Helpsheets ... continued 40 from homepage

Where the plan is to pay a dividend the director/shareholder must ensure that set procedures are in place. This article describes some traps for the unwary and what can be done to reduce the likelihood of HMRC enquiries into dividend payments made.

Trap 1- Timing

The relevant date for an interim dividend is either the actual date of payment (because a dividend resolution is not needed to confirm payment) or the date the payment is placed at the directors/shareholder's disposal. However, unless a resolution is signed and dated, HMRC will consider the payment date to be the date that the payment is entered into the company’s books. This could be a problem should the year of declaration be a year when the shareholder is a basic rate taxpayer but through slack record keeping the dividend is taxed in the next year when the shareholder may be a higher rate taxpayer. This ‘trap’ is more likely to occur in respect of an interim dividend because a final dividend only becomes an enforceable debt when approved by resolution at a general meeting of shareholders. Therefore the relevant date for a final dividend is the date of declaration, the date for which can be planned.

Trap 2 - PHI Insurance

Drawings in the form of dividends together with a low or nil salary could cause problems should the director claim under a Permanent Health Insurance policy. Such policies invariably pay out only on a percentage of earnings when the policyholder cannot work through illness or accident. Therefore it is recommended that the policy be reviewed to check that account is taken of dividend income as well.

Trap 3 - Correct paperwork

HMRC has been known to investigate disparities between dividends declared on a personal tax return with shareholdings declared at Companies House, raising penalties for incorrect returns. Proof in the form of a paper trail of dividends declared and share certificated can be vital as the recent tax case of Terence Raine v HMRC 2016 UKFTT 0448 (TC) showed..

The company, of which Mr Raine and his colleague were directors, was set up by an agent. They were under the impression that each was holding one share and one would be appointed as the director and the other the company secretary. However, the paperwork was completed such that, technically, one share remained in the agent's name. For 10 years, Annual Returns (now 'Confirmation statements') were submitted to Companies House which showed that Mr Raine held all the shares and the accounts confirmed this.. Every year, dividends were declared and paid with supporting counterfoils showing an equal split of share ownership. Eventually, HMRC checked the dividends declared against those shareholdings shown on the Annual Return and saw that they differed. The tax tribunal concluded that Raine must have been aware of the discrepancy, as he was the director who had signed the accounts. Therefore the tax demand and penalties that would have been paid as per the paperwork (namely, all taxable on Raine) were valid.

Purchasing a commercial property at auction is a common occurrence. Although usually the sale or lease of a commercial property is exempt from VAT, sometimes the commercial property listed for auction is being sold in circumstances where the question of whether a charge to VAT arises. HMRC deems 'commercial property' as a non-residential building such as a shop, office, warehouse, restaurant, farm, etc. and includes some student accommodation, hotels and care homes. If a business is selling a commercial property, it will be making an exempt supply, therefore it cannot recover any of the VAT associated with the selling costs.

When VAT is chargeable on commercial buildings

The exception to the sale of a commercial property being VAT exempt is on the freehold sale of a new (less than three years old) commercial property (which is standard rated for VAT). Student accommodation, including halls of residence, is exempt, provided that the appropriate certification is met, where necessary. Otherwise, no VAT is claimable unless the owner/seller has elected to 'opt to tax'.

Why would you 'opt to tax'?

The option to tax allows a business to charge VAT at the standard rate on the sale or rental of commercial property, transforming what would otherwise be an exempt supply into a taxable one. By taxing a property, a business can reclaim the VAT on costs related to that property, such as refurbishment or construction costs.

Most businesses do not need to opt to tax their trading premises as they will be using them to make taxable supplies in their everyday business (i.e. the business will not be making supplies of the property, but will be making supplies from the property). Therefore 'opting to tax' only needs to be considered if the intention is to rent out the property. The main benefit of the election is that the business can reclaim all the VAT suffered on the purchase, the associated professional costs and any ongoing expenses. The 'pay-off' for opting to tax will be that the landlord will have to charge VAT on rent and service charges and, importantly, when selling the property. If the tenant of the property is VAT registered, charging VAT would have no implications. However, if the tenant is not VAT registered, (e.g. small companies, charities, financial service companies, etc.), VAT would be an additional cost to the tenant.

Can you change your mind?

An election to opt to tax can be made at any time – it does not have to be on purchase or first occupation. The business may find that when it first occupies the property there is no need to opt to tax, but later may decide that it is beneficial to do so. If this is the case then it can then claim at a later date.

Option to tax on mixed-use property

When a property is of mixed-use, e.g. a shop below with flats above, the option to tax is only applicable on the commercial part of the property and not the residential part. When bidding at auction, the final bid price will be unknown until the hammer goes down. Therefore, with a mixed-use property, the split between the VAT standard rated commercial element (under the opt to tax) and the VAT exempt residential units will need to be apportioned on the purchase invoice. Note that VAT is charged on the buyer’s premium payable to the auctioneer (if applicable), whether or not the seller has opted to tax the property.

Practical point

When intending to purchase a commercial property at auction, it is important to make a claim to opt to tax beforehand, to enable recovery of the VAT paid on purchase. If the auction bid is unsuccessful, the election can be cancelled within six months or automatically lapses after six years.

A look at the consequences of direct exports where the supplier arranges the export of the goods themselves.

When a business exports goods from the UK the sales can be zero-rated, but a business has to fulfil certain criteria for the zerorating to apply. Following Brexit, exports are supplies of goods to any destination or customer outside the UK, except for sales from Northern Ireland which is still within the EU single market for VAT purposes.

There are two distinct categories of exports: direct exports and indirect exports (ex-works). With direct exports, the supplier of the goods arranges the transport and export of the goods themselves, and with indirect exports, it is the customer that arranges the transport and export of the goods. In both cases, the supplier must obtain evidence that the goods have been exported from the UK within three months of their removal.

Direct exports

A direct export occurs when the complete transaction from supply to export is under the control of the UK supplier or owner of the goods. HMRC’s internal guidance in the VAT Export and Removal of Goods from the UK Manual at VEXP20300 states that the location of the customer is not a relevant factor provided the goods are exported under the control of the supplier.

