Helpsheets ... continued 39 from homepage

Entitlement to the full state pension depends on having sufficient qualifying years. Where a person reaches state pension age on or after 6 April 2016, they need 35 qualifying years for a full state pension. If they have less than 35 qualifying years but at least 10, they will receive a reduced state pension.

A qualifying year is secured either through the payment of Class 1, Class 2, Class 3 or Class 4 National Insurance contributions or the award of National Insurance credits. National Insurance credits are awarded in various situations, such as where a person claims child benefit.

From 1978 to 2010, a scheme known as Home Responsibilities Protection (HRP) operated to reduce the number of qualifying years that a person with caring responsibilities needed in order to qualify for the full state pension. HRP was replaced by National Insurance credits from 2010.

Following a review by the Department for Work and Pensions, historical issues came to light with the recording of HRP on entitled individuals’ National Insurance records.

From May 2000 it became mandatory for claimants to provide their National Insurance number when claiming child benefit. Where a claim for child benefit was first made before May 2000 and the claimant did not provide their National Insurance number when making the claim, the HRP to which they were entitled may not have been recorded on their National Insurance record. This may mean that they receive less state pension than they are entitled to receive.

Last autumn, HMRC started sending letters to people who they believed may have been affected by this issue. However, anyone who has not received a letter but thinks that, potentially, they may have missing years is urged to check their eligibility online, and claim any years that are missing. This can be done by visiting the Gov.uk website at www.gov.uk/home-responsibilities-protection-hrp.

Where missing years are claimed and the claimant is not otherwise eligible for the full state pension, reinstatement of the missing years will increase their state pension. If the claimant has already reached state pension age, any arrears due to them as a result of the missing years will be paid. However, it should be noted that, as the state pension is taxable, this may mean that there is some tax to pay on the arrears.

HMRC's Alternative Dispute Resolution (ADR) process was introduced over a decade ago, the intention being to provide an 'alternative' cost-effective method for dealing with disputes between taxpayers and HMRC. ADR is a free service, although taxpayers can involve a professionally accredited mediator from outside HMRC at their own cost.

The ADR process

The process allows for the involvement of a trained ‘facilitator’, who works with both parties to resolve the dispute. The idea is that in a stalemate situation an independent facilitator  acts as a neutral third-party mediator.

As has long been the case, the 'independent' mediator is an HMRC officer who has been specifically trained, from a different team within HMRC having had no prior involvement with the case. Mediation meetings default to either video or telephone, therefore any taxpayer who wishes to conduct a meeting in person will need to make representations to the mediator early in the process.

An application for a case to be considered is made online and may be made at any time, although it is more appropriate to apply once all the facts of a case have been established and an impasse has been reached between the two parties. Either HMRC or the customer can suggest the use of ADR. The dispute is then referred to the mediator who will decide whether the case is suitable for ADR within 30 days.

What types of dispute can be raised?

HMRC does not offer ADR in specific instances such as debt recovery or automatic late payment penalties, high income child benefit charges, tax credits, PAYE coding notices, disagreements regarding a point of law or cases where HMRC criminal investigators are involved. HMRC will not usually allow mediation in disputes on the same issue as one that it is intending or has taken before the Tribunal.

If the dispute cannot be resolved through mediation, then the formal internal review process, or an appeal to the Tribunal, may be used instead.

Benefits of ADR

The primary benefit is the reduction in cost for both parties. It also allows both parties to step back, reassess the situation and, with the help of a trained facilitator, attempt to resolve the issue without the added stress and cost of going to a Tribunal.

Another significant advantage is the time it saves. By using ADR, the back-and-forth of letters between the taxpayer and HMRC is eliminated, and a clear timetable for the process is established. The expectation is that a case accepted for ADR will be settled, or at least be out of the ADR process, within four months, making the process more efficient and productive for both parties. To meet this expectation, both the taxpayer and HMRC must commit to providing information requested by the mediator within 15 days. Where HMRC needs to obtain approval for any settlement agreed at the mediation, this must be done within a week of the meeting.

A ‘dedicated helpline’ is available to provide support and guidance throughout the ADR process. This helpline is intended to speed up the service and to be an introduction to the process. Taxpayers who may be considering applying for ADR but are unsure whether their specific case fits the criteria, can speak to a qualified member of the ADR team and be advised accordingly. The ‘dedicated helpline’ is not intended to answer questions relating to a specific case but to advise whether the procedure is suitable for the caller's particular problem.

Practical point

The relatively low uptake of ADR tells a story. HMRC's Annual Report and Accounts 2023- 2024 show 1,309 applications made to ADR during the tax year – a 29% increase on the previous year; of those, only 512 applications were accepted, and 83% of those resolved. Either taxpayers are unaware of the service or if they are, they do not think the case will result in their favour so do not bother.

Many start-up businesses take out loans to get going, e.g. to purchase stock needed to sell, or to make the first rent payment or rent deposit. Whether that business is set up as unincorporated or as a company will impact on when interest paid before trading is allowable for tax purposes.

Unincorporated business

The most straightforward situation is where the business is set up as a sole trader or partnership. In this situation, any interest incurred pre-trading but paid personally will be treated for tax purposes as if incurred on the first day of trading.

Companies

Two situations present themselves here: firstly, of an individual who borrows in their own name and lends to the company and secondly, where the company takes out the loan in its own name.

Individual finances the company

An individual borrowing to lend to or acquire shares in a close company will generally be able to claim tax relief against income tax paid provided that the borrower (and associates) controls more than 5% of the company's ordinary share capital or the borrower works in the company's management team and holds some part of the company's share capital, however small.

Note: a 'close company' is one that is under the control of five or fewer participators (or any number of participators if those participators are directors), or where more than half the company's assets would be distributed to five or fewer participators, or to participators who are directors, should the company close.

Company borrowing

The position is different where the company takes out the loan as tax relief for interest incurred is subject to special rules known as the 'loan relationship rules'.

These rules apply to income and expenses relating to 'money debts', e.g. interest paid or received. Until the company starts to trade, any 'money debt' will be treated as a non-trading debit under the loan relationship rules.  Where there are insufficient profits to offset in the accounting period, such debits are carried forward and offset against total profits in subsequent periods.

Election

The way to ensure tax relief is obtained is to make an election to HMRC to treat the interest and other relevant costs as a trading expense once the company starts to trade. As ever with any tax claim there are conditions:

the election must be made within two years of the end of the accounting period in which the non-trading debit arises; and

the company must begin to trade within seven years of that period; and

the non-trading debit amount would have been treated as a trading debit had it been incurred in the period since trading commenced.

Second 'trap'

HMRC’s guidance states that the interest, etc must be incurred in an accounting period to be allowable. The 'trap' is that an accounting period only starts when a company has a source of income.

Practical point

The answer is to open an interest-bearing bank account as soon as the company is incorporated and deposit a small amount (say, £10) which triggers the start of an accounting period. The election can then be submitted to HMRC immediately but definitely before the end of two years following the end of the accounting period in which the debit arises, or the election will be refused.

One of the few pleasant surprises in the Autumn 2024 Budget was that the Chancellor did not increase the rate of capital gains tax on residential property gains, opting instead to bring the standard rates in line with the residential rates. The top rate applying to residential property gains once income and gains exceed the basic rate band remains at 24%, having been reduced from 28% to 24% from 6 April 2024. The rates are due to remain at 18% where income and gains are within the basic rate band and 24% thereafter for 2025/26. The annual exempt amount will also remain unchanged at £3,000.

Arguably, the Chancellor’s intention here is to encourage second homeowners to sell and reinvest in something other than property; in her Budget, she also increased the stamp duty land tax supplement for second and subsequent residential properties from 3% to 5% with effect from 31 October 2024.

Of course, no one has a crystal ball, and it is impossible to know for certain what will happen in the future. However, against expectations, residential property capital gains tax rates were not increased, are currently lower than they have been in the past and it may be the case that this is as good as it is going to get.

Many landlords may be thinking of selling. The climate for landlords is not what it once was. A raft of tax changes has cut into their profits and the end of the favourable tax regime for furnished holiday letting eliminates further tax advantages. Changes to renters’ rights may also leave landlords deciding that they have reached the end of the road and that the time has come to sell their rental property. Second homeowners may also be thinking of selling. The cost of having a second home is also likely to increase. From April 2025, councils have the power to charge a premium of up to 100% on council tax on second homes. These are defined as homes that are substantially furnished but which are not someone’s sole or main residence.

