Helpsheets ... continued 38 from homepage

Anyone who invests in a company is taking a chance, hoping that the directors, as representatives of the company, will use the money to increase the company’s profit. In return for taking this chance, a shareholder receives ‘payback’ usually as a share in the distribution of profits in the form of a dividend, however. payment is not automatic.

For a dividend to be paid, a company needs to have sufficient 'distributable profits' to cover the dividend at the payment date. ‘Profits’ in this instance are ‘accumulated, realised profits’, i.e. accumulated profits from the current and/or previous periods after covering any losses. Therefore, only dividends paid out of accumulated profits can be made. Dividends paid where there are no ‘distributable profits’ or made out of capital are termed 'illegal' under the Companies Act 2006.

How do you know a dividend is 'legal'?

Whether a dividend has been paid 'illegally' may only come to light when the final accounts are prepared for that period. Only then can it be confirmed whether sufficient ’distributable profits’ were available when the dividend was paid. There is a statutory requirement for full accounts to back up payment of a final dividend, but there is no such requirement when making an interim dividend. However, advice is to prepare management accounts before declaring any dividend just to ensure sufficient distributable profits are available to support that payment.

Tax implications of 'illegal' dividends

Should the dividend be found to have been issued ‘unlawfully’, HMRC will treat the dividend as not being received and the shareholder will be required to repay the amount paid. The time limit for recovery of dividends is six years from the date of declaration or the declared payment date, whichever is later. The only time such a dividend will be treated as a distribution and the shareholder is not required to repay, is if the shareholder was unaware of the illegality of the payment and had no reasonable grounds to believe that the dividend was so. However, lack of knowledge may be difficult to prove with director/shareholder dividend payments in owner-managed companies.

If a shareholder cannot repay the dividend, HMRC can argue that the payment was incorrectly designated and was, in effect, a loan. Should the loan not be repaid or written off within nine months and one day after the year end, then the company is liable to a tax charge. The percentage rate is the same rate as the higher dividend rate at 33.75%.

The tax charge payable by the company may not be the only tax implication. Should the total of all outstanding loans from the company exceed £10,000 at any time during a tax year, then the director is considered to have received a benefit in kind from their employment unless interest is paid.

What are the alternatives?

If cash is needed but cannot be paid via a dividend due to the above, an alternative is withdrawal as a salary or bonus, but this comes with extra tax and NI costs.

If payment can be made partly in cash and partly for services or goods which could be normally settled personally, such arrangements count as taxable benefits in kind. Such benefits in kind may be taxable at a lower tax rate than 33.75%.

A company can repay share capital and share premium by crediting the company's profit and loss account, thus allowing the company to pay a dividend where this creates positive balance sheet reserves..

Where illegal dividends are discovered, a note should be added to the year-end accounts. The director must immediately cease taking any further dividends until the company has accumulated future distributable reserves.

t is usual for a landlord to require a deposit from a tenant as security against damage to the property. This cannot be more than five weeks’ rent where the annual rent is less than £50,000 or more than six weeks’ rent where the annual rent is more than £50,000. The landlord can also ask for a holding deposit to reserve the property. This cannot be more than one week’s rent.

The way in which deposits are treated for tax purposes depends on the type of deposit and the basis on which the landlord prepares their accounts.

Security deposits

Security deposits taken by a landlord should be held in a custodial scheme such as those offered by MyDeposits, the Tenancy Protection Scheme or the Deposit Protection Service. During the term of the tenancy, the deposit continues to belong to the tenant. If there is no damage to the property, the deposit is returned to the tenant at the end of the tenancy. In the event that there is some damage to the property, the landlord may be entitled to all or part of the deposit, with the tenant’s agreement or, where the tenant does not agree, following the resolution of a dispute.

As the landlord is not entitled to the deposit at the point that it is taken from the tenant, it does not need to be taken into account as a receipt of the property income business. However, if at the end of the tenancy, all or part of the deposit is retained by the landlord, under the cash basis the retained deposit is brought into account as a receipt in the period in which the landlord received the cash. If the accruals basis is used, the retained deposit is brought into account as a receipt for the period in which the landlord became entitled to it, even if the cash is not paid over to the landlord until a later date.

Holding deposits

Holding deposits are another form of deposit commonly taken by landlords, particularly in periods where the letting market is buoyant and demand for property is high. As the name suggests, a holding deposit is paid by the tenant to secure the property while the tenancy agreement is signed. In return, the landlord will take the property off the market.

A holding deposit cannot be more than one week’s rent. The terms governing the use of the deposit and the circumstances in which it may be retained by the landlord should be set out in a holding deposit agreement so all parties know where they stand.

Should the let fall through and under the terms of the agreement the landlord retains some or all of the deposit as compensation for the inconvenience and costs incurred in relation to the prospective let, the amount of the retained deposit should be included as income of the property rental business. However, the landlord would be able to claim a deduction for any costs actually incurred in relation to the aborted let, such as advertising or legal fees.

If the let goes ahead, the holding deposit would either be returned to the tenant or used to form part of the security deposit (see above). If the holding deposit is returned, it does not form part of the income of the business. Where the holding deposit is used as part of the security deposit, the rules set out above governing the treatment of security deposits should be followed.

Where a landlord makes a loss on their property rental business, the options for using that loss are limited. The rules depend on whether the business is carried on by an unincorporated landlord or by a company.

Unincorporated landlords

Where a landlord has an unincorporated property business, the general rule is that if a loss is made in that property rental business, it is carried forward and set against the first available profits of the same property rental business. The relief is given automatically and there is no need to make a claim.

Example

Peter lets out a property on a long-term residential let. In 2023/24 he makes a loss of £1,200. In 2024/25 he makes a profit of £4,600.

The loss of £1,200 from 2023/24 is carried forward and set against the profit of his property rental business for 2024/25 of £4,600, reducing the taxable profit for that year to £3,400.

Where a landlord has more than one property in a single property business, the losses from one are set against the profits from another in arriving at the profit or loss for the business as a whole for a particular year – there is no need to consider each property separately.

Example

Jane lets out three properties. The properties comprise a single property rental business. In 2024/25 she makes a loss of £6,000 on one property, a profit of £4,300 on another property and a profit of £7,100 on the third property. Her profit for the business as a whole is £5,400. The loss on property 1 is automatically relieved against the profits on properties 2 and 3.

Where a landlord has more than one property rental business, the losses made in one business cannot be set against the profits of another property business. For example, a loss in 2023/24 on an FHL business could not be set against a profit in 2023/24 on a separate property rental business.

However, the abolition of the FHL regime from 6 April 2025 will mean that any unused losses from the former FHL business as at 5 April 2025 can be used against the profits from the amalgamated property business beyond that date.

If a property business ceases, relief for unused losses is lost, even if the landlord starts up a new rental business at a later date. Care must be taken if there is a pause in letting where there are unused losses as relief will only be available if the same business, rather than a new business, continues after the pause.

Corporate landlords

Where the property business is carried on through a company, the loss must first be set against the company’s total profits for the accounting period. Thereafter, it must be carried forward and set against future total profits of the same property business. Any unrelieved losses at the date of cessation are lost.

As outlined before the election, the new Government are to go ahead with their proposal to impose VAT on school fees. Legislation was published in draft on 29 July, together with a technical note.

From 1 January 2025, education services and vocational training supplied by a private school will be liable to VAT at the standard rate of VAT. Where fees are paid on or after 29 July 2024 in respect of a term starting on or after 1 January 2025, these too will attract VAT at the standard rate of 20%. Boarding services which are closely related to the supply of education services and vocational training will also be liable to VAT at the standard rate of 20% from 1 January 2025. The funds raised by the imposition of VAT on private school fees are to be used to fund education in the state sector.

For these purposes, a ‘private school’ is defined as a school at which full-time education is provided for pupils of compulsory school age, or an institution at which education is provided for those over compulsory school age but under the age of 19 (such as a sixth-form college), and in respect of which fees are paid for the provision of that education.

Nurseries, whether standalone or attached to a primary school, are to remain outside the VAT charge, which will apply from the first year of primary school.

Education provided at private sixth-form colleges, whether standalone colleges or attached to a private school, will be within the charge. However, education and vocational training which is provided by further education colleges will not be subject to VAT. Education and boarding provided by state schools remain exempt from VAT.

Private schools will also be required to charge VAT on any other services that they provide, for example, education provided before or after school and for extra-curricular activities, such as arts and sports clubs. However, where before and after-school clubs and holiday clubs only provide childcare and there is no education element, VAT will not be chargeable.

Pre-payments

The tax point is normally the time at which the services are performed. However, if a payment is made or a tax invoice is issued before the service is performed, this may instead be the tax point. To prevent parents from escaping VAT on payments for education services provided on or after 1 January 2025 by paying the fees in advance, retrospective legislation is to be included in the Finance Bill to provide that, where a payment is made on or after 29 July 2024 for education to be provided on or after 1 January 2025, VAT will be due on the fees. This will render attempts to save VAT by paying multiple years' fees in advance ineffective. The Government have stated that they will challenge the validity of lump sums paid before this date which do not relate to specific fees and will seek to collect VAT on fees where they believe this to be due.

Private schools who are not currently registered for VAT will be able to register from 30 October 2024.

No tax charge arises in respect of the provision of a nursery place for an employee’s child at a workplace nursery provided that the associated conditions are met. Unlike the exemptions for childcare vouchers and employer-supported childcare to the extent that these remain available, the tax exemption for workplace nursery places applies without limit.