This means that when dealing with a direct export the supplier can sell goods to a UK customer (either a business or private individual) and provided the supplier arranges the export to a destination outside the UK, the supply can be zero-rated.

Examples of direct exports include situations where the UK supplier or an agent employed by the supplier (e.g., a freight forwarder) is responsible for the physical export of the goods.

This is a little-known fact, including (worryingly) within HMRC who recently took a case to the First Tier Tribunal (FTT) where a taxpayer had undertaken direct exports.

In Procurement International Limited v HMRC [2024] UKFTT 949 (TC), HMRC considered that the appellant incorrectly zero-rated as direct exports certain supplies made by it. The assessments totalled £485,258.33.

The appellant’s business was that of a reward recognition programme fulfiller. In essence, the appellant supplied goods to customers who ran reward recognition programmes on behalf of their customers, who, in turn, wanted to reward their customers and employees.

The reward programme operators (RPOs) provided a platform through which those entitled to receive rewards could choose and order such rewards. The RPO would then place orders with the appellant for requested goods, which were delivered directly to the reward recipient (RR).

HMRC formed the view that where the RPO was registered for VAT in the UK, the appellant should not have treated any supply delivered to an RR outside the UK (pre-31 December 2020, including to an EU RR) or outside Great Britain (from 1 January 2021). HMRC considered that the UK presence of the RPO caused the supply to be made to the RPO in the UK or GB and be subject to VAT at the standard rate.

The appellant argued that the supplies had been correctly zero-rated as direct exports and cited VAT Notice 708 Paragraph 2.10 (pre-BREXIT) and 2.8 (post-BREXIT), which defined a direct export as arising where the supplier sends goods to a destination outside the UK (in the pre-Brexit version ‘and EU’), and was responsible for arranging the transport or appointing a freight agent.

This applied even when the customer was established in the UK. The FTT decided that the supplies were zero-rated as supplies of goods which had been exported pursuant to VATA 1994, s 30(6).

Practical tip

If a business arranges the export of goods itself, it can zero rate the sale even if its customer is a UK business or individual.

A consideration of some of the effects of the CGT changes announced in the Autumn Budget 2024.

In the Autumn Budget on 30 October 2024, Rachel Reeves made some significant changes to capital gains tax (CGT). The main purpose of this article is to explain some of the knock-on consequences that were not outlined in the speech.

The main rates of CGT

CGT for gains within the basic rate band increased from 10% to 18% for disposals on or after 30 October 2024; the rate for residential property gains and receipts of carried interest was already 18%.

The higher rate of CGT increased from 20% to 24% to align with residential property rates from the same date (except receipts of carried interest, which remains at 28%).

These new higher rates also apply for trusts and estates from 30 October 2024.

Individuals may allocate any basic rate band, capital losses and their £3,000 annual exempt amount against whichever gains they choose, but gains eligible for BADR are always deemed to use the basic rate band before it is allocated against other gains.

The Finance Bill published after the Autumn Budget 2024 contains various specific provisions relating to this mid-year change. For example, gains or losses treated as accruing to an individual under TCGA 1992, s 1M (temporary non-residents) in the tax year 2024/25 are to be treated as accruing before 30 October 2024.

Increase in the BADR tax rate

The lifetime limit of qualifying gains for BADR remains at £1m, but the current 10% tax rate will increase to:

 • 14% in 2025/26; and

 • 18% from 2026/27.

By 2026/27, the maximum CGT saving will be £60,000 (i.e., (24%-18%) of £1m of gains), compared to a £1m saving when the lifetime limit was £10m, less than five years ago.

Presumably, there will come a time when the relief will be completely phased out. The fact that the name was previously changed from entrepreneurs’ relief perhaps indicates that a potentially significant CGT break on disposal of a business does not particularly encourage entrepreneurs.

Where BADR gains have previously been deferred

There are some situations where gains eligible for BADR have previously been deferred and remain eligible for the relief on a subsequent crystallisation of the gain. Two examples are below.

1. Deferred gains from having taken loan note consideration, which subsequently crystallise on redemption and the seller satisfies the relevant BADR conditions in relation to the acquiring company in which the loan notes are held (i.e., the seller holds at least 5% of the ordinary share capital, etc., in the acquirer and works for it for at least 24 months).

2. The provisions (at FA 2019, Sch 16) relating to deemed disposals immediately before a fundraising event that would reduce the holding below 5%, where an election has also been made to defer taxation of this deemed BADR gain until a subsequent disposal of the shares.

Note that in these two scenarios, the taxpayer has retained a right to claim BADR at the time of the eventual disposal, not a right to retain a 10% tax rate. Thus, the prevailing BADR rate (and lifetime limit) will apply on crystallisation events from 2025/26 onwards.

Since the coalition government took power in 2010, there have been several changes to when and how gains eligible for BADR may be deferred. See HMRC’s Capital Gains Manual (at CG64135 to CG64171) for further details.

Practical tip

Where BADR gains have previously been deferred, consider advancing any crystallisation events to take place this year before the BADR tax rate goes up next April.

The importance of expressing intentions or wishes in writing for tax purposes. When it comes to tax, attention to detail is all-important. So, retaining documentary evidence to support the reason why something has been done can make all the difference between a tax relief or allowance being allowed or not.

Ticking the boxes

For example, the inheritance tax (IHT) exemption for ‘normal expenditure out of income’ can apply if a donor’s gift satisfies certain conditions. These are broadly that the gift must: (a) be part of the donor’s normal expenditure; (b) be made out of income (taking one year with another); and (c) leave the donor with sufficient income to maintain their usual standard of living. But what is ‘normal’ in this context? How can it be demonstrated? HM Revenue and Customs (HMRC) offers no firm guidance in terms of what is considered acceptable evidence for these purposes. However, a letter (or deed) from the donor stating the intention and circumstances of normal gifts to the recipient out of income (e.g., before the first of several proposed gifts) may be helpful evidence if queried by HMRC. A bank standing order (preferably accompanied by a letter to the gift recipients) might also be compelling evidence.