The problem for many landlords and second homeowners is that they purchased the property many years ago and are now sitting on a substantial inflationary gain. For many, at the time of purchase, relief was given for inflationary gains and capital gains tax was payable only to the extent that the gain outstripped inflation. This is no longer the case, and when the property is sold, the gain is taxed in a single tax year when in reality it may have accrued over as much as 42 years (capital gains tax was last rebased in 1982). The annual exempt amount has also fallen and is now only £3,000.

While this may all seem very unfair, particularly if the gain would have been sheltered by unused annual allowances had it been taxed on an annual basis over the period of ownership, this is largely academic. While one may hope that the issue of inflationary gains will be addressed, in the current climate, this is perhaps wishful thinking.

While the old adage of not letting the tax tail wag the dog holds true, if you are thinking of selling an investment property or second home in the not-too-distant future, it may be worth thinking of doing so before 6 April 2026 while the top capital gains tax rate on residential property gains is 24%, as it may not get better than this. Landlords exiting the FHL market can benefit from Business Asset Disposal Relief if they cease their business before 6 April 2025 and sell their properties within three years of the cessation date. With a rate of 10% until 5 April 2025 where BADR applies, this is a good deal.

One of the key announcements in the Autumn 2024 Budget was the rise in employer’s National Insurance contributions from 6 April 2025. From that date, the rate of secondary Class 1 National Insurance contributions is increased by 1.2 percentage points, from 13.8% to 15%. In a further blow, the secondary threshold – the point above which employer contributions become payable – will fall from £9,100 to £5,000.

On the plus side, the Employment Allowance is to rise from the same date, from its current level of £5,000 to £10,500. This will protect the smallest employers from the impact of the hike. From 6 April 2025, larger employers will once again be able to benefit from the Employment Allowance as the current restriction which limits availability of the allowance to employers whose secondary Class 1 National Insurance bill in the previous tax year was less than £100,000 is lifted. However, personal service companies where the sole employee is also a director remain unable to claim the allowance.

The upper secondary thresholds that apply where the employee is under the age of 21, an apprentice under the age of 25, an armed forces veteran in the first year of their first civilian job since leaving the armed forces or a new employee in the first three years of their employment at a special tax site are unchanged. However, the 15% rate will apply to any earnings in excess of the relevant upper secondary threshold.

The rate increase also extends to Class 1A National Insurance contributions (payable by employers on taxable benefits in kind, taxable termination payments and taxable sporting testimonials) and to Class 1B National Insurance contributions (payable by employers on items within a PAYE Settlement Agreement and on the tax due under the agreement), both of which rise to 15% from 6 April 2025.

Impact

The impact of the changes will depend on the number of employees that an employer has and the amount that they are paid. For example, for an employee on £20,000, before taking account of the Employment Allowance, employer’s National Insurance will increase from £1,504.20 for 2024/25 to £2,250 for 2025/26 – an increase of £745.80. However, for an employee on £100,000, the bill will rise from £12,544.20for 2024/25 to £14,250 for 2025/26 – an increase of £1,705.80

Very small employers with only a handful of employees who are not highly paid may find that their bills fall as the increase in the Employment Allowance outweighs the rise in secondary contributions. For example, an employer with three employees paid £30,000 will pay £3,652.60 for 2024/25 after deducting the Employment Allowance but will only pay £750 in 2025/26 after deducting the Employment Allowance. At the other end of the scale, as press reports attest, the additional cost can be significant. Employers with a workforce comprised predominantly of lower paid part-time workers, as is often the case in the hospitality industry, will be hard hit by the fall in the secondary threshold. Currently, no contributions are payable on earnings below £9,100; from April 2025, employer contributions are due on earnings over £5,000.

Mitigation

Eligible employers should ensure that they claim the Employment Allowance as this is not given automatically. Consideration can also be given to the make-up of their workforce. For example, savings can be made by employing workers under the age of 21 or armed forces veterans looking for their first civilian job, as contributions are only payable where earnings exceed £50,270 rather than £5,000 – potential savings of up to £6,790.50 per employee. Taking on two part-time workers rather than one full-time worker will also cut the bill by accessing a further £5,000 NIC-free band (saving £750).

Employers should also review the taxable benefits that they provide, and consider instead a switch to exempt benefits to save the associated Class 1A National Insurance. Employers should also review existing PAYE Settlement Agreements to check whether they remain affordable.

Business Asset Disposal Relief (BADR) is a valuable relief which reduces the rate of capital gains tax payable on gains made on the disposal of all or part of a business or the sale of shares in a personal trading company. The relief was previously known as Entrepreneurs’ Relief.

A sole trader selling all or part of their business must have owned the business for at least two years prior to the date of sale. The same test must be met where the business is being closed and the assets are being sold. Here the assets must be disposed of within three years after the date of cessation to qualify.

The relief is also available in respect of the disposal of shares or securities in a personal company that is either a trading company or the holding company of a trading group. A personal company is one in which the shareholder holds at least 5% of the ordinary share capital and that holding gives the shareholder at least 5% of the voting rights, and entitlement to at least 5% of the profits available for distribution and 5% of the distributable assets on a winding up, or 5% of the proceeds in the event that the company is sold.

Lifetime limit

The favourable capital gains tax rates only apply on gains up to the lifetime limit of £1 million. Spouses and civil partners have their own lifetime limit.

Rate

For 2024/25, gains eligible for BADR are taxed at 10%.

Prior to 30 October 2024, the BADR rate was the same as the capital gains tax rate for gains other than residential property gains and carried interest applying where  income and gains fall within the basic rate band. However, the latter was increased to 18% from that date (Budget Day), while the rate of capital gains tax once the basic rate band has been used up was increased from 20% to 24%. This increased the value of BADR – meaning for the remainder of the 2024/25 tax year it is worth 14% where gains would otherwise be taxable at the higher capital gains tax rate – a potential saving of up to £140,000.

However, this is a limited time offer and the disposal must take place before 6 April 2025 to access the 10% rate. From 6 April 2025, gains benefitting from BADR will be taxed at 14% – a saving of up to 10%. From 6 April 2026, the rate rises to 18%, bringing it back into line with the capital gains tax rate applying where income and gains fall within the basic rate band.

Timing

The date of disposal is key to accessing the best rates. Selling a business or shares in a personal trading company on or before 6 April 2025 will access the best rate of 10%. Where a disposal is on the cards, as long as the qualifying conditions have been met for the requisite two-year period, consideration could be given to bringing forward the disposal date to before 6 April 2025. If the business has already ceased, disposing of the business assets before 6 April 2025 will minimise the capital gains tax payable.

If a disposal before 6 April 2025 is not feasible, consider whether the business, business assets or shares can be disposed of before 6 April 2026 so that gains up to the available lifetime limit are taxed at 14% rather than at 18%. Unincorporated landlords thinking of exiting the furnished holiday lettings business when the favourable relief comes to an end may also wish to bring forward the cessation and the disposal of their properties to access the 10% rate.

Under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), sole traders and unincorporated landlords within its scope will be required to keep digital records of their trading and/or property income and provide quarterly updates to HMRC using MTD-compatible software. Its introduction is being phased in.

Phase 1 – April 2026 start date

From 6 April 2026, MTD for ITSA will apply to sole traders and unincorporated landlords whose combined taxable business and property income exceeds £50,000 a year. It is important to note that the trigger is the total from both sources. For example, a sole trader with business income of £40,000 who also has property income of £12,000 will need to comply with MTD for ITSA from 6 April 2026 regardless of the fact that separately neither business nor property income exceed £50,000.

Phase 2 – April 2027 start date

The MTD for ITSA mandation threshold is lowered to £30,000 from 6 April 2027. From that date, sole traders and unincorporated landlords with business and/or property income of more than £30,000 must comply with the requirements of MTD for ITSA.

Phase 3 – by the end of the current Parliament

At the time of the 2024 Autumn Budget, the Government announced that sole traders and unincorporated landlords with business and/or property income of more than £20,000 will be brought within the scope of MTD for ITSA by the end of the current Parliament. The precise date has yet to be announced – this will be done at a future fiscal event.

Plan ahead

It is important that sole traders and unincorporated landlords know their MTD start date and that they are ready to comply with the requirements of MTD for ITSA from that date. To do so, they will need to use MTD-compatible software. Details of software that ticks this box can be found on the Gov.uk website.

For many years the most tax-efficient method of withdrawing monies from a company by a sole director/owner has been to take salary up to the employer's secondary employer's NIC limit, with the balance taken as dividends. However, since July 2022, this standard calculation has changed such that withdrawing profits in the form of benefits in kind (BIK) may now be a consideration.