For the exemption to apply, the employer must either make available the premises in which the care is provided or meet the partnership requirements. The partnership requirements make it possible for smaller employers without the resources to open a workplace nursery on their premises to provide nursery places to their employees within the terms of the exemption. To meet the partnership requirements, the care must be provided under arrangements that include the employer on premises made available by one or more of those persons and, under the arrangements, the employer is wholly or partly responsible for financing and managing the provision of the care.

An employer may enter into a partnership with a commercial nursery to provide the care. However, to satisfy the partnership condition, the employer must have some responsibility for financing the provision of the care and for managing it.

As far as financing the care, this requires more than simply buying places at a commercial nursery and making a contribution to fixed costs. HMRC do not regard this condition as being met if the employer pays a set amount per child per month towards the fixed costs of an existing commercial nursery. Rather, the employer must accept the financial risk of running a childcare facility, contributing to total costs and taking joint responsibility for any losses.

Responsibility for managing the provision of care, either wholly or in part, requires input and influence on management decisions and the way in which the childcare is provided. This may include monitoring staff performance or allocating places.

Commercially marketed schemes

A number of commercially marketed schemes are available which take advantage of the tax exemption for workplace nurseries. Typically, they include some or all of the following features:

• the employee enters into a salary sacrifice scheme, giving up an amount of pay equal to the cost of a nursery place;
• the employer pays for a nursery place for an employee’s child (either at a nursery run by a scheme promoter or at an independent nursery);
• the employer pays the nursery an additional sum in addition to the cost of the place (typically about £400 a year); and
• the employer appoints the scheme promoter as their agents to act on their behalf at meetings of the nursery’s management committee.

The scheme is usually offered as a package.

While HMRC are of the view that most partnership schemes meet the exemption condition, they are aware of marketed schemes where the partnership requirement is not met because the employer does not share the financial risk and has no real say in how the nursery is run. Where this is the case, the tax exemption does not apply and a tax charge will arise if the employer meets the cost of a nursery place for an employee’s child.

Smaller employers looking to offer workplace nursery places to employees should be aware of this when considering a commercially marketed scheme.

Over the past few years, tax enquiries aimed at identifying and correcting errors or deliberate under-reporting in tax returns have increased. HMRC generates substantial revenue from all compliance activities and although the exact proportion relating to tax enquiries is not always separately reported, latest figures show that for 2023-24 the amount secured from all tax compliance activities was in the region of £41.8 billion. Read this article to find out more.

Receiving an enquiry letter

The first indication that a taxpayer's return is under enquiry is via an official notification letter. The envelope will be A4 size, containing a number of pages informing the taxpayer that the check has started, notifying them of the process and their legal rights and obligations. HMRC is not obliged to reveal why the taxpayer has been chosen for enquiry and if no reason is stated, a phone call may elicit an indication. Enquiries can be costly for both the taxpayer and HMRC and are usually the result of HMRC receiving information from third parties that has not been declared on the taxpayer's tax return. Years of unprofitability may also be investigated, as may large, unexplained changes in income and figures returned that may be inconsistent with comparable businesses.

Information requested

The letter will state what documents are needed (although HMRC often requests documents which may not be legally required). The self-employed and taxpayers with capital gains are required to retain documents for five years from the 31 January submission deadline; sixth years from the end of the accounting period.. However, it is advisable to retain for at least another year. Note that HMRC has four years from the end of the tax year to issue a discovery assessment and can go back 20 years if the taxpayer is found to be dishonest.

If the taxpayer is in business, they are expected to retain various documents including receipts, invoices and employment contracts (to verify salary and employment benefits). Property documents such as rental agreements, mortgage statements and ownership details for properties are expected to support income declarations and capital gains.

With the increased requirement for digital record-keeping under Making Tax Digital (MTD), HMRC now accepts electronic records instead of paper documents. These records must be kept digitally, ensuring traceability, linked to quarterly tax submissions and must be authentic, complete and legible. There are now apps linked to mobile phones that stream automatically into cloud storage and input into accounting software. HMRC is expecting businesses to take advantage of such facilities under MTD.

Bank statements are the most important documents to retain but be aware that banks retain statements online for the legal timeframe only.

VAT registered businesses are required to retain a valid VAT invoice. However, there is no requirement to keep receipts relating to specific types of supplies up to a value of £25 (including VAT), such as car parking charges. For supplies not exceeding £250, the supplier may issue a less detailed invoice.

Cash payments

Under an enquiry, HMRC invariably disallows claims for cash payments unless proper invoices and receipts can be presented. If an entry in the business records are not enough to allay HMRC's doubts, duplicate invoices could be requested should the supplier be contactable and willing to supply. HMRC has been known to require a signed letter from the supplier businesses stating the amount received (with their name and address/NI number, etc).

Third party information

HMRC may request information from third parties, such as customers, suppliers or financial institutions, to cross-check the taxpayer’s information.

Practical point

The taxpayer is expected to show that identifiable sums have been spent on deductible expenses. HMRC has won tax cases where a deduction has been disallowed because inadequate or no evidence was presented.

A sole trader or partnership business may make a loss for several reasons – not necessarily because it is not doing well. A business can be operationally successful but still report losses due to various strategic, financial or external factors.

There are several options available to gain tax relief for a loss. The default position is the ability to carry forward the loss and offset it against taxable income in future years, thereby reducing the tax liabilities for those years. The problem with the default position is that the loss must be offset against profits of the same trade. Should the nature of the trading activities change, offset will not be possible, although terminal loss relief may be available.

Another problem with carry forward relief is the possibility of wastage of personal allowances because the relief is automatic and reduces profits before the personal allowance is offset. Tax planning to preserve those losses could be incorporation. Under incorporation, the losses are preserved where a business carried on by an individual, or by individuals in partnership, is transferred to a company in exchange solely or mainly for shares which the company allots to the individual or their nominee. The losses cannot be used against the company's profit; instead, they are set against the director/shareholder's income (e.g. director’s fees), again provided the same trade is continuing.

Sideways relief

An alternative to carry forward is offsetting the loss against other general income. Choices for offset include:

• the same year as the loss or
• the previous year or
• both years if the loss is larger than the year of first offset.

The carry back of losses rather than carry forward could result in a tax refund if the business paid tax in that year.

Importantly, for losses arising in the 2023/24 tax year or earlier, the loss must have been calculated using the accruals basis of accounting. Losses arising in 2024/25 onwards are eligible for sideways relief against general income, irrespective of whether they are calculated using the cash or accruals basis.

Similar to the restriction regarding carried forward losses, all the sideways relief losses must be offset until ultimately used up or there is no income left. Again, this means that the personal allowance may be lost. However, with sideways relief, there is a further restriction in the form of the 'annual cap' which limits the available sideways loss to the greater of £50,000 or 25% of the taxpayer’s adjusted total income per year. The intention of the cap is to limit excessive claims.

Starting in business

It is a fact that, for various reasons, approximately 50% of businesses fail within the first three years of trading, with many making losses. As an extension of the sideways relief, if a loss occurs in any of the first four tax years of trading, a new self-employment business can set that loss against total taxable income of the three tax years immediately before the loss year. The restriction is in the order of offset. The rules state that the loss must be used against an earlier year first and then, if not fully offset against a later year. Again, losses arising in 2023/24 and earlier periods must be calculated using the accruals basis to be eligible for this type of relief, whereas for 2024/25 onwards they can be calculated using either the cash or accruals basis.

Terminal loss relief

The final relief available for trading losses offset is via terminal loss relief on cessation. This relief allows losses incurred in the final 12 months of trading to be used against profits of the trade in the year of cessation and those of the previous three years, potentially resulting in a tax refund.

Practical point

Should a tax return already have been submitted for one year and a loss made in the following year, the claim to carry back the loss can be made on an amended return, as a self-assessment tax return can be amended 12 months after the 31 January deadline for the tax year in question. If the 12-month window has passed, the return cannot be amended online and a letter to HMRC will be required.

A property rental business will have a start date, and it is important to know when this is. A landlord will normally undertake some preparatory work before letting their first property, and it is important to know when the preparatory work ends and the property business begins.

In their Property Income Manual, HMRC make the point that ‘where the rental business is letting property, the business can’t begin until the first property is let.’ Once the first property has been let, the property rental business exists, and the landlord can deduct subsequent expenses incurred wholly and exclusively for the purposes of the business when calculating the profits of that business.

Single property business

It is important to note that, regardless of the number of properties that a landlord has, they will normally be treated as parts of the same property business where owned by the same person acting in the same legal capacity. However, where a landlord has properties in the UK and outside the UK, the UK properties will form one rental business and the overseas properties another rental business. Although separate rules currently apply to furnished holiday lettings, a landlord who has furnished holiday lettings and other lets in the UK will only have a single UK property business.

Acquiring further properties

Once the first property has been let and the property business is up and running, any expenditure incurred in preparation to letting second and subsequent properties will be incurred by the existing property rental business and will be deductible in calculating the profits of that business, as long as the wholly and exclusively test is met. The pre-letting expenditure rules are not relevant to preparatory activities in relation to subsequent properties once the business has started.

Pre-letting expenses

Expenses incurred before the first let may be deductible under the pre-trading rules. Under these rules, the expense is deductible if it is incurred in the seven years prior to the start of the property rental business, and the expense would have been deductible if it had been incurred once the property rental business had started. Where these conditions are met, the expense is treated as if it had been incurred on the day on which the property rental business started, and relief is given in calculating the rental profits for that period.