Dropping a hint…

Some individuals have wills dealing with their estates that include discretionary trusts. The potential beneficiaries of such trusts commonly include the surviving spouse (or civil partner) and other family members. The discretionary trust deed generally gives the trustees discretionary powers over which beneficiaries are to benefit from the trust’s income and capital, and when they are to benefit.

In some cases, the testator may prefer a specific individual (e.g., a surviving spouse) to be the principal beneficiary. Can anything be done? The will (introducing the discretionary trust) might be accompanied by a ‘letter of wishes’ addressed to the trustees, expressing the hope that the trustees will exercise their discretion in favour of a particular beneficiary. However, it is important that such letters are not legally binding, must not impose any obligation, or impinge on the trustees’ discretionary powers. Nevertheless, a letter of wishes can offer the testator some degree of comfort that the specified beneficiary might at least be taken into consideration when the trustees consider exercising their discretion.

Just for the sake of it

It is not uncommon for close relatives to be self-employed, and for goods or services to be purchased from those relatives. It is important to distinguish between payments for goods and services, and payments made out of natural love and affection for the relative. HMRC’s Business Income Manual states (at BIM41810): ‘Where a trader receives what is termed a gift from a close relative (that is forebears, offspring, brothers and sisters) it may normally be accepted that the sum comes to the trader not in that capacity but by virtue of the close personal relationship.’ It will generally be helpful if gifts coincide with significant events (e.g., birthdays or Christmas) accompanied by a greeting card, letter or email. However, under no circumstances should payments for goods or services be disguised as voluntary and unexpected gifts.

Practical tip

If a tax dispute between a taxpayer and HMRC reaches the First-tier Tribunal, the facts and evidence will be considered, and the standard of proof is on a balance of probabilities. Taxpayers who retain proper documentary evidence of their intentions generally stand a better chance of success than those who do not.

The VAT flat rate scheme is a simplified scheme for smaller VAT-registered businesses. While using the scheme will save work, this may come at a cost if the amount of VAT paid to HMRC under the scheme is more than would be payable if traditional VAT accounting is used. This will depend on the actual VAT charged and incurred, the flat rate percentage for the trader’s business sector and whether the trader is a limited cost trader.

Eligible traders

A trader can use the flat rate scheme if they are registered for VAT or eligible to be registered and their annual turnover excluding VAT is not more than £150,000. Once within the scheme, a trader can remain in it as long as their annual turnover does not exceed £230,000. However, if turnover exceeds this limit temporarily, HMRC may allow the trader to remain in the scheme if they are satisfied that the trader’s turnover in the next 12 months will not exceed £191,500.

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

Nature of the scheme

Under the scheme, the trader pays a fixed percentage of their VAT-inclusive turnover over to HMRC rather than the difference between the VAT that they charge on sales and that incurred on expenses. This reduces the amount of record-keeping needed, and simplifies the VAT return process.

The flat rate percentage depends on the business sector in which the business operates. The percentages can be found on the Gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay.

Special rules apply to traders who meet the definition of a limited cost business. This is the case where goods cost less than 2% of turnover or less than £1,000 (where costs are more than 2% of turnover). Money spent on services is not taken into account in working out whether a business is a limited cost business. The calculation is performed for each VAT quarter, so a business may be a limited cost business in one quarter and not in another. Where a business is a limited cost business for a quarter, the VAT payable to HMRC is 16.5% of their VAT-inclusive turnover for that quarter, regardless of the sector they operate in and the flat rate percentage for that sector.

A business receives a 1% discount on their flat rate percentage for the first year of VAT registration .

Example

Alison runs a cattery and uses the flat rate scheme. She has been in the scheme for five years. For the VAT quarter in question, her VAT-inclusive turnover is £32,000. The flat rate percentage for her sector is 12%. The VAT that she must pay over to HMRC is simply 12% of £32,000, i.e.£3,840. She does not need to work out the difference between the VAT that she has charged and that she has incurred in the quarter.

Is it worthwhile?

Although the scheme will save work, it will not necessarily save the trader money, and they may pay more over to HMRC than if they continue to use traditional VAT accounting. This is more likely to be the case where the trader is a limited cost trader, as the VAT percentage of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of VAT-exclusive turnover, leaving a very narrow margin to recover VAT on purchases. As services are not taken into account in determining whether a business is a limited cost business, if the trader incurs a lot of VAT on services, the flat rate scheme may leave them out of pocket.

There is no substitute for doing the sums. Before signing up to the scheme, calculate the VAT that would be due using the flat rate percentage and that due under traditional VAT accounting and compare the two. Only then will it be possible to assess whether joining the scheme is worthwhile.

Although the economy is said to be stagnating with little growth on the horizon, many smaller companies are doing well and have healthy bank balances. However, with the interest rate return on cash in a bank account being relatively low, some companies are looking to invest spare cash elsewhere if investing in their own company is not desired or possible. Companies that are connected can lend to each other usually without any tax implications so long as conditions under the loan relationship rules are adhered to. Reasons for lending to another connected company include scenarios where one company is doing well with spare cash to invest and the other is not, or the connected company does not have cash for investment in their business.

Connected companies

HMRC define a 'connected' company as one where either the same person has control of both companies, or one person has control of one and persons connected with them have control of the other, or where two or more persons have control of both companies.

'Loan relationship' rules

Special rules apply to a company's loan relationships, covering all loans (whether in cash or not) made both by and to a company, requiring transactions to be conducted at arm’s length, reflecting what would typically occur between unrelated parties. The rules define how income and expenses arising from loan relationships are treated, as well as any gains and losses arising from changes in the value of loans or related transactions. For example, under normal loan relationships rules, interest is relieved when it accrues in the accounts, not when it is paid The transfer of cash for the loan amount is not a taxable event – it is only should interest be charged and received that a taxable event will occur.