By setting the employee primary NIC threshold and the personal allowance at the same amount of £12,570 and retaining the employer's secondary threshold for NIC at £9,100 (for 2024/25), any director can withdraw an amount up to the secondary threshold, without incurring tax or NIC charges for either the employee or employer whether the employment allowance (EA) is available or not,. Any additional withdrawals can be taken as dividends which do not attract NIC.

However, should the EA not be available (as is the situation where a company has a sole director-employee’), the employer is liable for NIC on the amount greater than £9,100. Corporation tax relief is available on the whole amount, such that paying an 'optimal' salary of £12,570, the corporation tax deduction outweighs the amount of NIC due by £508.36 per employee (assuming corporation tax rate of 25%).

Although calculations need to be made on a person-by-person basis and assuming the full available amount is withdrawn, as a generalisation for the year 2024/25 calculations show that:

Taking a salary up to the personal allowance of £12,570 with the balance as dividends is a more tax-efficient method of extraction up to £134,000;

For withdrawals between £134,000 and £411,000, the amount is £9,100 in salary with the balance as dividends; and

For withdrawals over £411,000, taking the whole amount as salary under payroll conditions is the most tax-efficient method.

Note that the calculations will be different for the 2025/26 tax year as the NIC percentages and limits are to be changed.

When are benefits more tax efficient?

There is another method of withdrawing profits that can prove even more tax/NIC efficient. As a generalisation, BIK are more efficient than salary, but less efficient than taking a dividend.

BIK will be more tax efficient than dividends where they are exempt from tax and NIC or where the calculation of the taxable benefit results in a low taxable amount, e.g. zero or low emissions company cars. In such a scenario, the recipient pays no or little tax but the company receives a tax deduction.

An advantage of BIK is that they can be provided even if the company is loss making.

Company cars

If a company car is provided, it may be more tax efficient than taking additional salary, especially if the car has low CO2 emissions or is a plug-in hybrid or electric vehicle. The BIK rate for electric cars is usually much lower than for high-emission vehicles. The value of the benefit is increased by including maintenance, servicing and repairs, road tax, insurance and sat navs, which are all tax deductible against corporation tax being paid for by the company but not taxable on the director. HMRC will not charge tax on extras with a list price totalling £100.

Pension contributions

Employer contributions to a pension scheme can be a highly tax-efficient benefit because they are typically not subject to income tax or NIC. Additionally, they can be deducted from the company’s taxable profits, thereby reducing company taxes.

Practical point

Taking BIK works best when the director does not need extra cash income or the benefit would otherwise have to be met from cash resources. A mobile phone contract is a typical benefit as no tax or NIC is payable where one mobile phone is provided and the phone contract is between the company and the supplier. The company can obtain corporation tax relief on purchase without tax or NIC implications for the director.

The Chancellor’s recent mini-Budget and subsequent U - turns threw a number of spanners into the works as far as profit extraction strategies are concerned. Initial revisions to profit extraction strategies in the light of the mini-Budget announcements now need to be revised.

Rates

For 2022/23, the dividend allowance is £2,000. Where dividends are not sheltered by the dividend allowance or any unused personal allowance, they are taxed at the dividend ordinary rate of 8.25% where they fall in the basic rate band, at the dividend upper rate of 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.

The rates were increased from 6 April 2022 by 1.25% as part of a package of measures to raise funds for health and adult social care with the introduction of a dedicated Health and Social Care Levy.  The Health and Social Care Levy has since been scrapped. It was announced at the time of the mini-Budget that the increased would be reversed from 6 April 2022. However, new Chancellor Jeremy Hunt subsequently announced that this will now not happen and dividend tax rates will remain at their 2022/23 levels.  The basic rate of income tax was due to fall from 6 April 2023 from 20% to 19%. This cut has now been delayed and the basic rate will remain at 20%.

Extracting profits

If profits from a personal or family company are to be used for personal use, they need to be extracted from the company. There are various ways in which this can be done, but from a tax perspective, the goal is to do so in a way that minimises the total tax and National Insurance payable.

A popular tax efficient strategy is to take a small salary and to extract further profits as dividends. The optimal salary depends on whether the National Insurance employment allowance is available. If it is, as may be the case for a family company, the optimal salary for 2022/23 (assuming the personal allowance has not been used elsewhere) is equal to the personal allowance of £12,570. Personal companies where the sole employee is also a director do not benefit from the employment allowance. Where the employment allowance is not available, the optimal salary for 2022/23 is equal to the annual primary National Insurance threshold of £11,908.

The changes announced in the mini-Budget and the subsequent U-turns do not change the optimal salary for 2022/23.

Taking dividends

Once the optimal salary has been paid, it is more tax efficient to take any further  yet)profits needed outside the company as dividends. Dividends are paid from post-tax profits and have already suffered corporation tax of 19%. The reinstatement of the proposed corporation tax reforms will mean that the funds from which dividends have paid may have suffered a rate of tax of more than 19% from 1 April 2023. This will be the case where profits exceed the lower profits limit, set at £50,000 for a stand-alone company.

For 2022/23, dividends should still be extracted (assuming sufficient retained profits are available) to use up the dividend allowance and any remaining personal allowance of the director and, in a family company scenario, any family members who are shareholders. Once the allowances have been used up, taking any further dividends will trigger a tax liability on those dividends. If the funds are not needed outside the company, it may be preferable not to pay a dividend to avoid the associated tax charge, perhaps delaying the payment of the dividend until it can be sheltered by a future year’s dividend or personal allowance.

Where further dividends are needed, the aim is to pay as little tax as possible. In a family company scenario, this may mean using the basic rate band of family members before paying dividends to the director where they would be taxable at a higher rate. As dividends must be paid in proportion to shareholdings, the tailoring of dividends to achieve this is only possible with an alphabet share structure whereby each family member has their own class of shares.

There is no substitute for crunching the numbers.

To ensure that a business does not pay more income tax than it needs to, it is important that a deduction is claimed for all allowable expenses. The rules on what constitutes deductible expenditure can be confusing. They also depend on whether the accounts are prepared on the cash basis or the accruals basis. However, there are some basic rules which must be met.

Wholly and exclusively rule

The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade. The rule works by prohibiting expenses that are not wholly and exclusively incurred, stating:

‘In calculating the profits of a trade, no deduction is allowed for –

• expenses not incurred wholly and exclusively for the purposes of the trade…’

There is no requirement that the expense is necessarily incurred.

Consequently, you can deduct an expense if it is incurred wholly and exclusively for the purposes of your business and the deduction is not otherwise prohibited (as for certain entertaining expenses and depreciation).

No deduction for private expenditure

Only business expenses meeting the wholly and exclusively test can be deducted – a deduction for private expenditure is not permitted.

If you operate as a sole trader, it may be easy for the boundary between business expenses and personal expenses to become blurred. For example, you may pick up some items for your home at the same time as some cleaning products for the business and pay for them together. In this situation, it would be easy it inadvertently claim a deduction for the whole amount. If the business items can be separately identified, a deduction can be claimed for these.

To prevent errors, it is advisable to keep good records and keep business and personal expenditure private. Ideally, there should be a separate business bank account which is used for business expenses.

Mixed expenses

If an expense has a business and a private element and these cannot be separated, a deduction is not allowed. An example would be normal clothes worn for work. However, the cost of a uniform featuring the business logo can be deducted.

Capital expenditure

The rules governing the deductibility of capital expenditure can be tricky and depend on the basis used to prepare the accounts. If the tradition accruals basis is used, capital expenditure cannot be deducted in calculating profits. Instead, relief is given through the capital allowances system. Where the annual investment allowance is available, as long as the £1 million limit has not been used up, qualifying capital expenditure can be deducted in full (as a capital allowance) in the year in which it is incurred.

Different rules apply under the cash basis, and capital expenditure can be deducted unless it is of a type for which a deduction is specifically denied. The main items of capital expenditure which are not deductible under the cash basis are land and buildings and cars. Capital allowance may be available instead for cars (as long as simplified expenses have not been claimed).

Common deductible expenses

While the list of deductible expenses will vary from business to business depending on the nature of the business, the following is a list of common deductible expenses:

• cost of goods sold;
• packaging;
• distribution costs;
• staff costs (wages and salaries, pensions);
• premises costs (rent, insurance, light and heat, cleaning, repairs);
• office costs (stationery, phone costs, printing, postage);
• advertising;
• finance costs (but note an interest cap applies under the cash basis); and
• accountancy and legal costs.

Check the list to ensure deductible items have not been overlooked.