Similar rules apply to capital expenditure. Where capital allowances are available, any qualifying expenditure is treated as incurred on the start date and is taken into account in calculating capital allowances for the first period of account.

There are various reasons why a person may not have told HMRC about the tax that they owe, ranging from a simple oversight to the deliberate evasion of tax. Regardless of the reason, if you have failed to declare income and gains on which tax is due, it is always better to take action to correct the situation than to wait to be ‘found out’ by HMRC.

There are various different ways in which a disclosure can be made, and the option that is right for you will depend on your particular circumstances.

The digital disclosure service

Individuals and companies can use the digital disclosure service to tell HMRC about errors that relate to income tax, capital gains tax, inheritance tax, corporation tax, National Insurance or the Annual Tax on Enveloped Dwellings. It cannot be used to tell HMRC about errors relating to VAT. The service can be used regardless of whether the error arose despite taking reasonable care, as a result of carelessness or because of deliberate actions.

There are various steps to follow.

The first step is to notify HMRC that you wish to make a disclosure via the digital disclosure service (see www.gov.uk/guidance/tell-hmrc-about-underpaid-tax-from-previous-years). At this stage it is not necessary to provide details of the income or gain. After making your notification you will receive a unique disclosure reference number (DRN) and a payment reference number.

The next stage is to make the disclosure. This can be done once you have the DRN, and must be done within 90 days of the date on which HMRC acknowledged your notification.

You will also need to calculate what you owe, and it is advisable to take professional advice. You will also need to work out the interest and penalties that are due. HMRC have an online calculator which can be used for this purpose. Interest is charged from the date that the tax was due to the date that it was paid.

The number of years covered by the disclosure would depend on the reason for the error – if you took reasonable care, the maximum period HMRC can go back is four years, if you were careless, it is six years, but if you deliberately misled HMRC, they can go back 20 years.

As part of your disclosure you will need to make an offer to HMRC.

Payment should be made when you submit your disclosure using the payment reference issued by HMRC.

If HMRC are satisfied that you have made a full disclosure, they will accept it. They may undertake further checks before accepting the disclosure. Where a disclosure is accepted, HMRC will send a letter of acceptance, which together with your offer letter forms a binding contract. If the disclosure is found to be incorrect or incomplete, it will not be accepted, Disclosures are unlikely to be accepted if they are made after HMRC have opened an enquiry or a compliance check. HMRC will contact you if they cannot accept the disclosure. Where this is the case, they may seek higher penalties or, in cases of fraud, consider a criminal investigation.

The contractual disclosure facility

The contractual disclosure facility (CDF) should be used where a disclosure is being made because you deliberately failed to tell HMRC about tax that you owe. This facility should only be used to admit tax fraud – it should not be used if you made an error despite taking reasonable care or you were careless.

If HMRC suspect you of tax fraud, they may offer you a contract through the CDF.

Specific campaigns

From time to time, HMRC run specific campaigns related to the non-disclosure of a particular type of income. Details of specific campaigns can be found on the Gov.uk website.

For example, HMRC have a specific form for telling them about undeclared sales arising from misuse of your till system (see www.gov.uk/guidance/make-a-disclosure-about-misusing-your-till-system).

If you provide your services personally to an end client through your own limited company or other intermediary, you may fall within the scope of either the off-payroll working rules or the anti-avoidance rules known as ‘IR35’. Both aim to redress the tax and National Insurance balance where the worker would be an employee if they provided their services directly to the end client; however, the responsibility for applying the rules differs. Under the off-payroll working rules, it is the engager who must decide if they apply, whereas the responsibility for assessing whether the engagement falls within the IR35 regime, and applying the rules if it does, falls on the worker’s personal service company or other intermediary.

IR35 or off-payroll working?

The nature of the end client determines which set of rules must be considered. Where the end client is a large or medium-sized private sector organisation or one in the public sector and they engage workers who provide their services through an intermediary (such as a personal service company), they will need to determine whether the worker would be an employee if they provided their services directly. Where this is the case, the end client (or fee payer where different) must deduct tax and National Insurance from payments made to the worker’s intermediary, rather than making the payments gross. Here, it is the end client who is responsible for applying the rules, not the worker’s personal service company.

By contrast, small private sector organisations do not need to worry about whether an engagement falls within the scope of the off-payroll working rules. Instead, the onus falls on the worker’s personal service company to determine whether the engagement is within IR35.

Know your end client

In order to ascertain whether you need to consider the IR35 rules, you need to know whether the client to whom you provide your services via your personal service company or other intermediary is a small private sector organisation. This will be the case if the organisation does not meet two or more of the following:

Annual turnover of more than £10.2 million

Balance sheet total of more than £5.1 million

More than 50 employees.

Often, particularly at the smaller end, it will be apparent. If not, you should check with the client.

Complying with IR35

If your end client is a small private sector organisation, you will need to determine whether the engagement falls within the scope of the IR35 rules. The first stage is to assess whether you would be an employee if you provided your services to the client directly. You can use HMRC’s Check Employment Status for Tax (CEST) tool to do this (see www.gov.uk/guidance/check-employment-status-for-tax). If the answer is yes, you will need to work out the deemed employment payment and calculate the tax and National Insurance due on this, and report it to HMRC by 5 April at the end of the tax year.

Many parents who fell within the ambit of the High Income Child Benefit Charge (HICBC) opted not to receive child benefit, rather than to receive it and pay it back in full in the form of the charge. However, changes to the HICBC which came into effect from April this year mean that some parents who previously lost all their child benefit to the charge will now be able to retain some or all of it. Where this is the case, they will need to restart their child benefit payments so that they do not lose out.

Changes to the HICBC

Prior to 6 April 2024, the HICBC applied where a child benefit claimant and/or their partner had adjusted net income of more than £50,000 a year. The charge was equal to one per cent of the child benefit for the year for every £100 by which adjusted net income exceeds £50,000. Once adjusted net income reached £60,000, the charge was equal to the child benefit for the year.

From 6 April 2024, the HICBC applies where the claimant and/or their partner have adjusted net income of more than £60,000 a year. The charge is equal to one per cent of the child benefit for the year for every £200 by which adjusted net income exceeds £60,000. Once adjusted net income exceeds £80,000, the charge is equal to the child benefit for the year.

Where both the claimant and their partner have adjusted net income in excess of the trigger threshold, the charge is levied on the person with the higher adjusted net income.

Impact on child benefit

It is always important to claim child benefit to preserve the associated National Insurance credits, particularly where the claimant will not pay sufficient National Insurance contributions for the year to be a qualifying year.

However, where the charge is equal to the child benefit for the year, it may be preferable to opt not to receive the child benefit than to receive it only to repay it in the form of the HICBC.

For 2023/24 and previously, where the person liable for the charge had adjusted net income of £60,000 or above, the charge equalled the child benefit for the year. Consequently, a decision may have been made not to receive the benefit. However, as a result of the changes to the HICBC thresholds from April 2024, the charge will only be equal to the child benefit for the year once adjusted net income reaches £80,000.

As a result, where adjusted net income is £60,000, the HICBC would be 100% of the child benefit in 2023/24, but in 2024/25, there would be nothing to pay. Similarly, where adjusted net income is between £60,000 and £80,000, the charge would be equal to 100% of the child benefit in 2023/24 but less than 100% of the child benefit in 2024/25.

Claimants who had opted not to receive child benefit and either they or their higher earning partner has adjusted net income of at least £60,000 but less than £80,000 will now be able to retain some or all of their child benefit. Consequently, they should restart their payments so that they do not lose out. It is important to do this without delay as it can take up to 28 days before you will receive your first payment. The Child Benefit Office will let a claimant know in writing whether they will receive backdated payments and, if so, how much.

Payments can be restarted by using the online service or by completing the online form. Alternatively, HMRC can be contacted by phone on 0300 200 3100 or by post by writing to them at the following address:

HM Revenue and Customs – Child Benefit Office

PO Box 1

Newcastle upon Tyne

NE88 1AA.

While having more money in your bank account than is needed may seem ideal, for director shareholders of a company with surplus cash, it could be storing up future problems. The poor or non-existent interest rates for company bank accounts and the impact on shareholders' ability to benefit from various tax reliefs, including Inheritance Tax Business Relief (formerly known as Business Property Relief), are potential consequences that should be considered and prepared for.

Initially a cash surplus is likely to be retained profits rather than actual money in the bank. Some of the money may have been allocated to pay creditors, including future tax bills. If these liabilities have already been taken into account and there is cash available surplus to immediate needs after taking into account salary and maximum dividend payments, all potential and future liabilities and monies set aside for expanding the business, etc, then letting cash sit in a bank account is not effective tax planning.

Surplus cash on closure

Often companies build up large cash balances because the director shareholders do not want a large personal tax charge (which may result from paying dividends). The owners may be looking to withdraw the funds when the business is sold or closed. However, that may only be deferring the tax liability because treating a distribution as capital is only available on the company's closure if the total amount paid to all shareholders is less than £25,000. Where the distributable amount exceeds this, the shareholders pay income tax at the dividend tax rates.

The situation where having a surplus company cash balance may impact on tax planning is when considering Business Relief (BR). Ownership of a business, or share of a business, is included in the owner's estate, although BR of either 50% or 100% (depending on the type of the business assets) is available. The worst-case scenario is that excess cash can affect the trading status of a business, turning it from a trading company to an investment company, which can result in BR being denied. In practice, HMRC believes that cash generated from 'trading activities' should not necessarily prejudice a company’s 'trading' status. Any surplus cash would have to be actively ‘managed’ before it was considered a ‘non-trading or investment' activity of the business. However, as soon as income from investments (including cash) exceeds trading income, the company is no longer a 'trading' company. Accordingly, BR will not be available on closure, and capital gains tax (CGT) will be charged at the usual rates on any amount withdrawn (i.e., for 2024/25 at either 10% for basic rate taxpayers or 20% for higher or additional rate taxpayers).

