when the director becomes entitled (or has access) to the payment.

It is possible to have a bonus declared in a set of company accounts such that corporation tax relief may be claimed, but the actual payment is accrued, paid and taxable at a later date. However, a problem can arise for the director where the actual payment date might not be for months, but PAYE will be due. A solution could be for directors to meet before the accounting year end and agree to a commitment to pay the bonus, but not determine the actual amount. This way, the amount for PAYE purposes will not be ‘determined’ by the end of the year.

Dividends

When a dividend is deemed to be subject to income tax in the hands of a shareholder is determined by the period in which payment becomes enforceable.

Dividends are treated as paid on the date they become ‘due and payable’, which typically aligns with the payment date, but need not necessarily do so.

The general principles for determination are:

 • The resolution by the directors to pay an interim dividend does not create an enforceable debt, because the directors may revoke a decision to pay an interim dividend prior to the date of payment; therefore, an interim dividend is deemed paid when payment is made.

• In comparison, final dividends are declared at the end of the financial year and approved by the shareholders at the annual general meeting (AGM). Importantly, the payment date is the payment date specified by the company, often shortly after the AGM but need not necessarily be so. Final dividends declared with a stipulation as to date of payment, do not create an enforceable debt until that date. In comparison, final dividends without any stipulation create an immediately enforceable debt.

Doubts about the date of payment can be settled by inserting a clear statement in the company’s articles of association confirming when enforceable debts are created. Minutes of directors’ meetings (or written resolutions, as applicable) should also make it clear how and when each dividend will be paid, and that the declaration creates an enforceable debt.

Practical tip

Recent tax cases have indicated that an enforceable debt cannot arise in respect of an interim dividend, and therefore the tax liability relies on the date of payment. The cases also underline the importance of written proof. While HMRC lost those cases, this does not guarantee a similar outcome in the future and, as such, should not be relied upon for tax planning.

Despite the improving economy, bad debts are still a fact of life for many businesses. HMRC is aware that not all invoices are paid on time and allows bad debt relief to be claimed by businesses that have already paid VAT to HMRC on sales invoices that remain unpaid.

How bad debt relief is allowed depends on the accounting scheme being used. The cash accounting scheme is the most straightforward way to avoid a bad debt problem because output tax on invoices issued is only declared on a return when payment has been received. In effect, this means that bad debt relief is automatic. Although cash accounting may be beneficial for businesses suffering late payers, the 'downside' of this scheme is that input tax is not claimable until the business pays its suppliers, rather than the potentially earlier VAT period under the invoice-based accounting scheme.

In comparison, VAT bad debt relief under invoice accounting requires the VAT shown on the issued invoice to already have been paid to HMRC. To recover the VAT the debt must be:

• at least six months overdue from the date of the supply (i.e. the due date of the invoice)
• written off in the accounts
• claimed within four years and six months from the date the payment became due.

The process of claiming bad debt relief is straightforward, being made by adjusting the VAT return for the period in which the six-month period has passed, including the amount with the input VAT being claimed for the period. If the debtor is subsequently declared insolvent and the business wishes to make a claim, the claim will be of the VAT-inclusive amount as the VAT will have to be accounted for on any debt recoveries.

If the debt is the other way round and it is the purchaser who is in default, the input VAT already claimed on supplies should be repaid to HMRC regardless of whether the supplier reclaims bad debt relief. In practice, the debtor will, in all probability, not be in touch with the supplier and will be unaware whether bad debt relief has been claimed; whether the VAT is repaid to HMRC is something that HMRC may not be able to trace unless under enquiry.

Flat rate scheme

The flat rate scheme (FRS) applies a fixed percentage to quarterly gross sales to calculate the VAT payment. A claim for bad debt relief under the FRS could be beneficial.

Example

James uses the FRS percentage of 10.5% under the cash accounting scheme. One of his clients goes into administration owing him £5,000 + £1,000 VAT.

If James had been paid, he would have received £1,000 and declared £630 on his VAT return (i.e. £6,000 gross income multiplied by 10.5%). Non-payment means a VAT surplus of £370, which effectively represents compensation for the loss of input tax incurred by using the scheme instead of adopting invoice accounting.

Zero rated sales

Bad debt relief revolves around the VAT charged to the customer. Applying the rules means that an FRS business making zero rated supplies would not be eligible for the relief and FRS VAT would always be payable. If the business uses the cash basis, this would lead to the situation that, on writing off the bad debt, the FRS VAT would become payable. In this situation, the bad debt regulations are not applied such that the business can ignore (if cash accounting) or reclaim (if invoice accounting) the FRS VAT on the bad debt.

Practical point

Note that the due date is relevant to the six-month claim, e.g. if goods were delivered on 25 June, the invoice issued on 30 June, and the payment terms were 14 days, the six-month period starts on 13 July.