Practical point

There is no legal or tax reason for charging interest between UK resident connected companies, therefore many such loans between connected companies do not. However, should interest be charged, it will be taxable in the lending company's accounts but tax deductible in the borrowing company's accounts.

Investing in property

Trading companies can invest in property; however, it is more common for a separate non-trading company to be incorporated to keep the investment property separate from the main trading company (i.e. 'ring fence' the property). One  reason for separation is that personally drawing funds from a company usually incurs a tax bill;another is that should the trading company go into liquidation then the property will be saved from creditors. However, the main reason is to avoid jeopardising the availability of Business Asset Disposal Relief on any future sale/winding-up of the trading company.

In order to make the investment, the trading company lends its surplus cash to the investing company, which then purchases the property in its own name. If the investment is funded through a combination of an inter-company loan and a mortgage from an external lender, it is advisable for the investment to be made by the non-trading company. This is because if the investment is made in the trading company's name, lenders typically require personal guarantees from the directors or often a fixed and floating charge debenture over the company itself. Understandably, many business owners would rather avoid such charges over their trading company.

Invariably the loan will be satisfied by the sale of the property. However, the lending company may decide to write off the loan. Where companies are connected, the usual treatment for a loan that is written off is that the transaction is tax neutral (i.e. there is no charge to the borrowing company and no tax relief for the lending company).

Practical point

There is no legal requirement for a formal loan agreement to be made especially where the companies are connected either by being owned by a sole director or husband and wife as neither company is likely to sue the other for breach of contract.

As the cost-of-living crisis deepens, many employees are looking to save money. One option is to cut the cost of the commute by cycling to work. There can be tax benefits for this too.

Exemption for employer-provided cycles

Employees can enjoy the use of employer-provided cycles and cyclists’ safety equipment without having to pay tax on the associated benefit as long as the following conditions are met:

1. There is no transfer of property in the cycle or equipment – it remains the property of the employer.

2. The employer uses the cycle and/or equipment mainly for qualifying journeys. These are journeys between home and work and business journeys.

3. The cycles and/or equipment are made available to the employees who want to make use of them. It is not necessary for each employee to have their own dedicated bike; the employer can operate a pool system where employees who want to borrow a bike can do so from a pool.

Salary sacrifice

A Cycle to Work scheme combines a salary sacrifice arrangement with hire agreement. There are a number of commercial providers offering such schemes, which are popular.

Under the scheme, the employee enters into a salary sacrifice scheme and gives up part of his or her salary in return for the provision of a cycle. The employee enters into a hire agreement, under which they hire the cycle from either the employer or a third party. The hire is paid for by the sacrificed salary.

As long as the above conditions are met, the provision of the cycle is exempt from tax. It is important to stress here that ownership of the cycle must not at this point pass to the employee. As employer provided cycles are protected from the operation of the alternative valuation rules, the exemption is not lost by using a salary sacrifice scheme. The arrangement allows the employee to save tax on the salary given up, and both the employer and employee to save Class 1 National Insurance.

Cycle to work schemes typically run for three years. At the end of the period, the employee has three options:

1. Extend the hire agreement.

2. Return the cycle and equipment.

3. Buy the cycle and equipment.

There are no tax consequences if the employee chooses option 1 or 2. If the employee decides to buy the bike, as long the amount paid is at least equal to the market value of the bike at the time of the transfer, there is no tax to pay. However, if the amount paid is less than the market value, the shortfall is a taxable benefit.

HMRC recognise that it can be difficult to establish the market value of a second-hand bike. Consequently, a simplified approach can be used under which no tax charge will arise as long as the employee pays at least the percentage of the original value for the age and original cost of the bike as shown in the table below.

Age of cycle   Acceptable disposal value (% of original price)

                      Original price < £500  Original price £500 or more

1 year                      18%                           25%

18 months               16%                           21%

2 years                    13%                           17%

3 years                      8%                           12%

4 years                      3%                             7%

5 years                     Negligible                   2%

6 years & over         Negligible                   Negligible

So, for example, if an employee pays at least £24 for a cycle costing £300 (8% of £300) at the end of a 3-year hire period there will be no tax to pay on the transfer.

Where a person has a property portfolio, they may consider giving away one or more of their investment properties during their lifetime to reduce the inheritance tax payable on their estate. However, inheritance tax cannot be considered in isolation, as there may also be capital gains tax consequences which need to be taken into account.

We take a look at some of the issues.

Inheritance tax

Inheritance tax is payable on the estate to the extent that it exceeds the available nil rate bands. Each person has a nil rate band of £325,000. A surviving spouse or civil partner’s estate can also benefit from the unused proportion of their spouse/civil partner’s unused nil rate band. This must be claimed. They can also benefit from any unused residence nil rate band, which is available where a main residence is left to a direct descendent.

For inheritance tax purposes, gifts fall out of account if they are made more than seven years before death. The gift is known as a ‘potentially exempt transfer’ (PET) as inheritance tax will only be chargeable if the donor dies within seven years of making the gift.

Where the gift is made at least three years before death, taper relief applies, reducing the inheritance tax payable on the death estate. This can have unintended consequences.

The nil rate band is applied to shelter gifts in the order in which they are made. This can act to reduce the IHT-saving properties of the nil rate band. For example, if a gift is made between 6 and 7 years before death, taper relief will mean that the effective IHT rate on the gift is 8%. However, if the gifts falls within the nil rate band, no inheritance tax will be payable. Consequently, that portion of the nil rate band will only save tax at 8% rather than at the 40% that would be payable on a gift made at death or within three years of death.

To enhance the likelihood of a lifetime gift being free of inheritance tax free (and to maximise the tax-saving potential of the nil rate band), it should be made earlier rather than later.

Capital gains tax

Making a lifetime gift of an investment property can be effective for saving inheritance tax, but it may trigger a capital gains tax liability. If the gift is made to a connected person, such as child, there will be a deemed disposal at market value, and capital gains tax will be payable on the gain. Further, gifting the property will mean that there are no sale proceeds from which to pay the tax.