A large cash balance could also reduce the value of the company qualifying for BR by the value of the ‘excepted asset’ (an asset or cash not used wholly or mainly for business purposes in the previous two years), unless it can be shown that the cash was being retained for a specific and identifiable purpose.

Transfer of accumulated profits

If you can accumulate cash, navigate any IHT problems and pass your company shares to a beneficiary on death, then from a CGT perspective, the beneficiary will effectively receive the accumulated profits tax free. The reason for this CGT-break is that the beneficiary receiving the shares is treated for tax purposes as having acquired them at market value on the date of death. Therefore, a beneficiary could wind up the company or sell it immediately after inheriting the company, taking the accumulated cash profits and there would be no CGT to pay.

Practical point

The most tax-efficient method of withdrawing surplus cash is by the company employer making pension contributions. The company can contribute to a director's pension without the salary restriction that self-employed workers face. Contributions are tax free up to £60,000 a year, with contributions above this limit subject to a tax charge.

Selling your house and garden separately – why the order matters

There are circumstances in which it may be desirable to sell some or all of a garden or the land attached to a residence separately from the residence itself. Where this is on the cards, it is essential to plan ahead to prevent an unwanted tax liability arising accidentally. Here, it is vital that the separate sales are conducted in the correct order to preserve private residence relief.

Nature of private residence relief

Private residence relief prevents a capital gains tax liability from arising where a property is sold for a gain which has been the owner’s only or main residence throughout the period for which they have owned it. If the property has not been the only or main residence throughout, private residence relief will apply to the periods for which it was occupied as such, the last nine months of ownership and also any periods which count as a qualifying absence.

Extension to garden and grounds

Private residence relief applies not only to the property itself, but also to land that is enjoyed with the residence ‘as its garden or grounds up to the permitted area’. The permitted area is set at 0.5 hectares. However, a larger area may qualify if it is required for the reasonable enjoyment of the residence having regard to the size and character of the dwelling house.

Does the land qualify?

When looking to sell off a parcel of land separately to the main residence, the first question to ask is whether the land in question forms part of the garden and grounds. Consideration will need to be given to the size and whether this exceeds the permitted area and, if it does, whether it can reasonably be regarded as necessary for the reasonable enjoyment of the property. Further, a residence’s garden and grounds will normally be land that surrounds a property and is enclosed with it. Land that is physically separated from the property will not usually be part of the grounds, and a plot of land a short distance from the property will not normally benefit from the relief, even if it is used as a garden. However, it is important to consider the facts in relation to the particular property, and where a house has been built with the garden on the other side of the street and the garden has been conveyed with the property, the relief should extend to the garden.

If the land being sold does not form part of the garden or grounds of the residence, it will not benefit from private residence relief and any gain arising on the sale of the land may be liable to capital gains tax.

Land sold first

Provided that the land being sold is part of the garden or grounds of the main residence, if it is sold separately ahead of the main residence, it will qualify for private residence relief. As long as the associated property has been the main residence throughout the period of ownership, the gain will be sheltered in full. The part disposal rules will apply.

Land sold after the property

The availability of private residence relief for the land is contingent on there being an associated property which is occupied as an only or main residence. Once the property has been sold, this is no longer the case. Here, the timing of the sales is crucial.

HMRC’s view is that if a residence and part of the garden are sold separately and the house is sold first, if the date of the contract for the subsequent sale of the land is before the sale of the house has completed, the sale of the land will benefit from private residence relief. However, if the contract date for the sale of the land is after the sale of the property has completed, relief will be lost.

Where a property has at some time been a main residence, certain periods of absence are treated as periods of residence for the purposes of private residence relief (PRR). With some planning, it is possible to take advantage of this to minimise a taxable gain arising on the disposal of a property.

Three-year absence for any reason

One of the permitted absences is a period of absence of up to three years for any reason. This will count as a period of residence provided that the owner lived in the property as a main residence prior to the period of absence and also following the period of absence. This rule provides the potential to reduce the capital gains tax bill on the sale of a former home which has been let out by moving back into it before it is sold.

Example 1

Karen purchased a flat in January 2014 for £150,000. She lived in it until March 2022. She then purchased a new home, keeping the flat and letting it out. In 2024, she decides to sell both properties to buy a bigger home. She sells her house first, moving back into the flat in June 2024. The flat is sold for £400,000 and the sale completes in October 2024.

The flat was Karen’s main residence from January 2014 to March 2022. She was then absent from the property until June 2024 – a period of two years and three months, before living in the property again from June 2024 to October 2024 as her main residence.

As the period of absence was less than three years and was bookended by periods where the property was her main residence, the whole gain of £250,000 is sheltered by private residence relief and there is no capital gains tax to pay.

Example 2

Harry bought a flat in January 2018 which he lived in for three years. He then bought a house with his girlfriend. The flat is let until it is sold in October 2024, realising a gain of £200,000. Harry owned the flat for six years and nine months (81 months) and occupied it as his main residence for three years (36 months). As the property had at one time been his main home, the final nine months of ownership will also qualify for private residence relief.

Consequently, the gain attributable to 45 months of ownership (£111,111) will be sheltered by private residence relief. However, the remaining gain of £88,889 (attributable to 36 months’ ownership) will be chargeable to capital gains tax, subject to any available annual exempt amount and unused losses. Had he moved back into the property prior to sale, this gain could have been sheltered from capital gains tax.

Timing

Careful planning can further increase the exempt gain. Where a property has been lived in as a main residence at some point, the last nine months of ownership will qualify for private residence relief. Consequently, while the property must be lived in again after the absence for it to attract relief, the owner can move out again nine months before disposal and retain relief for that period. This will allow a period of up to three years and nine months during which the property was not occupied as a main residence to benefit from private residence relief.

When starting a business, there are a number of ways in which this can be done. Options include operating as a sole trader, forming a partnership or setting up a limited company. Of these, operating as a sole trader is the simplest.

Taxes you must pay

If you run an unincorporated business as a sole trader, you are self-employed for tax purposes. If you make a profit, you will need to pay income tax on that profit if your total taxable income for the year is more than your tax-free allowances. Unlike a company, the tax bill for your business is not worked out separately; rather, it is taken into account in working out your overall personal tax liability for the tax year. Depending on your profit level, you may also need to pay Class 4 National Insurance.

Registering as a sole trader

You only need to tell HMRC about income from self-employment if you earn more than £1,000 in the tax year before deducting expenses. The £1,000 limit applies across all your self-employments, rather than per business. This £1,000 limit is known as the trading allowance.

Where your income exceeds the trading allowance, you will need to register for Self Assessment if you are not already registered. You can do this online (see www.gov.uk/register-for-self-assessment). This must be done by 5 October following the end of the tax year in which a liability first arose.

National Insurance

If your profits from self-employment are more than £12,570 for 2024/25, you will need to pay Class 4 National Insurance. For 2024/25, this is at the rate of 6% on profits between £12,570 and £50,270 and at the rate of 2% on profits in excess of £50,270. The payment of Class 4 National Insurance will earn you a qualifying year for state pension purposes.

If your profits are between £6,725 and £12,570, you will not have to pay any Class 4 National Insurance, but you will be awarded a National Insurance credit which will give you a qualifying year for state pension purposes for free. If your profits are less than £6,725 for the tax year, you will not receive the National Insurance credit. However, you can pay Class 2 contributions voluntarily at the rate of £3.45 per week to help build up your state pension entitlement.

Keeping records

You will need to keep records of your income and business expenses so that you can work out your profit. The default basis of accounts preparation is now the cash basis, under which you only take account of cash in and cash out. When working out your profit, you can deduct the £1,000 trading allowance rather than actual expenses if this is more beneficial (which will be the case if your actual expenses are less than £1,000).

Paying tax and National Insurance

Under Self Assessment, your tax and Class 4 National Insurance bill must be paid by 31 January after the end of the tax year to which it relates (so by 31 January 2026 for your 2024/25 profit).

If your tax and Class 4 National Insurance bill for the previous tax year is £1,000 or more, you will need to make payments on account. This means that you will have to pay 50% of the previous year’s liability on 31 January in the tax year and 31 July after the end of the tax year. Any balance due must be paid by 31 January after the end of the tax year.

It is prudent to put away money each month so that you have it available to pay your tax bill. Alternatively, you can set up a budget plan with HMRC.

As ever, the answer to this question depends on what type of professional fees have been incurred.

Professional fees are income and corporation tax deductible if incurred 'wholly and exclusively' for the purpose of the trade, profession or business. However they must not be capital in nature or losses not connected with/ arising out of the trade. The situation is not always clear-cut and the circumstances surrounding the payment and the precise nature of the professional services provided must be examined.

Wholly and exclusively

Whether a payment can be claimed under the 'wholly and exclusively' rules can be explained using accounting fees as an example. Fees incurred for preparing accounts for commercial reasons satisfy the ‘wholly and exclusively’ test. In strictness, any additional fees incurred for computing and agreeing the tax liability on trading profits are not allowable. However, HMRC will not disallow the fees where the work relates to normal, recurring expenses incurred in preparing accounts or agreeing the tax liability.