A property rental business will have a start date and an end date, and it is important to know what those dates are.

When setting up a property rental business, there will be some preparatory work, and costs will be incurred in  setting up the business. The start date will draw a line in the sand between activities that are preparatory to the letting and activities that are part of the property rental business.

Where a person has more than one property, they may well have more than one property business. All UK properties let properties owned by the same person form part of the same UK property rental business. However, overseas properties are kept separate, as are furnished holiday lettings and UK furnished holiday lets are kept separate from EU furnished holiday lets.

For example, if a person owns a buy-to-let property on their own, a UK furnished holiday let on their own and two residential lets with their spouse, they will have three property businesses:

a property rental business comprising the rental property which is solely owned;

a share in the property rental business comprising the two jointly owned rental properties; and

a UK furnished holiday lettings business.

The start date for each property will need to be established.

Once a business is up and running, any preparatory activities undertaken in relation to further let properties will be activities of the existing business, rather than preparatory activities.

Start date

The date that the rental business begins is a question of fact. Where the business is letting property, the business will start when the first letting commences.

On-going expenses

Once the property letting has commenced, relief for expenses incurred on or after the date of commencement is given in accordance with the usual rules. Expenses are deductible if they are revenue in nature and incurred wholly and exclusively for the purposes of the property rental business and a deduction is not otherwise prohibited. Relief for capital expenditure is given either in accordance with the cash basis capital expenditure rules where accounts are prepared under the cash basis, or through the capital allowances system.

Relief for expenses in getting further properties ready to let is given under these rules, rather than under the pre-trading rules.

Pre-commencement 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.

If you are a VAT-registered business you must charge VAT when you make taxable supplies. You must also pay over the difference between VAT you have charged and the VAT that you have suffered to HMRC (or, where a scheme such as the flat rate scheme is used, the amount due to HMRC under the scheme rules). Assuming your customers pay their bills, it is the customer who provides the funds for the output tax which must be passed on to HMRC and from which you can recover any input tax that you have incurred.

But what happens if the customer cannot or will not pay their bill?

If you are not paid for supplies of goods or services that you have made to a customer on which you have charged VAT, you may be able to claim relief from VAT on the bad debts that you have incurred. Conversely, if you do not pay bills on which you have reclaimed input VAT, you may need to repay that VAT.

Bad debts

You can claim relief for VAT on bad debts if the following conditions are met.

• You have already accounted for the VAT on the supplies and paid it to HMRC.
• You have written off the bad debt in your day-to-day VAT account and transferred it to a separate bad debt account.
• The value of the supply is not more than the customary selling price.
• The debt has not been paid, sold or factored under a valid legal assignment.
• The debt has remained unpaid for a period of 6 months from the later of the time that the payment was due and payable and the date that the supply was made.

It should be noted that if you use the cash accounting scheme or a retail scheme that allows you to adjust your daily takings for opening and closing debtors, a claim for bad debt relief is unnecessary as VAT is only paid on amounts that you have actually received from your customers.

You must wait at least 6 months from the later of the date on which the payment was due and payable and the date of the supply before making a claim. The claim must be made within 4 years and 6 months from that date. You can claim the relief in your VAT return, but the claim cannot be made in a return for a VAT accounting earlier than the one in which you become entitled to the relief.

The need to wait 6 months before making the claim means that you will have to pay the VAT over to HMRC in the first instance (and meet the cost of this) before claiming it back.

You must also notify your defaulting customer that you have made a claim for bad debt relief.

Repaying input tax

If you do not pay a supplier and you have reclaimed VAT on that supply, you must repay the input tax if the debt remains unpaid 6 months from the later of the date of the supply or date on which the payment was due. If you are given time to pay (for example, payment terms are 30 days), the clock starts from the date payment is due rather than the invoice date.

To make the repayment, you should make a negative entry in your VAT return and account for the repayment in the return for the period in which the repayment became due.

As the cost of living crisis continues to bite, you may find that come 31 January 2025 you are struggling to pay your Self Assessment tax bill. If this is the case, it is important that you do not bury your head in the sand – the bill will not go away and, with the addition of interest and penalties, will become bigger. However, there are options available which may allow you to pay what you owe over a longer period.

Coding out

If you filed your 2023/24 tax return online by 30 December 2024 or filed a paper return before 31 October 2024 and you have PAYE income, if you owe £3,000 or less, HMRC will collect what you owe by adjusting your tax code for 2025/26. This effectively allows you to pay in interest-free instalments and is something of a good deal.

Time to Pay Arrangements

To spread the cost, you may be able to pay your bill in instalments by setting up a Time to Pay Arrangement with HMRC. You may be able to do this online if all of the following apply:

You have filed your 2023/24 tax return.

You owe £30,000 or less.

You are within 60 days of the 31 January deadline.

You do not have any other payment plans with HMRC.

You can do this by logging into your HMRC account.

If you are unable to set a plan up online, you may be able to do so by calling HMRC on 0300 200 3820. You will need to provide details of your income and outgoings.

Where an arrangement is set up, you will be charged interest on the tax paid after the due date. However, penalties are not applied. The arrangement is designed to be flexible and if you are able to you can clear it early to save interest. If you struggle to meet the repayments under the arrangement, the best course of action is to contact HMRC to try and renegotiate the agreement, for example to pay your tax over a longer period. If you fall behind or do not pay what you owe and do not agree a revised plan with HMRC, they may take action to recover what you owe.

HMRC currently charge interest at 2.5% above base. This is to increase to 4% above base from April 2025. If you are able to borrow money at a lower rate, it may be preferable to take out a loan to pay your tax than to use a Time to Pay Arrangement.

Budget Payment Plans

Looking ahead, you may find it easier to set aside some money to pay your tax bills. While you can simply have a separate bank account for this purpose, you may prefer instead to set up a Budget Payment Plan with HMRC so that you cannot dip into the account in the year. A Budget Payment Plan allows you to put money aside for your next Self Assessment bill by making regular weekly or monthly payments to HMRC. If the amount put aside is less than the amount you owe, the balance must be paid by the due date. If you have put aside more than you need, you can ask for a refund. You can pause payments for up to six months.

As long as your tax affairs are up to date, you can set up a Budget Payment Plan through your online HMRC account.

Review payments on account

If your 2023/24 tax and Class 4 NIC bill is more than £1,000 and you do not pay at least 80% of your tax through deduction at source, such as via PAYE, you will need to make payments on account of your 2024/25 tax liability. Each payment is 50% of your tax and Class 4 bill for 2023/24 and payments are due on 31 January 2025 and 31 July 2025. It is advisable to review your payments on account. If your income has fallen and you expect to owe less for 2024/25 than for 2023/24, you can opt to reduce your payments on account. However, if you reduce them too much, interest will be charged on the shortfall.

Stamp duty land tax (SDLT) is charged at the residential rates on residential property and at the non-residential rates on non-residential or mixed property. For the residential rates to apply, the building must be ‘used or suitable for use as a dwelling or in the process of being constructed or adapted for such use’. Where the property is derelict and cannot be used as a dwelling, SDLT is charged at the non-residential rates. If the property in question is a second or subsequent residential property, such as an investment property, this may result in a lower bill.

However, before purchasing an investment property in a poor state of repair on the basis that the non-residential rates will apply, it is important to check that your view of what constitutes an uninhabitable dwelling is in line with what HMRC will accept as being uninhabitable. It is important to note that in HMRC’s view, 95% of refund claims submitted on the basis that a property in need of repair is not suitable for use as a single dwelling are incorrect, so the advice here is to proceed with caution.

Mudan case

The question of whether a property was inhabitable was considered recently by the Upper Tribunal in the case of Mudan. The case concerned whether a building which had previously been used as a dwelling and which was in need of renovation and repair at the time of purchase was ‘suitable for use as a single dwelling’.

At the time of purchase, SDLT was paid on the basis that it was a residential property. A refund was subsequently claimed on the basis that SDLT should have been applied at the non-residential rates on the basis that the property was not suitable for occupation as a dwelling. The taxpayer contended that work needed to be done to make the property a safe place to live, as opposed to a pleasant place to live. This included rewiring and other electrical work, a new boiler, water pumps and pipes, a new roof, repairs to broken windows, new pipework and tanking of the basement due to flooding, removal of the kitchen to get rid of a bad smell and vermin and the removal of lots of rubbish.

The First Tier Tribunal found that, despite the fact that the property was not in a state such that a reasonable buyer might be expected to move in straight away, it was capable of use as a dwelling. It had been recently used as such and was structurally sound.