This may not be a problem, and indeed can be beneficial, if the value has fallen and the disposal will give rise to a loss. Even a gain may not be problematic if it can be sheltered by allowable losses or the available annual exemption, or if the tax payable is small enough to warrant the potential inheritance tax saving.

If there is a gain, a higher rate taxpayer will pay tax on it at 28%. If the donor survives seven years, there will be no inheritance tax to pay. Where this is the case, making a lifetime gift and paying capital gains tax at 28% on the gain will be cheaper than gifting the property at death and the estate paying inheritance tax at 40% on the full value at the date of death. Where the gift is made at death, there is no capital gains tax for the estate to pay – there is a tax-free uplift at death.

However, if the donor does not survive seven years, there may well be inheritance tax and capital gains tax to pay, particularly if the value of the property exceeds the nil rate band. This may significantly increase the total tax payable.

It should also be remembered that on lifetime gift the donee will acquire the property at market value and will pay capital gains tax on any gain that they make on their disposal unless they occupy the property as their only or main residence. Where the property is acquired at death, their base cost is the market value at the date of death.

Weigh up the pros and cons

There is something of a gamble here as the tax outcome will depend on whether the donor lives seven years from the date of the death. It is a question of weighing up the different options and deciding what risks are worth taking to potentially save tax.

There are various reasons why tax may be overpaid, and when more tax has been paid than is due, it is understandable that the taxpayer will want this to be refunded as soon as possible. The process for claiming a refund depends on why the overpayment arose.

Employees

An employee may have paid too much tax on their employment income. This may be the case if their tax code is incorrect or because they have incurred expenses on which tax relief is due.

A claim for relief for employment expenses can be made using the online service on the Gov.uk website or by post on form P87. It is important to include the required supporting evidence with the claim.

If the employee has received a tax calculation letter (P800) showing that they are due a refund, they should follow the instructions in the letter for claiming that refund. Where the letter indicates that the claim can be made online, the claim should be made using the online service on the Gov.uk website at www.gov.uk/tax-overpayments-and-underpayments/if-youre-due-a-refund. The claimant will need to provide the reference number from the P800 letter and their National Insurance number. The refund should be made to the claimant’s bank account within five days. A refund can also be claimed through the taxpayer’s personal tax account or using the HMRC app, or by writing to HMRC. Where the tax calculation letter informs the taxpayer that they will be sent a cheque, they do not need to make a claim as the cheque will be sent to them by post. This should be received within 14 days of the date on the P800 letter.

Taxpayers who have yet to receive a P800 for 2023/24 should receive it by the end of the March.

Self Assessment overpayments

A taxpayer may be due a refund under Self Assessment if their income has fallen and the payments made on account exceed their liability for the year. They may also be due a repayment if a loss relief claim has been made.

An application for a refund where tax has been overpaid can be made in the return, and where this has been done HMRC will usually send the repayment automatically within two weeks of the return being submitted. If a refund was not requested in the return, it can be claimed through the taxpayer’s online Self Assessment account. They simply need to choose the ‘Request a Repayment’ option and follow the instructions.

A refund can also be claimed through the taxpayer’s personal tax account by selecting ‘Claim a refund’ and following the instructions. A similar process is followed where a refund is claimed through a business tax account. Refunds can be paid into UK bank accounts, or the taxpayer can request a cheque. A refund is normally paid within two weeks of making a claim.

Tax due under Self Assessment for 2023/24 should have been paid in full by midnight on 31 January 2025, along with the first payment on account for 2024/25. Financially, January is a difficult time for many people and they may be unable to find the funds to pay all the tax that they owe. Where this is the case, ignoring the problem will not make it go away; rather, it will make it worse as interest and penalties will be charged, increasing the amount that will have to be paid to HMRC to clear the bill.

As far as interest and penalties are concerned, interest is charged from the due date to the date of payment. Currently, interest on overdue tax is charged at 2.5% above the Bank of England base rate. At the time of writing, the late payment rate was 7.25%. However, from April 2025, interest on overdue tax will be charged at a rate of 4% above the Bank of England base rate. It is easy to see how this can soon mount up. If tax remains due 30 days after the deadline,  a penalty of 5% of the unpaid tax is charged. Further penalties of 5% of the unpaid tax are charged six months after the due date and 12 months after the due date.

Payment plans

However, there are steps that can be taken to take control of the situation and to clear the debt. One option is to set up a Time to Pay arrangement to pay the tax in instalments. It may be possible to do this online. Although interest will still be charged where payment is made in instalments, there will be no penalties to pay.

A taxpayer should be able to set up a Self Assessment payment plan online if all of the following apply:

• the latest tax return (i.e. that for 2023/24) has been filed;
• the date is within 60 days of the payment deadline;
• the amount owed is £30,000 or less; and
• the taxpayer does not have any other payment plans  or debts with HMRC.

Taxpayers who are unable to set up a payment plan online should contact HMRC to see if it is possible to agree to pay what they owe in instalments. HMRC will take into account their income and expenses, and also whether they have any savings. Taxpayers with savings will be expected to use these to pay any tax that they owe.

When setting up a plan, it is important to be realistic about the payments and ensure that these are manageable – the taxpayer can always clear the debt earlier if they are able to do so. If a payment is missed, HMRC will usually contact the taxpayer to find out why. They may let the taxpayer renegotiate the plan. However, if payments are regularly missed, HMRC may start action to collect the debt in full. This may involve instructing a debt collector or collecting the tax direct from the taxpayer’s wages or bank or building society account. If the tax remains unpaid, HMRC may instigate court action.

Plan ahead

To ensure that money is put aside to meet future tax bills, consideration could be given to setting up a budget plan. This works a bit like a savings account in that the taxpayer makes regular payments to HMRC which are set against future tax bills. If the taxpayer has not put enough aside to meet the bill, the balance must be paid by the normal due date.

A look at a ‘deathbed’ tax planning step for spouses or civil partners.

Inheritance tax (IHT) has been labelled by some as a tax on death. However, IHT has also been referred to as a voluntary tax, as steps can often be taken during an individual’s lifetime to reduce the IHT burden on their death. In addition, forward planning can sometimes reduce capital gains tax (CGT) in advance of an individual’s death.