In comparison, the costs of completing a personal tax return or a capital gains tax computation are not allowable as they are not wholly and exclusively incurred. However, in practice, HMRC's approach is that the cost of preparing the return as a proportion of the total fee would be too small to be material.

Capital assets

Where professional fees are incurred in connection with the acquisition, disposal or modification of a capital asset, the situation becomes more complex. Fees relating to capital expenditure are allowable but against capital gains tax rather than income tax.

Leases

Fees incurred on the renewal of a short lease with the owner’s consent are a capital expense, but HMRC has stated that, as the amount is likely to be small, such fees may be allowed against income tax on de minimis grounds. Situations where the amounts are sizeable and as such deductible as a capital expense include:

• where the new lease is for a long term (e.g. more than 50 years); or
• where the lease provides for the payment of a premium – the disallowance may be limited to a proportion of the renewal expenses appropriate to the premium, etc.

Restructuring of a business

Professional fees incurred in connection with the acquisition, alteration, enhancement or defence of the fundamental structure of a business are generally deemed to be capital. HMRC gives these activities as examples:

• forming, renewing, varying or dissolving a partnership
• negotiating a merger between companies or partnerships
• forming and registering a company
• defending against a petition by shareholders to wind up a company.

Loan finance

Fees incurred in connection with raising, repaying or replacing long-term finance, or rearranging the terms on which such finance is borrowed, would not be income tax deductible as the loan would be capital. The expense would follow the reason for the loan which is raising capital. However, a statutory deduction applying only to income tax allows the incidental costs of raising loan finance. Any costs not expressly relieved (e.g. a penalty for early repayment) remain allowable but as capital.

In calculating the profits of a trade using the cash basis of accounting, the general rule is that no deduction is allowed for interest paid on a loan. For companies, the incidental costs of raising loan finance are dealt with under the loan relationships rules.

Plant and Machinery

Should the business use traditional invoice accounting, professional fees (e.g. survey fees, architects’ fees, quantity surveyors’ fees, legal costs) incurred relating to the acquisition, transport and installation of plant or machinery are added to the cost as expenditure incurred under capital allowances on the provision of the plant or machinery.

Landlords with furnished holiday lettings (FHLs) currently enjoy favourable tax advantages compared to those letting residential property on longer term lets. However, these advantages are to come to an end, and from 6 April 2025 FHLs will be treated as for other residential lets. However, transitional rules will allow landlords to access some of the capital gains tax reliefs for a limited period.

Interest and finance costs

Landlords with FHLs were unaffected by the restrictions in the relief for interest and finance costs that apply to unincorporated landlords letting residential property and were able to continue to deduct interest and finance costs in full in calculating the taxable profit for their FHL business. However, from 6 April 2025 this is to come to an end and relief for interest and finance costs will be given as a basic rate tax reduction. Corporate landlords letting holiday accommodation will still be able to deduct interest and finance costs in full.

Capital gains tax reliefs

One of the main advantages of the current FHL regime is the ability to access a range of capital gains tax reliefs available to traders. These include access to Business Asset Disposal Relief (BADR), business asset rollover relief and gift holdover relief.

Under transitional rules, where the FHL business ceased prior to 6 April 2025 and the conditions for BADR were met, the relief will continue to apply beyond that date to a disposal occurring within the normal three-year period following cessation. The ability to access BADR is very valuable as it reduces the rate of tax on the gain on the gain to 10% – saving £1,400 for every £10,000 of gain where the gain would otherwise be chargeable at the higher residential rate of 24%. Unincorporated landlords looking to bring their FHL business to an end may wish to consider a cessation date prior to 6 April 2025, particularly where the properties are pregnant with gain.

Access to the other capital gains tax reliefs will also be lost from 6 April 2025. However, where the criteria for relief include conditions that apply in a future tax year (such as the business asset rollover relief requirement that the new asset must be acquired within three years from the date of disposal of the old asset), the conditions will not be disturbed where the FHL rules were met prior to the abolition of the regime.

It should be noted that an anti-forestalling rule will apply which will prevent the use of unconditional contracts in a bid to secure access to the reliefs. This will apply to contracts entered into on or after 6 March 2024.

Losses

From 6 April 2025, an unincorporated landlord with both holiday lets and other lets will have a single property business. The profits and losses from all properties will be combined to arrive at the profit or loss from the business as a whole. Where a landlord has unused losses from an FHL business as at 5 April 2025, these will be carried forward and will be available to offset against the future profits of the combined property business going forward.

Pensions

Currently, profits from an FHL business count as relevant earnings for pension purposes. This will cease to be the case from 6 April 2025. As tax relieved pension contributions are capped at 100% of earnings (or £3,600 where this is higher), subject to the availability of the annual allowance, FHL landlords may wish to consider making pension contributions in 2024/25.

Furnishings and fixtures

Landlords with FHL are currently able to claim capital allowances on furnishings and fixtures. This will usually be in the form of the Annual Investment Allowance to secure 100% relief for the expenditure in the year in which it is incurred. However, the landlord has the option to claim a writing down allowance instead and, where the landlord has a balance on the capital allowances pool, they will be able to continue to claim capital allowances beyond 5 April 2025 until that balance has been extinguished.

Going forward, no relief will be available for new domestic items from 6 April 2025. Instead, relief will be available on a like-for-like basis when these are replaced under the rules for replacement of domestic items.

More flexibility

Access to the FHL rules require the property to meet strict conditions as to availability for letting and days actually let. Although the landlord will need to meet reduced requirements to access business rates relief, the removal of the FHL rules will provide greater flexibility as to how the property is let. For example, a landlord could let a property as a holiday let over the summer and on a longer-term let over the winter without worrying about falling foul of the FHL rules. This may lead to an increase in rental income.

If you are entitled to a refund of tax deducted from savings and investment income, you can claim the refund using form R40 if you do not complete a Self Assessment return. If you do complete a Self Assessment tax return, you do not need to make a separate claim as any tax due to you will be taken into account in computing the amount due or repayable under Self Assessment. A claim can be made on form R40 for the current tax year and the previous four tax years.

If you are making the claim for yourself, you make the claim online or by using the postal form. If you are making the claim on behalf on someone else, you will need to use the postal form, which is available on the Gov.uk website at www.gov.uk/guidance/claim-a-refund-of-income-tax-deducted-from-savings-and-investments.

To make the claim, you will need to provide your personal details and details of your income. This will include employment income, pension income, state benefits, interest and dividend income, income from trusts, settlements and estates and income from UK land and property. You will also need to provide details of payments made under gift aid, and indicate whether you are entitled to the blind person’s allowance and/or the married couple’s allowance. You must also provide details of the address to which the repayment should be sent.

Using an agent

An agent can also make a refund claim on your behalf. Since 30 April 2024, agents claiming a refund of income tax deducted from savings and investment income on behalf of their clients must use the new standard HMRC R40 form. In the event that the agent is the nominated third party to whom the repayment is to be paid, they must complete the nomination section on the new form and provide their agent reference number (ARN). If the claim is made on a different version of the form, it will still be accepted, but the nomination section will be disregarded and the claim will be paid direct to the client rather than to the agent. The client will also need to complete the section of the form indicating that they are nominating a professional to act on their behalf. If this section of the form is not completed correctly, the repayment will be made to the client rather than to the agent.

R40 claims for interest paid on payment protection insurance

Where the R40 repayment claim relates to interest on payment protection insurance (PPI), evidence of the original PPI payment must be submitted when making the claim. The document must show the gross interest, the tax deducted and the net interest. This could be a certificate from the company that made the refund, showing the tax deducted from the refund, or a final response letter from the company making the refund.

If it works correctly, the tax that is collected under PAYE will exactly match the tax that is due for the year. However, in practice, this balance may be disturbed, for example, because benefits included in a tax code change or a wrong tax code is used, and an employed taxpayer may pay too much or too little tax as a result. Where this is the case, HMRC will send out a letter. This may be a tax calculation letter (P800) or a Simple Assessment letter. The letter will explain how to pay any taxed that is owed or, where the taxpayer has overpaid tax, how to claim a refund. A letter will only be sent out where the taxpayer is employed or in receipt of a pension. Where the taxpayer is within Self Assessment, over and underpayments are dealt with through the Self Assessment system.

The letters are normally sent out between June and the end of November each year. A person may receive a tax calculation letter if the wrong tax code has been used, if they finished one job and started another in the same month and were paid for both jobs in that month, they started receiving a pension or received Employment and Support Allowance or Jobseeker’s Allowance.

A Simple Assessment letter will be sent where a person owes tax that cannot be collected via an adjustment to their tax code, they owe tax of more than £3,000 or have tax to pay on their state pension.

Claiming a refund

HMRC have changed the way in which they deal with refunds where tax has been overpaid under PAYE. Previously, where a refund had not been claimed, HMRC would send a cheque out automatically 21 days after the issue of the tax calculation letter. They no longer do this and, where tax has been overpaid under PAYE, the taxpayer will only receive a refund if they actually claim it. The tax calculation letter will explain how to do this.

Where the letter states that the refund can be claimed online, this can be done by visiting the Gov.uk website at www.gov.uk/tax-overpayments-and-underpayments/if-youre-due-a-refund. The refund can be made via bank transfer. Alternatively, a cheque can be requested.

Refunds can also be claimed through the taxpayer’s personal tax account or the HMRC app. A taxpayer can also contact HMRC on 0300 200 3300 and request a cheque.

Taxpayers who do not receive a tax calculation letter but who think that they have paid too much tax under PAYE should contact HMRC.