On appeal, the Upper Tribunal also found for HMRC, concluding that the property was suitable for use as a dwelling and liable to the residential rates of SDLT. The following findings are worthy of note:

Being suitable for ‘use as a dwelling’ is not the same thing as a property being ready for immediate occupation.

It is necessary to assess the extent to which the building has the fundamental characteristics of a dwelling and is structurally sound.

If a property has previously been used as a dwelling, this will be relevant in considering whether it is suitable for use as a dwelling.

The question to consider is whether the works of repair and renovation are such that the building no longer has the characteristics of dwelling.

Takeaways

A clear distinction is drawn between a derelict property and one that is in need of modernisation. Work such as replacing kitchens and bathrooms, new boilers, rewiring, substantial repairs to windows, floors or the roof, damp proofing and repairing flood damage do not make a property unsuitable for use as a dwelling, even if the need to do this work means that the property cannot be reasonably occupied until it is done. To count as derelict for SDLT purposes, it would need to be structurally unsound or damaged to the point that normal repair, renovation or modernisation work will not resolve the issue. Most doer-uppers will not fall into this category.

VAT-registered businesses who use invoice accounting generally account for VAT when invoices are issued and received. HMRC have recently published new Guidelines for Compliance which set out their recommended approach to the compliance process to ensure that VAT is accurately declared by the business. The guidelines can be used to help establish an appropriate tax control framework which identifies and assesses tax risk and has effective controls in place to reduce those risks. The guidelines cover specific areas and also outline good practice in relation to risk management.

Order to cash

The overall objective of order to cash is the timely, complete and accurate recording of transactions and payments. This will cover the placing of the sales order, the dispatch of the goods and the issue of the tax invoice. The guidelines highlight controls which should exist at each stage, including, for example, controls to ensure that sales orders are only processed within customer credit limits, Goods Dispatch Note shipments are accurately and promptly recorded and that the correct tax rates are used on tax invoices.

Procure to pay

The procure-to-pay section of the guidelines covers initiation of purchase orders, the receipt of the supply, the receipt and processing of the supplier’s tax invoice and the payment of that invoice. The guidelines set out the controls that should exist at each stage, such as ensuring that purchase orders are only placed for approved requisitions, that supplies are only accepted if they have a valid purchase order, that only invoices that represent goods or services received are posted to accounts payable and that payments are only made in respect of invoices relating to goods and services which have been received.

Employee expenses

The guidelines also outline expected controls in relation to the processes for capturing, authorising and paying employee expenses, highlighting system controls and those relating to the processing of expenses and workflow. They also include examples of controls for different types of expenses, such as motor expenses, business entertainment and mobile phones.

Record to report

Record to report refers to the accounting process which involves the collection, processing and presentation of information to provide strategic, financial and operational analysis. For example, data gathered in the general ledger will be used to produce balance sheets, profit and loss statements, cash flow statements, budget reports and management reports. Controls are needed in relation to both the overall systems implementation and the operation of the general ledger.

VAT reporting

For invoice VAT accounting, controls are needed for various purposes, including compliance with Making Tax Digital (MTD) regulations and the provision of VAT reports. This would include, for example, controls to ensure that VAT reporting is MTD-compliant.

Manual adjustments

Manual adjustments may be made for various reasons, for example to consolidate totals from different business functions or systems or to correct errors. The guidelines set out controls which are expected for different types of manual adjustment.

Outsourcing

Controls are also needed where third parties are used to perform parts of the process. The guidelines highlight the controls which are required where functions are outsourced.

Recommended reading

The Guidelines for Compliance (Help with VAT compliance controls (GfC8)) are recommended reading for businesses using invoice accounting for VAT. The business should check that the recommended controls are in place.

Post pandemic, homeworking has become the norm, especially the increase in 'hybrid' working, i.e. spending part of the week at home and part in the office.

On the face of it, claims for tax relief on travel and subsistence costs for such employees should be straightforward, as in no claim, because if the employee were not working from home, they would bear the cost of ordinary commuting to the office or workplace.

However, that does not consider s337-339 ITEPA 2003which confirms that a deduction from earnings is allowed for travel and subsistence expenses where an employee is obliged to incur the cost should the workplace be temporary (i.e. not a 'permanent workplace'). The question with homeworking is whether the home becomes the 'permanent' workplace and the office 'temporary’.

Definition of 'temporary workplace'

A 'temporary' workplace is somewhere where the employee attends to perform a task of limited duration or for a temporary purpose. Therefore, even if attendance is regular, the place may not be classified as a 'permanent' workplace. The next section of the s339 ITEPA 2003) defines a 'permanent' workplace as being where an employee spends or is likely to spend more than 40% of their working time over more than 24 months. This rule is not just about the amount of time spent but also looks at the intention or expectation of the parties at the time the period was initially agreed and at any time subsequently.

Under this rule, travel from home to a place of work where the employee spends less than 40% of their time (e.g. two days out of five) should mean that the office is a 'temporary' workplace and therefore travel from home to the office (and any subsistence costs incurred) should be tax deductible.

HMRC appears to confirm this in their Employment Manual at EIM32065 where the text states that a temporary workplace is 'somewhere the employee goes only to perform a task of limited duration or for a temporary purpose'.  The text goes on at EIM 32150 to state that 'where a visit is self-contained (that is, arranged for a particular reason rather than as part of a series of visits to the same workplace for the continuation of a particular task) it is likely to be for a temporary purpose'. The thought arises that should the attendance at the office be for a particular purpose (e.g. a sales meeting), then that may reinforce the point that the office is 'temporary' and that a claim may be possible.

HMRC's stance

From the above it could be argued that a claim for travel from the home base to the office could be made. Pre pandemic, HMRC's main investigations under this heading covered situations where employees had a workplace at home and employers met the cost of journeys between home and the office. Post pandemic, we can expect to see such situations being queried in the future, especially if the employer makes any reimbursement of costs incurred.

HMRC is aware of the increasing likelihood of claims (not least because many of HMRC's employees still work at least some of their working time at home), so it has updated its guidance under EIM01471 headed 'Employment income: employees who work at home: arrangement of guidance' which confirms situations where tax relief may be claimed on expenses or benefits incurred whilst homeworking and provided by the employer. HMRC gives an example where a claim would be disallowed under EIM32174 'Travel expenses: travel for necessary attendance: employees who work at home: hybrid working example'. The example considers the scenario where a 'flexible way of working is offered on a voluntary basis' – this leads to the question as to whether the claim would be allowed should flexible working from home be compulsory.

Practical point

HMRC's stance is that most employers provide all the facilities necessary for work to be carried out on business premises and therefore any employee working from home does so out of choice. Therefore, no tax relief for travel or subsistence costs whether paid personally or by the employer is available.

The favourable tax rules that apply to furnished holiday lettings (FHL) come to an end on 5 April 2025. For many landlords, this may be the time that they decide to bring their FHL business to an end and to sell up.

One of the main benefits of the existing FHL regime is the ability to access Business Asset Disposal Relief (BADR) on the disposal of business assets following the cessation of the business. Currently, the capital gains tax rate where BADR applies is 10%, compared to a rate of 24% for residential property gains once income and gains exceed the basic rate band.

Where a FHL business ceases on or before 5 April 2025, BADR will continue to be available where the properties are disposed of within three years of the cessation date.

Landlords letting furnished holiday accommodation who are thinking of ceasing their holiday letting business are advised to do so prior to 6 April 2025to preserve availability to BADR. Moving over to the new regime and then deciding to sell up may be very costly, particularly if the properties have been owned for some time and are pregnant with gains as the gains will be taxed at residential rates rather than the favourable rates that apply where BADR is available.

Favourable rates

The favourable rates of BADR apply to qualifying gains up to the individual’s lifetime limit. This is set at £1 million. It should be noted that a single limit applies to all gains qualifying for BADR – there is no separate limit for FHLs. However, on the plus side, spouses and civil partners each have their own limit.

Where gains qualifying for BADR are realised prior to 6 April 2025, they are taxed at 10%. This is 14% less than the rate applying to residential gains where income and gains exceed the basic rate band. Landlords looking to bring their FHL business to an end and to sell their properties will be able to benefit from the 10% rate if they dispose of them before the end of the current tax year.

If a disposal in 2024/25 is not feasible, as long as the FHL business ceases before 6 April 2025, BADR will be available as long as the property sales complete within three years of the date of cessation. Again, the sooner the properties are sold the better. Gains benefitting from BADR on properties sold in 2025/26 will be taxed at 14% as a long as they are within the lifetime limit. If the sale is delayed to 6 April 2026 or beyond, the rate rises to 18% where BADR is available.