Accelerating gifts

For example, married couples (or civil partners) can achieve CGT savings by making gifts between themselves, particularly in unfortunate circumstances where the life expectancy of one spouse is shorter than the other. The gift of an asset (e.g., investment property) between connected persons is normally treated as a disposal at market value for CGT purposes. However, gifts between spouses living together are generally treated as being made on a ‘no gain, no loss’ basis.

On death, a deceased individual’s assets are generally treated as acquired by their personal representatives at market value; in effect, there is a CGT-free uplift in the value of the asset on death. This can have beneficial overall results.

Example: Keep it in the family

Andrew and Bethany are married, and are UK resident and domiciled. Unfortunately, Bethany has recently been diagnosed with a terminal illness, and her life expectancy is less than a year. Andrew owns an investment property in London, which is standing at a significant capital gain. He transfers the property to Bethany. Under the terms of her will made several years ago, Bethany’s estate passes on death to Andrew. Sadly, Bethany died nine months later, leaving her entire estate (including the London property) to Andrew. The lifetime gift of the investment property from Bethany to Andrew was free of CGT. Andrew received the property back on Bethany’s death, uplifted to market value. Andrew might consider selling the property shortly afterwards, with little or no CGT to pay (NB for IHT purposes, transfers between UK domiciled spouses (or civil partners) are exempt; hence Andrew’s investment property was gifted to Bethany, and Bethany’s estate (including the London property) passed to Andrew, without an IHT charge on each occasion).

‘Dodgy’ planning?

When undertaking tax planning, it is generally prudent to consider how HM Revenue and Customs (HMRC) might perceive it; is the planning likely to be accepted, or is it susceptible to challenge? For example, a general anti-abuse rule (GAAR) is aimed at counteracting ‘abusive’ tax arrangements. If the GAAR applies to an abusive arrangement, the tax advantage is broadly counteracted by adjustment on a ‘just and reasonable’ basis. Furthermore, a penalty of 60% can be imposed. Could HMRC challenge the above ‘deathbed’ tax planning as being abusive? HMRC’s guidance on the GAAR (tinyurl.com/GAARPartD) includes an example (at D19) illustrating ‘standard’ tax planning along similar lines to the above example (i.e., a CGT arrangement involving a gift of shares between spouses, followed by the death of the recipient spouse several months later). It concludes that the GAAR would not apply. Of course, the fact that an arrangement is not ‘caught’ by the GAAR does not mean that it has HMRC’s ‘blessing’; it may still be challenged in an HMRC enquiry.

Practical tip

Don’t forget to consider all relevant taxes in planning arrangements. For example, the gift of an investment property by Andrew in the above example could result in a stamp duty land tax liability if an outstanding mortgage existed on the property, which was taken over by Bethany.

A combination of higher interest rates and stealth taxation may mean that you are now paying tax on savings income for the first time. If this is the case, it may be worth taking out an Individual Savings Account (ISA) to enjoy more of your investment income tax-free. ISAs are available from a number of financial institutions, including banks and building societies, credit unions, friendly societies, stockbrokers, peer-to-peer lending services and crowdfunding companies.

There are different types of ISAs for persons aged 18 and over:

• cash ISA;
• stocks and shares ISA;
• innovative finance ISA;
• Lifetime ISA.

The previous Government had announced plans to introduce a British ISA. However, the current Government are not going ahead with it.

There is also a Junior ISA for children under the age of 18.

ISA limit

There is an annual ISA investment limit of £20,000 in a tax year. The limit may be invested in a single account or spread across different types of accounts. The maximum amount that can be invested in a Lifetime ISA is £4,000 a year. Spouses and civil partners each have their own limit.

A separate limit of £9,000 per year applies to Junior ISAs.

Cash ISA

Savings in a cash ISA can be held in bank and building society accounts and in some National Savings products. Interest earned on savings held within a cash ISA is tax-free.

Stocks and shares ISA

Investments within a stocks and shares ISA can include shares in companies, unit trusts and investment funds, corporate bonds and Government bonds. However, shares owned in a personal capacity cannot be transferred into a stocks and shares ISA, although it is possible to transfer shares from an employee share scheme into an ISA.

Income and gains from the investments held within the ISA are tax-free.

Innovative finance ISA

Investments within an innovative finance ISA can include peer-to-peer loans (i.e. loans given to other people or businesses without using a bank), crowdfunding debentures (i.e. investments in a business by buying its debt) and funds where the notice or redemption period means that the funds cannot be held in a stocks and shares ISA. Arrangements that are already in existence outside the innovative finance ISA cannot be transferred into an innovative finance ISA. Income and gains on investments within an innovative finance ISA are tax-free.

Lifetime ISA

A Lifetime ISA is designed to help people to save either for their first home or for retirement. Cash and stocks and shares can be held in a Lifetime ISA. Returns are tax-free. Lifetime ISAs also benefit from a tax-free Government bonus equal to 25% of the amount saved, capped at £1,000 a year. However, there are more conditions than for other ISAs.

The maximum amount that can be invested in a Lifetime ISA is £4,000 a year. This counts towards the overall limit on investments in ISAs, set at £20,000 per tax year.

A person must be aged 18 or over and under 40 to open a Lifetime ISA and the first payment must be made into the account before the individual turns 40. Once an account is open, the individual can continue to contribute up to £4,000 a year until they reach the age of 50. Beyond age 50, the account remains open and will continue to earn interest, but no further deposits can be made and no further government bonuses will be paid.

Money can only be withdrawn from a Lifetime ISA without penalty where it is used to buy a first home once the individual has reached age 60 or if they are terminally ill with less than 12 months to live.

On the face of it, the 25% Government bonus makes a Lifetime ISA an attractive option for saving for a deposit for a first home. However, the money in a Lifetime ISA can only be used in this way if the home is purchased with a mortgage and does not cost more than £450,000. In London and other areas with high property prices, buyers may struggle to find a first home within this price bracket. If a first home is purchased for more than this, the saver has the choice of either leaving the funds in the account until they reach the age of 60 or withdrawing the money saved and forfeiting the government bonus. The bonus will be clawed back if the funds are withdrawn other than for one of the three permitted reasons.