The remittance basis of tax is an optional tax treatment that allows individuals who are resident but not domiciled in the UK to pay tax on foreign source income and gains only if they are remitted to the UK in exchange for paying a fee. The fee is set at £30,000 where the person has been resident for at least seven of the previous nine tax years and at £60,000 where the person has been resident in at least 12 of the previous 14 tax years. Where unremitted income and gains are less than £2,000 in the tax year, no fee applies.

For all UK tax purposes, an individual is deemed to be domiciled in the UK if they have been resident in the UK for at least 15 of the previous 20 tax years.

The remittance basis will cease to apply from 6 April 2025. Instead, it will be replaced with a new residence-based regime.

The new regime

At the Spring 2024 Budget, the then Government announced a serious of changes to the rules for non-doms, including the abolition of the remittance basis and, subject to some transitional rules, the introduction of a new residence-based regime. The proposals are being taken forward by the current Government, albeit with some changes, and will apply from 6 April 2025.

Under the new regime, all UK residents will be taxed on their worldwide income wherever arising, regardless of their domicile. This is subject to an exemption for new arrivals who will benefit from a 100% tax exemption for foreign source income and gains for their first four years of residence, provided that they have not been UK resident in the previous ten years.

A form of Overseas Workday Relief will continue to apply. This provides relief from UK tax for earnings from work performed abroad which are not remitted to the UK. The Government are to consult on what this will look like going forward.

The previous Government’s proposals included a 50% reduction in the foreign income subject to UK tax in 2025/26 (the first year of the new regime) for individuals who lose access to the remittance basis from 6 April 2025 and who are not eligible for the 100% exemption for new arrivals. The new Government are not going ahead with this.

UK residents who are not able to benefit from the four-year exemption for new arrivals will be liable to capital gains tax on foreign gains. However, where the remittance basis has been used, UK capital gains tax will only apply to gains arising after the ‘rebasing date’ which is to be announced at the October 2024 Budget.

Foreign income and gains that arose prior to 6 April 2025 while the individual was taxed under the remittance basis will continue to be taxed when remitted to the UK. This will apply to remittances of pre-6 April 2025 foreign income and gains of individuals eligible for the four-year exemption for new arrivals.

A temporary repatriation facility will be available to individuals who have been taxed on the remittance basis which will enable them to remit foreign income and gains arising before 6 April 2025 and pay tax at a reduced rate on the remittance for a limited period after the remittance basis has ended. The length of this period has yet to be announced.

Inheritance tax

The current inheritance tax rules are domicile based. This will cease to be the case from 6 April 2025 when inheritance tax will also become residence based. This change will affect the property within the charge to inheritance tax.

The proposal is that a basic test will apply to determine whether non-UK assets are liable to UK inheritance tax. This will depend on whether the person has been resident in the UK for ten years prior to death or another chargeable event and will be subject to a proviso that will keep the person within the scope of UK inheritance tax for ten years after they leave the UK.

The use of excluded property trusts to keep assets outside the scope of inheritance tax will also be brought to an end.

Following the pandemic, flexible working hours are on the increase. This shift has provided employees with the legal right to request flexible working from the first day of their employment. However, there is no statutory right for employees to work from home as yet. Homeworking is already the norm for many self-employed.

Where existing space is not suitable at home for a room to be set aside as an office, many may look to build an extension, convert a loft or build a garden room. Should the employer pay the cost, a benefit-in-kind charge may arise as the employee is deemed to gain a benefit from using a company asset.

For the self-employed, tax relief cannot be claimed on the cost of the structure itself nor for any other costs directly associated with the building and office installation, including delivery charges if a ready-made office is purchased. The cost of initial decoration also falls within this category. However, repairs, including redecoration costs, are allowed. The cost of heating and lighting is tax deductible, as is the water supply if metered separately from the home.

Capital allowances

Tax relief may be available under the plant and machinery rules for certain payments. HMRC has issued a definitive list of claimable items and the contractor must itemise their invoice accordingly to show items that can be claimed. Such items include the thermal insulation of the building, electrics, kitchen equipment and fittings, washbasins/sinks/sanitaryware, furniture and furnishings (e.g. curtains, desks, etc.) and fire alarm systems.

Remember that capital allowances can only be claimed if accounts are prepared using the traditional (accruals) accounting method; capital allowances cannot be claimed if the cash based accounting method is used.

VAT

The VAT rules differ from those for income tax and corporation tax. Not only can VAT be reclaimed on any running expenses relating to office use but also on the cost of building or purchase of a ready-made office, as well as for any decoration. The VAT relating to the business proportion can be reclaimed should the office be used partly for business and partly for private purposes - any apportionment must be on a just and reasonable basis.

Businesses on the flat rate scheme (FRS) can reclaim the VAT paid on invoices exceeding £2,000 only if that invoice shows the cost of goods purchased separate from the labour cost; no split is required for invoices under £2,000. In addition, there is no restriction on private use under the FRS.

Business asset disposal relief (BADR)

A claim under the BADR rules may be possible where BADR is claimable on the disposal of shares, and there is an associated disposal of assets used by the company. Such assets can include premises used by the business but personally owned by the director. The main requirement for relief in such circumstances is for the asset to have been used in the trade throughout the two years before the share disposal.

Practical point

Problems may arise should the office be attached to the main residence as areas of a private residence 'used exclusively for the purpose of a trade or business, or of a profession or vocation' are denied principal private residence relief.

The current tax regime for furnished holiday lettings has a number of advantages, including the ability to deduct interest and finance costs in full when calculating the taxable profit. This enables the landlord to secure tax relief for interest and finance costs at their marginal rate of tax, something that is advantageous where the landlord pays tax at the higher or additional rates and has a mortgage on properties which are let as furnished holiday lets.

However, the favourable tax regime for furnished holiday lets is to come to an end on 5 April 2025. After that date, unincorporated landlords letting furnished holiday accommodation will be subject to the interest rate restrictions that apply to unincorporated landlords letting residential accommodation outside the furnished holiday lettings regime. This means that relief for interest and finance costs will be given as a tax reduction rather than being deducted in calculating the taxable profits of the property business. The reduction will be capped at 20% of the interest and finance costs.

Using a property company

The interest rate restriction does not apply to corporate landlords, and landlords with furnished holiday lettings may consider incorporating their business when the furnished holiday lettings regime comes to an end. However, while this will enable interest and finance costs to be deducted in full, there are disadvantages as well as advantages.

Incorporating an existing business

Where the landlord already has a furnished holiday lettings business, incorporating that business will have a number of tax consequences.

Stamp duty land tax may will be payable again when properties are transferred into the company.

There will be a disposal for capital gains tax purposes and, as the company will be a connected person, this will be at market value. However, incorporation relief may be available which will delay the point at which the capital gains tax is payable until the shares in the new company are sold.

Setting up a new property company

If a landlord wishes to start letting holiday accommodation, they may wish to do so through a company. Rather than transferring properties owned by the landlord into the company, the company will purchase the properties. Stamp duty land tax will be payable on the purchase.

Taxation of rental profits

Where furnished holiday accommodation is let by a company, the profits will be charged to corporation tax rather than income tax. The rate payable will depend on the profits and will range from 19% to 25%. Thus, the rate paid by the company may well be lower than the rate that the landlord would pay personally. However, unlike an individual, a company does not have a personal allowance so tax is payable from the first pound of profit.

As noted above, the interest relief restriction does not apply to companies, so any interest and finance costs can be deducted in full in calculating the taxable profit.

If a property is sold, any gain will be taxed at the corporation tax rates. By contrast, an unincorporated landlord would pay capital gains tax at either 18% or 24% on residential property gains and would benefit from the £3,000 annual exempt amount if not already used up – something not available to companies. Individuals must report residential gains within 60 days of completion and pay any capital gains tax due within the same window. For companies, there is no separate reporting and the corporation tax on the gain is payable by the normal corporation tax due date, nine months and one day after the year end.

Extracting the profits

Although a company may pay less tax on rental profits than an unincorporated landlord, if the director/shareholder wishes to use the profits outside the company for personal use, these need to be extracted and this may incur further tax charges, reducing the attractiveness of the company set-up. The tax implications will depend on how the profits are extracted and the director’s personal circumstances.

A person who is resident and domiciled in the UK is liable to UK tax on their worldwide income. Consequently, if they have overseas property that they rent out, any rental profits are taxable in the UK.

Separate overseas property business

As far as property rental businesses are concerned, UK properties and overseas properties are treated as being part of different property businesses – the overseas properties will form an overseas property business and the UK properties will form a UK property business. The profit or loss for each business must be calculated separately.

Same calculation rules

The same rules apply to calculate the profits of an overseas property business as apply for a UK property business. However, where a landlord lets furnished holiday accommodation abroad, the current tax regime for furnished holiday lettings only applies where the holiday let is in the UK or the EEA. Where properties are let as holiday lets outside the UK and the EEA, they are treated as for other residential lets.

Use of losses

Where a property business makes a loss, the loss can only be carried forward and set against future profits of the same property business. Thus, if a landlord has both an overseas property business and a UK property business, losses made on the overseas property business cannot be set against a profit on the UK property business and vice versa.

£1,000 property allowance

A landlord letting overseas property can benefit from the £1,000 property allowance. However, each individual is only entitled to one £1,000 allowance rather than one per business.

Foreign tax

Landlords letting overseas property may be liable for tax on their rental profits in the country in which the property is located, so the landlord may be liable to pay tax both in the UK and abroad on the same profits. However, relief is given from the double charge on the same income, either in accordance with the terms of the Double Taxation Treaty with the other country where one exists, or under the UK rules.