Landlords keen to benefit from the favourable rates while on offer need to cease their FHL business before 6 April 2025 and sell their properties as soon as possible, and in any event within three years of the date on which their business ceased.

Despite the shortage in rental accommodation, investment in residential property is out of favour. In her Autumn Budget, the Chancellor increased the cost of buying a second or subsequent residential property by raising the stamp duty land tax (SDLT) supplement by two percentage points, from 3% to 5%, with effect from 31 October 2024.

SDLT is payable on the chargeable consideration on land and property in England and Northern Ireland. Land and Buildings Transaction Tax is payable on land and property purchases in Scotland, whereas land and property purchases in Wales are liable to Land Transaction Tax.

As far as SDLT is concerned, the amount that is payable depends on the type of land or property – residential or non-residential or mixed.

Residential property rates

SDLT is payable on each slice of consideration where the cost exceeds the SDLT residential threshold. This is currently £250,000 but will revert to £125,000 from 1 April 2025. From that date, a separate rate will apply to the band of consideration from £125,000 to £250,000.

The threshold for first-time buyers is higher. The threshold, which only applies where the purchase price is £625,000 or less, is currently £425,000. The threshold will revert to £300,000 from 1 April 2025, and the price cap will revert to £500,000.

For second and subsequent residential properties, SDLT is charged where the consideration is £40,000 or more at the residential rates plus a supplement. The supplement was 3% prior to 31 October 2024. It was increased to 5% from 31 October 2024. The reduction in the residential threshold from 1 April 2025 will increase the rate purchasers of second and subsequent residential properties pay on the slice from £125,000 to £250,000.

The residential rates applying now and from 1 April 2025 are shown in the tables below.

31 October 2024 to 31 March 2025

Consideration           SDLT rate.      Second and subsequent

                                          residential properties

                                          (consideration £40,000

                                          or more)

Up to £250,000           0%              5%

Next £675,000 (portion

from £250,001 to

£925,000)                 5%              10%

Next £575,000 (portion

from £925,001 to £1.5

million).                 10%             15%

Remaining amount (over

£1.5 million)             12%             17%

First-time buyers buying a property costing no more than £625,000 pay nothing on the first £425,000 and 5% on the remainder.

From 1 April 2025

Cosideration             SDLT rate.      Second and subsequent

                                          residential properties

                                          (consideration £40,000

                                          or more)

Up to £125,000            0%              5%

Next £125,000 (portion

from £125,001 to

£250,000)                 2%              7%

Next £675,000 (portion

from £250,001 to

£925,000)                 5%              10%

Next £575,000 (portion

from £925,001 to

£1.5 million)             10%             15%

Remaining amount (over

£1.5 million).            12%.            17%

First-time buyers buying a property costing no more than £500,000 pay nothing on the first £300,000 and 5% on the remainder.

Impact

An individual buying an investment property for £700,000 would have paid SDLT of £43,500 if the purchase completed before 31 October 2024.

If the purchase completes between 31 October 2024 and 31 March 2025, the SDLT hit is £57,500 – an additional £14,000 (2% of £700,000).

If the purchase does not complete until after 1 April 2025, the SDLT hit is £60,000 as a further 2% is payable on the band from £125,000 to £250,000.

Non-residential property

For non-residential properties, no SDLT is payable on the first £150,000. Thereafter it is payable at 2% on the next £100,000 and at 5% on the balance. There is no supplement where the individual has multiple non-residential properties. The non-residential rates also apply to mixed property, for example, a shop with a flat above.

Employers looking to spread some seasonal cheer can do so in a tax-efficient manner by taking advantage of the exemptions for annual parties and functions and trivial benefits.

Christmas parties

The tax exemption for annual parties and functions will only apply to a Christmas party if the following conditions are met.

The event is an annual event – one-off events do not qualify.

The event is open to all employees or to all those at a particular location.

The cost per head (inclusive of VAT) is not more than £150.

Some points are worthy of note.

While it is permissible to provide an event for employees at a particular location or working within a particular department, all employees at that location or within that department must be invited. Events for staff of a particular grade only, for example, managers, fall outside the terms of the exemption, and as such their provision constitutes a taxable benefit.

The cost per head is the total cost of providing the function, including extras such as transport and accommodation, divided by the number of attendees (employees and guests). The total cost includes VAT, even if this is later recovered.

If the cost per head is more than £150, the whole amount is taxable, not just the excess over £150. Where a tax charge arises and the employee brings a guest, the taxable amount is the cost per head for both the employee and their guest (so £350 for an event where the cost per head is £175).

Where more than one annual event is held in the tax year, all will be tax-free if the total cost per head does not exceed £150. Where the total cost per head is more than this, the exemption can be used to best effect.

Gifts

The trivial benefits exemption allows employers to provide employees with low-cost gifts without triggering a tax charge under the benefits in kind legislation. The exemption will only apply if the following conditions are met.

The gift is not cash or a cash voucher.

The gift does not cost more than £50.

The employee is not contractually entitled to the gift.

The gift is not provided under a salary sacrifice arrangement.

The gift is not provided in recognition for services performed or to be performed.

The cost of the gift is the cost to the employer of providing it. Where a gift is made available to a number of employees and it is not practicable to determine the cost of each individual’s gift, the average cost can be used instead. Directors and office holders of close companies and members of their family or household can only receive £300 of tax-free trivial benefits a year; for other employees there is no limit.

Care must be taken where the gift comprises a season ticket, voucher or a benefit accessed using an app. Here the cost is the annual cost, rather than the cost each time the season ticket, voucher or app is used. This may bring the gift outside the scope of the trivial benefits exemption, even if the cost of each individual item or use is less than £50.

Consider a PSA

If a taxable benefit does arise in respect of the Christmas party or a gift, consider meeting the liability on behalf of your employees by means of a PAYE Settlement Agreement (PSA). It is the season of goodwill after all.

Under payrolling, employers deal with taxable benefits provided to employees through the payroll, treating the taxable amount of the benefit like additional salary and deducting the associated tax from the employee’s cash pay. Where a benefit is payrolled, the employer does not need to report it to HMRC via the P11D process after the end of the year. However, the benefit must still be taken into account in calculating the employer’s Class 1A National Insurance liability on their P11D(b).

Currently, payrolling is voluntary and employers who wish to payroll must register to do so before the start of the tax year from which they wish to commence payrolling – it is not possible to join in-year. However, this is to change as from 6 April 2026 payrolling will become mandatory for all but a couple of taxable benefits. At the time of the Autumn 2024 Budget, the Government confirmed that mandatory payrolling will go ahead as planned, and provided more details as to what it will look like.

Excluded benefits

Mandatory payrolling will apply to all taxable benefits in kind with the exception of employment-related loans and employer-provided living accommodation. Currently, it is not possible to payroll these benefits, but voluntarily payrolling will be introduced for both of them from April 2026, meaning that employers providing these benefits can choose either to payroll them voluntarily or report them to HMRC after the end of the tax year via the P11D process. For 2026/27 and later tax years, it will no longer be possible to report other benefits on a P11D. Employment-related loans and living accommodation will be brought within mandatory payrolling from a later date.

Taxable amount

To find out the amount to include in the payroll in respect of the payrolled benefit, employers will need to calculate the cash equivalent of the benefit and divide it by the number of pay periods in the tax year. Where an employee is paid monthly, 1/12th of the cash equivalent of the benefit will be taxed through the payroll each month.

If the cash equivalent value changes during the year, as would be the case, for example, if an employee changed their company car, the employer would need to recalculate the cash equivalent value and revise the payrolled amount accordingly for the remainder of the tax year.

End of year process

Employers will be expected to ensure that the amounts that are reported for taxable benefits in kind are as accurate as possible. Corrections should be made as soon as possible if the value changes in-year. However, an end of year process is to be introduced to provide for amendments to the taxable value of benefits that cannot be determined in-year. Details of this are not yet available and will be provided in due course.

Reporting requirements

Following the move to mandatory payrolling, employers will need to provide more information than they currently need to do so under the voluntary system. From April 2026, Class 1A National Insurance contributions on benefits in kind will also be collected through the payroll, rather than after the end of the year as now, and the reporting requirements will be increased to facilitate this and also to provide a more granular breakdown of payrolled benefits in kind.

Benefits in kind (BIK) are goods and services provided to an employee (or a member of their family or household) for free or at significantly reduced cost. The type of benefit and the way it is provided can affect the tax and NICs to be paid and the reporting requirements.