Junior ISAs

A Junior ISA is a long-term tax-free savings account for children. There are two types of Junior ISA, a cash ISA or a stocks and shares ISA and a child can have one or both types. The account can be opened by a parent or a guardian with parental responsibility. However, the money belongs to the child. As any interest is tax-free and not taxed on the parent, a Junior ISA is an attractive option for a parent wishing to save for their child. The child can take control of the account when they reach the age of 16, but cannot withdraw the money until they turn 18.

A look at the Chancellor’s Autumn 2024 Budget proposal of a fundamental change to the inheritance tax treatment of pension funds.

A basic principle of pensions has been that tax relief – on premiums paid, the fund itself and the lump sum when the pension was taken – encouraged saving for a pension to supplement the state scheme.

However, in 2015 a further relief was given, in that it became possible for the individual to bequeath a pension to beneficiaries without it being included in their estate for inheritance tax (IHT) purposes.

The effect for some was that, in retirement, rather than use their personal pensions, they would supplement their state pension income by drawing from other savings and capital that would be liable to IHT on death.

In her October 2024 Budget, the Chancellor of the Exchequer, Rachel Reeves, proposed to end this tax benefit. The Budget Report document states: “The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes from 6 April 2027. This will restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance.”

Types of scheme and exemptions

The proposed change will apply to both direct contribution (personal or stakeholder pension) and direct benefit (final or career average salary pension) schemes. Some pensions, such as a dependant’s scheme pension which would be subject to income tax, and a lump sum paid to a charity, will retain their IHT exemption.

Further, no liability to IHT will arise on pension funds that are bequeathed to a surviving spouse or civil partner. These will remain exempt from IHT under the normal relief for transfers to spouses.

Double tax charges and mitigation

If an individual dies under 75 years of age, their dependents can draw their pension funds free of income tax within the following two years. If the individual is over 75, the funds will be subject to income tax at the marginal rate of tax – up to 45%. There is no proposal to change these rules.

Consequently, if an individual dies aged over 75, the pension fund could suffer both an IHT charge in their estate and then an income tax charge on their dependent. Another effect of bringing the pension fund into the IHT net is that if this increases the value of the estate to more than £2m, the £175,000 residence nil-rate band could be lost.

Advice will be required by those with substantial pension savings. Mitigation measures might include taking the tax-free lump sum from the pension and gifting this (free of IHT as a potentially exempt transfer if the donor survives a further seven years) or drawing money from the fund over a period of years and giving this away free of IHT if the conditions for gifts out of income are met.

Conclusion

The proposed changes will come into effect from 6 April 2027, so taxpayers have time to consider the potential effect on their estates. A review should be undertaken – plans to leave pension funds to relatives and others, particularly other than to a spouse or civil partner, may require revision.

If the government’s aim of restoring pensions as a source of income in retirement is achieved, the earlier gifting of other assets may be effective for IHT purposes. There may also be a perhaps unintended consequence that individuals may in future use other savings vehicles, such as an ISA, rather than pensions.

The initial income tax reliefs available for pensions will be foregone in exchange for avoiding a potential double tax charge if beneficiaries were to withdraw the funds in later years.

Practical tip

It is proposed that any IHT due on the pension fund will be paid by the pension scheme administrator, who will be responsible for reporting and paying any liability. HMRC is consulting on the detailed rules.

Navigating through the practical consequences of the antiavoidance rules to deter so-called ‘phoenixism’.

The ‘phoenixism’ anti-avoidance legislation in question at ITTOIA 2005, s 396B (‘Distributions in a winding-up’) is a curious animal in various ways. It complements changes to the transactions in securities (TiS) rules in ITA 2007, which now specifically identify a distribution in a winding-up as a TiS (at ITA 2007, s 684(2)(f)). A trap for the unwary

However, unlike the TiS rules, HMRC decided at the start that no clearance procedure would be available for ITTOIA 2005, s 396B, which may therefore present a dilemma for the taxpayer and their professional advisers. If applicable, section 396B ‘converts’ a capital distribution to a shareholder in a winding-up into an income distribution.

The application of ITTOIA 2005, s 396B is subject to four conditions (A-D), all of which must be met. Conditions A-C are factual tests, while Condition D involves a ‘main purpose’ test. HMRC argues that since they do not give rulings on questions of fact or purpose, a statutory or even an informal clearance procedure is inappropriate.

So, basically, it is left to the individual and their professional advisers to consider whether section 396B applies and to self-assess accordingly. It seems to me that the taxpayers who are most likely to be exercised by section 396B are those to whom, on the face of it, it might apply but probably does not.

Jumping the hurdles

Conditions A and B are straightforward, while Condition C is more onerous and applies where the individual is involved in some way in a similar business to that of the defunct company during the two years from receiving a distribution during winding-up.

But it is quite widely drawn and concerns not only the subsequent interests and activities of the individual themself but also, potentially, those of relatives and other ‘connected’ persons. HMRC gives a number of relevant examples in its Company Taxation Manual at CTM36330.

It is Condition D at ITTOIA 2005, s 396B(5), however, which is the real crux of the matter. It basically asks whether it is ‘reasonable to assume, having regard to all the circumstances’, that the main purpose or a main purpose of the windingup was to avoid income tax.

Those circumstances ‘in particular’ include the fact that Condition C is met (ITTOIA 2005, s 396B(6)). That is to say, there must be a causal connection between the winding-up and obtaining of a tax advantage and the subsequent involvement in a similar business. The guidance does not give any examples but does propose (at CTM36340) a nonexhaustive list of issues that may be relevant.

The main purpose test is stated to be ‘subjective but may be inferred from objective characteristics having regard to all the circumstances’. We are also told that:

‘The individual will know their purpose and, if fairly described, can be confident that there will be enough supporting evidence (having regard to all the circumstances) for an officer to arrive at a sound conclusion’.