Scammers are becoming increasingly adept at fooling people and a favoured tactic is a letter, a text or an email purporting to be from HMRC, often promising a tax refund in exchange for personal and financial data.

During the summer, many taxpayers received a very convincing scam letter which appeared to be from HMRC, seemingly from the Individuals and Small Business Compliance scheme. The letter asked the recipient to provide business bank statements, the most recent set of accounts, VAT returns in PDF format for the last four quarters and a clear photo of either a passport or a driving licence for all the directors for ‘identification purposes’, and for them to email the information to companies-review@hmrc-taxchecks.org. The letter warned that if the information was not provided, they would ‘conduct an investigation and possibly freeze any business activity’ until the investigation is complete. The letter had the look and feel of a genuine HMRC letter, adopting a similar format and font.

It is easy to see why people would be duped, and the threat of having their business assets frozen is enough to panic many people into complying.

So, if you receive a letter which appears to be from HMRC, what can you do to check its authenticity?

The first point is to consider what is being asked and why. There are some red flags in the letter. Firstly, the unique taxpayer reference (UTR) quoted is only six digits, whereas a UTR is ten digits. It is always prudent to check that the UTR quoted on a letter is correct. Further, it is sensible to ask why HMRC would ask for copies of the last filed accounts and VAT returns, which are easily available to them. The request to send photos of a passport or driving licence should also be viewed with suspicion. Finally, the email address to which the documents are to be sent is not a genuine HMRC email address, which would end in ‘gov.uk’.

Genuine HMRC contact

HMRC produce regular updates to help taxpayers gauge whether a communication that appears to be from them is indeed genuine. The guidance can be found on the Gov.uk website. Typically it will list recent communications from HMRC, so the taxpayer can check whether the communication they have received is listed. HMRC will contact taxpayers by letter, text and email, and sometimes will use more than one communication channel.

Stay alert

It is important to be alert to the possibility that a communication which seems to be from HMRC may be a scam. Particular care should be taken as regards clicking on links included in a text or an email. While HMRC may include links to information on the Gov.uk website or to a webchat, other links should be viewed with suspicion – if in doubt, don’t click on the link. HMRC will never send links which offer a tax refund on the provision of personal or financial details, nor will they ask for personal or financial information by text.

Reporting scams

Scam texts can be forwarded to 60599. Suspicious emails, texts, letters and phone calls can also be reported to HMRC by emailing them at phishing@hmrc.gov.uk.

HMRC have a range of powers at their disposal to collect unpaid tax. If you are struggling to pay a tax bill, or know that you will not have the funds available to meet an upcoming bill, it is better to take action than to ignore the problem and hope it will go away – it won’t. Interest will be charged on tax paid late, and late payment penalties may also apply.

Set up a Time to Pay arrangement

Rather than paying your tax bill in one hit, you may be able to set up a Time to Pay arrangement and pay in instalments. Depending on your circumstances, you may be able to set this up online. If not, you can call HMRC to discuss your options. Although interest will be charged, setting up an instalment plan will save late payment penalties. Further details on setting up a Time to Pay arrangement can be found on the Gov.uk website at www.gov.uk/difficulties-paying-hmrc/pay-in-instalments.

HMRC visits

If you have unpaid tax and a Time to Pay arrangement is not in place, HMRC will try and contact you first to discuss options for settling the bill. However, if you do not respond and do not pay what you owe, an HMRC officer may visit you at your home or business premises. At the visit they will discuss the situation with you and try and agree a plan for settling the debt, either in full or in instalments. The HMRC officer will be able to take card payments during their visit.

Debt collection agencies

HMRC may also pass the debt to a debt collection agency to collect on their behalf. A debt collection agency may contact you by letter or text or by phone, but they will not visit you. You can pay the debt collector what you owe. You can also discuss using a Time to Pay arrangement to settle the debt.

Adjusting your tax code

If you pay tax under PAYE, HMRC may be able to adjust your tax code to collect the debt.

Taking possessions to cover the debt

If neither HMRC nor an appointed debt collection agency have been able to collect the debt, HMRC may look to take possession of your goods to cover the debt. They will warn you before they do this and offer you the opportunity to settle the debt first. A formal notice of enforcement will be issued, for which there is a charge. An HMRC officer will visit you and ask you to pay the debt. If this is not done, they will either take possessions there and then to cover the debt or ask you to sign an agreement, which will include a deadline by which the debt must be paid. If the tax debt is not paid by the deadline, the goods will be removed and sold to clear the debt. You will be charged for this. If the amount realised from the sale of the goods is less than the tax debt, you will be liable for the difference; if it is more, you will be paid the excess. HMRC will not take possessions that are essential for your security and wellbeing.

Court proceedings

HMRC may use court proceedings to recover the debt through charging orders, attachment of earnings orders, third party debt orders or from pension payments.

Insolvency

Where all other options have been exhausted, HMRC may apply to the courts to make a person or company insolvent.

If a VAT registered business has taxable income only (including zero-rated sales), it is entitled to full input tax recovery on its expenses, subject to the usual rules. Businesses with exempt income only cannot claim input tax and will not be registered for VAT, in most cases. The 'trap' problem comes when a business makes both taxable and exempt supplies, and incurs VAT on costs relating to both – then some kind of input tax apportionment is needed.

A typical example of a partial exemption business is an estate agent which earns exempt income from mortgage commission and taxable income on commission received when it acts as an agent to sell a property. Input VAT on the purchase of a computer for the sole use by the mortgage broker cannot be reclaimed as the income is exempt. Purchasing a computer solely for use by a sales negotiator will be fully claimable. A computer for the office manager will be treated as an overhead/mixed cost, therefore only part of the VAT can be reclaimed. The problem comes with calculating how much of that overhead input VAT is reclaimable.

Calculation – standard method

The starting point is the concept of ‘direct attribution’ and the need for a business to allocate input tax on its expenses to one of three different categories: expenditure relating to standard rate VAT, expenditure relating to exempt sales and the rest (termed 'residual'). Under HMRC's standard calculation method, this residual input tax is split in proportion to total supplies and expressed as a percentage as follows:

Recoverable percentage of residual input tax =

Value of taxable supplies in the period (excluding VAT)

Total value of supplies in the period (excluding VAT)        × 100

The claimable proportion is an estimated figure calculated each quarter, superseded by an annual adjustment at the end of each tax year when the same formula is used but using annual rather than quarterly figures. To make the calculation easier, the previous year’s recovery percentage can be used (termed the 'in-year provisional recovery rate’) to estimate the claimable residual input tax in each period and finalised by an annual adjustment. The final percentage is then used as the provisional recovery percentage for the next year and so on, saving the need to calculate separate recovery percentages for each period.

In making this calculation, reverse charges and the purchase of capital goods are included.

Calculation – 'special' methods

There are instances where the standard method may not accurately reflect the actual situation, and a different calculation method could potentially allow for more reclaimable VAT. This is particularly relevant for new businesses that are more likely to incur increased start-up costs. A special method can be used if it produces a result that is more 'fair and reasonable' than the standard method.

Examples of special methods can include comparing:

• output values;
• numbers of transactions;
• staff time or numbers (e.g. how many staff work on VATable supplies compared with non-VATable supplies);
• inputs or input tax;
• square footage allocations;
• costs allocations.

Practical point

If the method is subsequently found to be inaccurate, HMRC has the power to issue an assessment to recalculate input tax on a ‘use’ basis. This method does not rely on whether the supply is exempt or not; instead, it is calculated on the basis of use or intended use of input tax bearing costs in the making of taxable supplies.

Special method application

A business wishing to use a different method must submit a declaration explaining why the current method is unsuitable, together with a worked example. Start-up businesses can use an alternative method without HMRC's formal permission.

Practical tip

Care is needed when allocating taxable and exempt invoices. Even the smallest link between an expense and taxable activities is enough to treat the input tax as residual.

Nearly ten years ago in March 2015 the then-Chancellor George Osborne announced a government initiative setting out a vision for the 'end of the tax return' and a 'transformed tax system' under the title of 'Making Tax Digital' (MTD). The MTD start date for small businesses was first planned as being April 2018, then the focus switched to MTD for VAT which commenced on time for most VAT registered businesses, for VAT periods starting on or after 1 April 2019.

Since then, there have been various delays not helped by Covid and many thought the 'initiative' would not happen. However, whilst HMRC is yet to officially confirm that Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will go ahead as from 6 April 2026, a new piece of guidance has been released titled 'Work out your qualifying income for Making Tax Digital for Income Tax' intended to assist those who may be required to submit under MTD. MTD for corporation tax is to be implemented at a date still to be announced.

Reminder – what is MTD?

The two critical requirements for MTD are to:

• Keep transaction records via a 'digital link'; and
• Use compatible software to submit returns to HMRC.

HMRC is looking for 'transparency' between the business's underlying accounting records and tax returns; this, HMRC believes, will reduce the risk of tax error, making compliance and enforcement more efficient.

Digital record keeping will form the basis of submissions with transactions recorded digitally and the details submitted using specific MTD compatible software. The software will electronically link bookkeeping records into HMRC's MTD computers.

Taxpayers will be required to submit 'updates' every quarter (or more frequently if the taxpayer wishes). The 'time window' for submission will be from 10 days before the quarter end to one month and seven days after so as to align with the current VAT return submission deadline.