Private use of a company vehicle creates a taxable BIK, with the amount of  benefit depending on the type of vehicle and fuel. The tax charge on an employee's private use of a van is generally lower than that of a car (zero in some circumstances) and as such an employer-provided van may be a viable alternative to a company car.

Is it a car or is it a van?

HMRC defines a company van as ‘a mechanically propelled road vehicle that is a goods vehicle (a vehicle of a construction primarily suited for the conveyance of goods or burden of any description) and has a design weight not exceeding 3,500kg’. That the vehicle might be considered a van for other purposes, such as road tax or VAT, is irrelevant. HMRC guidance at EIM23110 states that ‘actual use of a particular vehicle is irrelevant: the statutory test is a test of construction, not use’.

The tax case of Coca-Cola v HMRC [2020] covered the issue of whether crew cab vehicles (which have a second row of seats behind the driver and can carry a larger number of passengers than a transit van) were cars or vans for BIK purposes. Coca-Cola argued that the crew cab vehicles used by their staff were vans, while HMRC said they were cars. The Tribunal decided in HMRC's favour since the vehicles considered made substantial provision for passengers. Therefore, their predominant purpose could no longer be that of carrying goods.

'Restricted private use'

Provided the van is primarily needed for the employee's job and not used for private purposes, they can drive the van for ordinary commuting between the home and workplace. This is because it falls under the 'restricted private use' exemption.

If the employee uses the van privately outside of commuting, they will incur a fixed BIK charge. This is usually significantly lower than on an average car BIK, generally making employee provision of vans a win-win solution. Providing an employee with a company van is therefore a far better option than providing a car, where any commuting would cause a claim that the car is only used for business travel to fail.

What is the charge?

The charge is based on a standard scale charge of £3,960 per annum for 2024/25 should the van emit CO2 when driven (which is the majority of vans). This amount is taxed at the employee’s marginal tax rate such that for a basic rate 20% taxpayer, the tax is £792; £1,584 for a higher rate 40% taxpayer; and £1,782 for an additional rate 45% taxpayer. In addition, the employer providing the benefit pays employer’s Class 1A NIC on the value of the benefit at 13.8% (i.e. £546.48). A flat rate benefit of £757 applies should the employer provide fuel.

Note that there is no BIK charge for zero-emission company vans. Therefore, a company's electric van can be used by an employee as a tax-free benefit and it will be available for unrestricted private use.

Practical point

To avoid the company van BIK trap, a formal private use agreement prohibiting any significant private use should be in place. In addition, the company must let their motor insurance provider know that the van is to be used for work and incidental personal use.

In a partnership, profits and losses are shared between the partners in accordance with the profit sharing ratio. This may be fixed, for example, three partners may agree to share profits in the ratio of 40:35:2; but it does not have to be. Instead, the partners can simply agree to share profits and losses in such proportions as is agreed between them.

A fixed profit sharing ratio has the advantage of certainty as each partner knows at the outset what their share of the profits will be. It also enables the partners to agree up front on an allocation with which they are happy, and which is transparent. However, this may not be the best option from a tax perspective. By contrast, a flexible profit sharing ratio whereby partners agree on the profit allocation each year according to their personal circumstances will allow them to minimise their combined tax bill. While this is unlikely to be acceptable where the partners only have a professional relationship with each other, where there is a personal relationship, for example, if the partners are married or in a civil partnership, a flexible profit sharing ratio can be advantageous from a tax perspective.

Example

Anne and Bill are married and in partnership. They agree to share profits and losses in such proportion as is agreed between them.

In 2021/22, Anne also has a job from which she earns £35,270. Bill’s only income is from the partnership.

The partnership makes a profit of £70,000. Taking account of their personal circumstances, they agree to share the profits in the ratio 2:5, so that Anne receives profits of £20,000 and Bill receives profits of £50,000.

Anne pays tax of £4,000 on her profits (£20,000 @ 20%).

Bill pays tax of £7,846 (20% (£50,000 - £12,570)).

Their combined tax bill is £11,846. If they had shared profits equally, the combined tax bill would have been £14,846 as £15,000 of the profits would have been taxed at 40% rather than 20%.

Anne retired from her job on 1 April 2022. In 2022/23 her only income is from the partnership. However, Bill undertakes a consultancy role from which he earns £40,000. The profits from the partnership are £60,000 for 2022/23. As their circumstances are different this year, it is better from a tax perspective to share profits in the ratio of 5:1, so that Anne receives profits of £50,000 on which she pays tax of £7,846 and Bill receives profits of £10,000 on which he pays tax of £2,000 – a combined tax bill of £9,846.

Had they continued to share profits in the ratio 2:5, Anne would have received profits of £17,143 on which she would have paid tax of £914.60 and Bill would have received profits of £42,857 on which he would have paid tax of £14,168.80, and their combined tax bill would have been £15,083.40. By adopting a flexible profit sharing ratio, they can reduce their combined tax bill by over £5,000.

January 2024

The cost of living crisis has impacted on people’s ability to take holidays and short breaks. If you are a landlord letting a furnished holiday let (FHL), you may find that the downturn in bookings means that you are unable to pass the occupancy tests for your let to qualify as an FHL for tax purposes.

For a let property to count as an FHL, the property must be in the UK or the EEA and must contain sufficient furniture for normal occupation. It must also pass three occupancy tests.

Condition 1 – the pattern of occupation condition

For the property to be an FHL, the total of all lets that exceed 31 days must not be more than 155 days in the year.

Condition 2 – the availability condition

The property must be available for letting for at least 210 days in the tax year.

Condition 3 – the letting condition

The property must be actually let for at least 105 days in the tax year.

If the letting condition has not been met in a particular year, you may be able to use a period of grace election to ensure a property that has previously qualified as an FHL continues to do so.

Period of grace election

A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to. The impact of the cost of living crisis is an example of where this may be the case, and offers landlords a potential lifeline.

To make a period of grace election, the pattern of occupation and availability conditions must still be met. Also, the letting condition must have been met in the year before the first year for which the landlord wishes to make a period of grace election. If the letting condition is not met again in the following year, a second period of grace election can be made. However, if the test is not met in year 4 after two period of grace elections, the property will no longer qualify as an FHL. A period of grace election can be made either on the Self Assessment tax return or separately (either with or without an averaging election).

For example, if the property met the letting condition in 2022/23, a period of grace election can be made for 2023/24 and 2024/25 if the letting condition is not met in those years, as long as the other two occupancy conditions are met. However, the letting condition must be met again in 2025/26 for the property to qualify as an FHL for that year.

A period of grace election for 2023/24 must be made by 31 January 2026.

Multiple FHLs and averaging

In the event that a landlord has more than one FHL, and the letting condition is met in some but not all of the properties, an averaging election could be made instead. Where this is made, the test is treated as met if on average the holiday lets are let for 105 days in the tax year. For example, a landlord with three holiday lets would need the properties to be let for a minimum of 315 days in total for an averaging election to be used to meet the letting condition across all three properties.

Business property relief (BPR) is one of the more valuable tax reliefs available to business owners because it reduces the value of an estate for IHT purposes on both life and death transfers.

The amount of BPR available is:

100% BPR for:

• an unincorporated business, such as a sole trader;
• an interest in an unincorporated business, such as a partnership;
• shares in an unlisted company, including companies listed on the Alternative Investment Market.

50% BPR for:

• shares in a quoted company which give at least 50% of the voting rights;
• land, buildings and/or machinery used in an unincorporated business in which the deceased had an interest or in a company controlled by the deceased.

Many owners assume that just because they have shares in a company, for example, no IHT will be due on their share of the company (100% BRP relief). However, it is easy to get into a situation where this is not the case as two conditions need to be fulfilled. At first reading, these conditions look easy enough to fulfil however, delve further and problems can arise.

The two conditions are:

• the shares need to have been owned for at least two years; and
• the company must carry on a 'trading' business rather than an 'investment' business.

Problem 1 - too much cash

Assets not used 'wholly or mainly' for the business during the last two years, or not required for future business use cannot come under the claim – importantly, included here are high levels of cash. HMRC considers 'excessive' cash balances to be 'excepted' assets. As a general rule, any cash that is more than is reasonably needed for a business's present and future requirements is likely to be treated as excessive. For example, money needed to service delays in customer payments would come within the realms of 'future business use'. However, HMRC would expect to see firm plans in place as to intention (e.g. for business expansion). Should withdrawal of monies be possible then the shareholder may have to weigh up the tax cost of loss of BPR against the cost of extracting cash from the business in the form of salary or dividend.

If the company owns assets mainly used privately, these will reduce the value eligible for BPR in the same way as the cash balance.

Problem 2 - binding agreements

One common problem is where there is a shareholder's agreement in place such as a provision for the surviving shareholders to purchase the shares of a deceased shareholder for the deceased's estate. In this situation, HMRC will argue that this constitutes a binding contract for sale and deny BPR. The advantage of such clauses is that they restrict shares from being acquired by anyone other than the current shareholder owners. A way to counter this is to replace such a clause with a cross-option agreement, where the surviving shareholders have the option to buy the shares and conversely, the estate has an option to sell them. The sale will depend on either option being exercised and so cannot be a binding contract.

Other Problems

BPR will be denied in other circumstances, the usual one being if the company deals mainly in land and buildings e.g. the shareholders of an owner-managed company primarily operating a rental property business.

If a business partner retires but retains a financial interest in the capital account. In this case, BPR will not be available because the retiree will be a creditor of the business.

Statistics published by HMRC in August 2022 revealed that in the 2021/22 tax year, 129,000 taxpayers reported residential property disposal using HMRC’s online service, filing 137,000 returns in respect of 141,000 disposal and paying £1.7 billion in tax. However, an estimated 26,500 returns (20%) were filed late, suggesting some ignorance around the rules and the filing deadlines.

What do you need to know?

Need to report residential property gains

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

A reportable gain will arise if you sell a residential property that has not been your only or main residence throughout the period you owned it (or the whole period bar the final nine months). This may be the case because the property has been let out or is a second home. Where the property is owned jointly, each co-owner must report their own share of the gain.

The gain must be reported to HMRC using the online service (see www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020). You will need the property details to hand, including the address and post code, acquisition and completion dates, the cost of the property, the disposal proceeds, details of any enhancement expenditure and details of any reliefs or allowances that you wish to claim.

Need to pay associated tax

You will also need to pay the capital gains tax on the gain within the same 60-day window. This is the best estimate of the tax due at the time that the gain was made. You can make use of the annual exempt amount (unless it has been used on a residential property gain earlier in the tax year), and any losses already realised in the year, or brought forward.

Payments can be made by debit or corporate credit card, via online banking or by cheque,

You will need to finalise your capital gains tax position on your self-assessment return for the tax year in which the completion took place to take account of other disposals in the tax year. There may be further tax to pay if you have made chargeable gains on other assets. You may also be eligible for a refund if you realised a capital loss later in the tax year after the completion date of the property.

If economic advisers are to be believed then we are heading into a recession lasting at least a year and every recession brings with it business casualties. Some companies are pre-empting and selling up now. When selling a private limited company you have two possible routes: a sale of the company’s shares, and/or a sale of the company’s assets.

Under a share sale, the buyer acquires all the company’s shares and the company continues with the buyer as the new owner. With an asset sale, the buyer will acquire all or certain assets of the company, and they may also assume certain liabilities associated with those assets. The buyer takes over ownership of the assets, leaving the company as a ‘shell’ which is then closed down after the sale. It is normally more beneficial to sell company shares rather than go down the asset sale route because the latter brings with it the problem of extracting the sale proceeds from the company which could lead to a double tax charge.

Usually, the sale proceeds are in cash but that need not necessarily be the case - sometimes they may be in the form of loan notes (Qualifying Corporate Bonds) or a mixture of both.

Cash or loan notes?

Cash

Selling shares in a company brings with it the advantage of claiming Business Asset Disposal Relief (BADR) which is a major attraction for the seller. However, there are conditions which, if not met, result in a loss of relief.

BADR is not a ‘relief’, but a special CGT rate applying to gains realised on the disposal of certain qualifying business assets. A claim to BADR charges CGT at 10% and, as such, is particularly beneficial to higher and additional rate taxpayers who otherwise would be charged 20%.

The fundamental requirement for BADR is that the seller is required to work for the company (as a director or employee). The disposal must be 'qualifying' which includes a material disposal of business assets. Business assets for this purpose include all or part of a trade, qualifying share disposals by directors (or, if relevant, employees), or assets of the trade.

The claim is subject to an overriding lifetime allowance claimable by any individual -- currently £1m. BADR must be claimed on or before the first anniversary of the 31 January following the tax year in which the disposal takes place.

Loan Notes

If the shares are sold at a gain, this is usually taxed in the year in which the sale contract is agreed but the gain can be reduced or at least deferred by paying the seller wholly or partly in fixed-interest loan notes (qualifying corporate bonds - QCB) spread over possibly several years. Essentially these loan notes are IOUs, usually coming with restrictions on when they can be encashed. Under special rules when shares are sold in exchange for QCBs, a capital gain is calculated as if it is chargeable when the QCB is redeemed, disposed of or ceases to qualify as a QCB.

The main disadvantage is that BADR cannot be claimed by taking these notes. However, this may be more tax effective than first thought as spreading the gain can lower the overall tax burden compared with taking all the sale proceeds as cash (even if BADR can be claimed). Spreading over several years will enable the use of the annual allowance (if not otherwise used each year) and lower tax rates may mean that the tax bill is lower overall than taking all the money in one go. It should be noted that this practice may not reduce the tax bill as much as it would before the Autumn Statement. In that statement, the Chancellor announced that the annual exempt amount is to be cut from £12,300 to £6,000 from 6 April 2023 and then halved again to £3,000 from 6 April 2024.

However, to take advantage of this tax planning, the company needs to be the seller's company when the QCBs are redeemed. A way of achieving this is for the seller to negotiate to remain with the company as a director or employee and importantly, maintain a 5% shareholding. Further, if the seller was married they could transfer some of the loan notes to the spouse before redeeming them which would further reduce the tax bill.

CGT ‘traps’

A selection of capital gains tax issues involving trusts.

Trusts can be used for a wide variety of purposes, such as asset protection or passing family wealth down generations. From a tax perspective, trusts need to be handled carefully to prevent unexpected and unwelcome consequences. This article highlights a selection of capital gains tax (CGT) issues. However, remember to also consider other potentially relevant taxes (e.g., inheritance tax (IHT) and income tax) in advance of any events or transactions involving trusts.

Give it away…properly!

If the trust’s creator (settlor) gifts an asset to the trust (e.g., an investment property), this will be a deemed disposal at market value for CGT purposes. This could result in a chargeable gain for the settlor, even though no proceeds are received for the property. A form of CGT relief (holdover relief) generally applies to defer gains on transfers of assets on which IHT is immediately chargeable, such as the gift of a property to a discretionary trust (TCGA 1992, s 260(2)(d)). However, this relief is subject to various conditions and exceptions, including that the trust must not be ‘settlor interested’, such as where a ‘dependent child’ of the settlor (i.e., a child, including a stepchild, who is under 18 years old, unmarried and does not have a civil partner) can benefit from the trust. Thus, when setting up a trust, consider the trust’s potential beneficiaries carefully.

Sharp claws

A separate form of holdover relief is potentially available for gifts of business assets (TCGA 1992, s 165). However, the held-over gain on the disposal may be ‘clawed back’ from the transferor in certain circumstances. For example, this can arise if during the ‘clawback period’ (i.e., up to six years after the end of the tax year of disposal) the trust becomes settlor-interested. There are only limited exceptions to this anti-avoidance rule, so it would be prudent to keep a close eye on events involving the trust during the clawback period.

Timing is everything!

If seeking to rely on holdover relief under TCGA 1992, s 260 on the basis that a transfer out of the trust to a beneficiary results in an immediate IHT charge, the timing of the transfer may be critical to the availability of that holdover relief.

For example, no IHT is chargeable (so no CGT holdover relief is available) on a transfer which occurs within three months of the day on which the trust commenced, or within three months following a ten-year anniversary of the trust. In other words, if no IHT is chargeable on the transfer, no holdover relief under section 260 is available either.

Practical tip

 A holdover relief claim under TCGA 1992, s 260 can have unfortunate implications where the asset transferred is a house. For example, a parent may wish to gift a buy-to-let property into trust, which subsequently becomes the main residence of their adult child as a trust beneficiary. The parent might intend holding over any gain on the property disposal for CGT purposes (under section 260), and the trustees may intend claiming principal private residence (PPR) relief on a subsequent disposal of the property.

However, PPR relief may be restricted or denied on the disposal of a dwelling by an individual or settlement trustees in such circumstances, if the property’s base cost has been reduced following one or more section 260 holdover claims on its earlier disposal (TCGA 1992, s 226A).