Such quarterly updates will be on a cumulative basis, allowing errors to be corrected as part of the following update and removing the need to resubmit previous quarters.

A year end filing (termed 'final declaration') will also be required to confirm the previous quarterly submissions' data and include claims such as the restriction of mortgage interest (if such information has not already been included in the 'updates'), capital allowances, claims and other taxable income (e.g. investment and employment income). The submission deadline for this filing will be by 31 January after the year end.

Who will be mandated?

As of 6 April 2026, MTD ITSA will apply to all self-employed individuals, partnerships and landlords (including trusts which receive income from property) whose combined gross income from those sources exceeds £50,000. Those taxpayers with income between £30,000 and £50,000 will come under the scheme a year later, on 6 April 2027. Taxpayers whose income is less than £30,000 are exempt for now (although this is under review).

Note: It is important to note that these thresholds are gross trading/property income and not net or taxable profit. Where a taxpayer has more than one trade or has trading and property income, the total figure must be considered.

The next stage

HMRC advises that it is 'gearing up' for the 6 April 2026 start date and intends to write to all taxpayers who it thinks will likely be mandated into the scheme. HMRC will look at the 2024/25 submission and issue advisory letters as to which taxpayers they think should come under the scheme as from 6April 2026. HMRC also intends to start an advertising campaign to inform taxpayers of the new system, including webinars.

Practical point

Taxpayers who believe they will be mandated into the scheme should consider opening a separate business bank account if they are not already using one for their accounts. Some business bank accounts come with free recording software built in.

Under English property law, there are two ways in which property can be owned jointly – as joint tenants and as tenants in common. The way in which the property is held can have tax consequences. It also determines what happens if one of the joint owners dies.

Joint tenants

Where a property is owned as joint tenants, the owners together own all of the property equally – together they own the whole rather than each owning a specified share.

Where the property is let, the tax implications depend on whether the joint owners are married or in a civil partnership. Where this is the case, the income is deemed to accrue in equal shares and each spouse/civil partner will be taxed on 50% of the income. This may not be the most tax efficient split where the parties pay tax at different marginal rates, but where the property is held as joint tenants, unfortunately, this cannot be changed.

If the joint owners are not married or in a civil partnership, the income is allocated equally between the partners in the absence of an agreement to the contrary. However, the owners can jointly elect for a different income split; each joint owner will be taxed on the income they receive.

For capital gains tax purposes, each joint owner is treated as having an equal share of the property and any gain on disposal is split evenly between the owners, with each being taxed on their share of the gain. This rule applies regardless of whether the joint owners are married/in a civil partnership or not.

Where a jointly owned property is owned as joint tenants, if one joint owner dies, their share automatically passes to the surviving joint owners – they cannot leave it in their will to their children or other beneficiaries, for example. The deceased’s share will form part of their estate at death. Where the joint owners are married or in a civil partnership, the surviving spouse exemption will apply.

Tenants in common

The other option for owning property jointly is as tenants in common. Where this route is taken, each joint owner owns a specified share of the property. This can be helpful from a tax planning perspective.

Where the property is let, the default position for property owned jointly by spouses and civil partners is that it accrues to them equally. However, where the property is held as tenants in common and the underlying beneficial ownership is other than 50:50, they can elect (on form 17) for the income to be split by reference to their underlying shares. This can be useful to ensure that the income is taxed at the lowest possible marginal rate. Where necessary, the beneficial ownership can be changed by making a transfer from one spouse/civil partner to the other. This can be done without triggering a capital gains tax liability as transfers between spouses and civil partners are deemed to be done on a no gain/no loss basis. This option is not available where spouses/civil partners hold a property as joint tenants.

Where the co-owners are not married or in a civil partnership and the property is owned as tenants in common, income is allocated by reference to their ownership shares and each owner is taxed on their share. However, the joint owners can agree on a different income split and will be taxed on the income they receive.

Spouses and civil partners can also take advantage of the no gain/no loss rule to change the underlying beneficial ownership prior to disposal to minimise the capital gains tax payable on any gain. This option is not available where the joint owners are not married or in a civil partnership.

On death, where a property is owned as tenants in common, the joint owner’s share will be passed on in accordance with their will or under the intestacy provisions if they die intestate – it does not automatically pass to the surviving joint owners. This provides the scope for inheritance tax planning.

Overdrawn director’s loan account – must your company pay tax on the balance?

In personal and family companies, the lines between the company’s finances and the director’s finances may become blurred. A director may withdraw money from the company for personal use or may lend money to the company. The company may pay some of the director’s personal bills, and the director may personally meet some company expenses. The director’s loan account is simply an account for recording the transactions between the director and the company in much the same way as a bank account.

At the company’s year end, the director’s loan account may show a zero balance. Alternatively, the account may be in credit. This may be the case if the director has provided a loan to the company or personally met company expenses. The third scenario is that the director’s loan account is overdrawn. Where this is the case, the director owes money to the company.

Implications of an overdrawn director’s loan account

An overdrawn director’s loan account may have tax implications for both the director and the company. This will depend on the loan account balance and whether it is cleared by the corporation tax due date.

As far as the company is concerned, if the director’s loan account balance remains outstanding on the date on which corporation tax for the period is due (which is nine months and one day after the company’s year end), the company will need to pay tax on the balance at that date. The tax is paid at the same time as the corporation tax for the period, but crucially is not corporation tax. The charge is imposed by section 455 of the Corporation Tax Act 2010 and is generally referred to as ‘section 455 tax’.

The rate of section 455 tax is aligned with the dividend upper rate, currently 33.75%. Unlike most taxes, it is refundable once the loan has been cleared, with the tax becoming repayable nine months and one day from the end of the accounting period in which the loan is cleared (i.e. the corporation tax due date for that period).

The tax is to a certain extent voluntary as there will be no section 455 tax to pay if the director clears the overdrawn balance ahead of the corporation tax due date. There are various ways in which this can be done. For example, the director could introduce personal funds to the company, the company could declare a dividend to clear the loan balance or pay a bonus. However, there may be a tax cost of clearing the loan and, where this is higher than the section 455 tax, it may be preferable to pay the section 455 tax instead, reclaiming it when the loan balance can be cleared in a more tax-efficient manner.

If the outstanding loan balance tops £10,000 at any point in the tax year, the director will be liable to a benefit in kind charge on interest on the loan balance at the official rate (assuming the director pays no interest on the loan). The company will also pay Class 1A National Insurance at 13.8% on the taxable amount. However, there is no tax or Class 1A National Insurance to pay if the balance remains below £10,000, enabling a director to borrow up to £10,000 for up to 21 months (if the loan is taken out at the start of the accounting period) tax and interest-free. This can be worthwhile.

If you pay tax through PAYE, as will be the case if you are an employee or a pensioner, you may need to complete a Self Assessment tax return if you have other sources of income, such as income from property or investments or from self-employment. If at least 80% of the tax that you owe is collected through PAYE, you will not have to make payments on account, even if the tax that you owe under Self Assessment is more than £1,000.

The normal deadline for paying tax under Self Assessment is 31 January after the end of the tax year, so by 31 January 2025 for 2023/24 tax. However, if you file your return earlier, you may be able to pay the tax that you owe through PAYE via an adjustment to your tax code.

30 December deadline

To take advantage of the opportunity to pay the tax that you owe for 2023/24 through PAYE, you must file your tax return by 30 December 2024 if you file online. If you have already submitted a paper return by the 31 October paper filing deadline, you may also qualify.

You will not be able to pay your tax through your tax code if:

you do not have sufficient PAYE income for HMRC to collect the tax that is due;

paying tax in this way will mean that more than 50% of your PAYE income is deducted in tax; or

you will pay more than twice as much tax as you do normally.

Further, you can only pay the tax that you owe under Self Assessment in this way if the amount that you owe is £3,000 or less. It is important to note that this limit applies to the total amount of tax that you owe under Self Assessment – if you owe more than £3,000, you cannot make a part-payment to reduce the bill to £3,000 and then pay this through your tax code.

Where the return is filed on time, the amount that you owe is £3,000 or less, you already pay tax under PAYE and you are not otherwise excluded from paying your tax through PAYE, HMRC will automatically adjust your tax code to collect the tax that you owe, unless you specify on your tax return that you do not want the tax collected in this way.

If you are not eligible to pay through PAYE despite your bill being £3,000 or less, you will need to pay what you owe by 31 January 2025, or set up a Time to Pay arrangement with HMRC.

Collection mechanism

To collect tax through PAYE, your tax code will be adjusted so that your tax-free allowances are reduced. The amount of the reduction will reflect both the tax that you owe and your marginal rate of tax. For example, if you are employed and owe tax under Self Assessment of £2,000 in respect of rental income and you are a higher rate taxpayer paying tax at 40%, your tax code will be adjusted by 500 (as 40% of £5,000 is £2,000). This will mean if you receive the basic personal allowance of £12,570, your tax-free allowance will be reduced by £5,000 and your tax code will be reduced to 757L.

To collect tax for 2023/24, the adjustment is made to the 2025/26 tax code, so that the tax is collected in 12 equal instalments throughout the 2025/26 tax year.

Advantages

Opting to pay tax through PAYE removes the need to pay the tax in a single payment by 31 January 2025. It also provides the option to pay in instalments without the need to set up a Time to Pay arrangement, with the added advantage that the instalments are interest-free. By contrast, interest is charged where tax is paid in instalments under a Time to Pay arrangement The first payment is not made until April 2025, providing a further cash flow benefit.

On the downside, your take home pay will be reduced as a result.