In any situation where ITTOIA 2005, s 396B potentially applies, it will most likely fall to the professional adviser to weigh the situation and form a conclusion in order to advise the client, which, properly documented, could form the ‘supporting evidence’ referred to.

Practical tip

In considering Condition D, the main focus must be on the causal connection (or lack of) between the winding-up of the company and the subsequent involvement in a similar business. For example, suppose that two similar businesses (say, Company X and Company Y) had been run side by side for many years before it was decided to wind up Company X. Conditions A to C would be met but, having regard to all the circumstances, it is probably not reasonable to assume that winding up Company X had tax avoidance as a main purpose in concluding that Condition D is not met.

A different way of giving employees benefits.

Since the start of the Covid pandemic in March 2020, the number of people working from home in the UK has increased. With more employees now home-based, benefits-in-kind that are centred on the workplace are less attractive; but there is also the issue of fairness for those who, through their job role or domestic situations, need to be office-based.

Historically, where companies have offered fixed benefit packages, it is to all employees, irrespective of their individual needs or preferences. However, the rigidity of these packages often results in employees paying for benefits they do not use while lacking options that could significantly enhance their work-life balance, which may be the situation with many home-based employees in particular.

Salary sacrifice vs flexible benefits

Many businesses already have a type of ‘flexible benefit’ scheme in place in the form of a salary sacrifice scheme, which enables part of an employee’s salary to be exchanged for a non-cash benefit, usually increased pension contributions (although other benefits such as bikes, mobile phones and bus passes may be included).

However, hybrid working has increased the use of what is termed ‘flexible benefits’ packages, which allow all employees to choose from options centred around an individual’s personal circumstances where an employee is allocated a ‘benefit allowance’ (described in some schemes as a ‘flex fund’ or ‘flex account’). Many employees opt for additional holidays under these schemes.

If there is one, the main difference is that ‘salary sacrifice’ may refer to a degree of employee choice given on a single employment benefit. A flexible benefit scheme often applies a choice to several different employment benefits at the same time.

Flexible benefit plans can also permit specific eligibility criteria for an employee to qualify. A few benefits are available to employees who work a certain number of hours per week, and others are available to employees who have been with the company for a certain time.

‘Benefit allowance’

This ‘allowance’ represents the amount of money the employer is prepared to spend to provide the employee with their chosen benefits. HMRC usually accepts that the allowance itself is not taxable or subject to National Insurance contributions (NICs) unless the employee chooses to draw some of the allowance partly or all in cash.

Sometimes, the employer’s scheme allows the employee to ‘spend’ more than their benefit allowance. Any additional amount over the allowance is subject to PAYE, unless there has been an effective reduction in the employee’s contractual pay. Employees are therefore effectively reinvesting some of their income into a benefit of their choosing. If the employee wants additional benefits beyond what the employer’s contribution covers, they can opt to pay the difference through payroll deductions.

Bear in mind that very few ‘flexible’ benefit schemes are genuinely flexible. Most schemes are built on ‘company paid’ benefits, where the employer provides a minimum level of core benefits that the employee cannot remove (at least not for a cash alternative); as such, not every benefit is optional.

Employee credits

Flexible benefits programmes often use a credit based system, where employees are allocated a certain number of credits they can use to purchase the benefits of their choice. This system also allows the ability to allocate a higher amount of credits to different levels of work or length of service. This type of scheme benefits from the ability to adjust employee credits annually to accommodate changing circumstances.

Practical tip

Although permitting flexible benefits may go a long way towards retaining or attracting staff, offering flexible benefits adds to a business’s costs. Setting up and managing the scheme requires time and can be complicated to administer as each employee may want different types and levels of benefits. Remember that any re-evaluation of benefits-in-kind needs to factor in employer’s NICs of 13.8% for 2024/25 (increasing to 15% for 2025/26)

A look at issues with extracting profits from a limited company.

With limited companies, business profits belong to that company as a separate legal person and are subject to corporation tax on them; the company’s owner will generally be subject to income tax and National Insurance contributions (NICs) on whatever they withdraw. It is different from a sole trader or partner, who is taxed on their profit (or profit share) irrespective of their drawings.

Shareholders and directors can therefore plan the extent of their withdrawals in an attempt to mitigate their personal tax liability.

Who can take profits from a company?

Shareholders own the company and take distributable reserves in the form of dividends. These are taxed more favourably than other types of income – they are subject to lower rates of income tax and are exempt from NICs, so they will usually make up the bulk of a small company owner’s remuneration.

For smaller or medium-sized businesses, shareholders will usually also be the directors; these are officers registered as such at Companies House who actually run and manage the company day-to-day and, for tax purposes, are treated as employees of the company.

They will be on the company’s payroll and be able to draw a salary (along with bonuses) subject to PAYE income tax and NICs; officers can draw a fee, but anything beyond those duties can attract a larger salary. Pension (employer) contributions can also be made.

However, whilst salaries, bonuses, and pension contributions are deductible for corporation tax purposes, dividends come from post-tax profits, so there is no such deduction for the company.

How else can profits be withdrawn?

Whilst dividends and salaries or bonuses are usually the main means of profit withdrawal, the company can also be charged rent for use of the director shareholder’s land and property (e.g., personally owned company trading premises). Assets owned personally and used by one’s company can have adverse implications for inheritance tax (i.e., only 50% business property relief) and capital gains tax (CGT) for elements of non-business ownership (and charging rent for business asset disposal relief (BADR)).

Likewise, interest can be charged for the company’s use of an individual’s capital, i.e., loans, rent and interest paid are deductible for the company and, whilst subject to income tax for the owner, are exempt from NICs.

As well as loans being made to the company to receive interest, the company can make loans to the director shareholders. The company is charged a ‘deposit’ (a ‘section 455 charge’) of 33.75% of the loan, returnable when the loan is repaid or written off; however, for the individual, a written-off loan is taxed as a dividend or salary. Outstanding loans (charging below the official rate of interest) above £10,000 will also attract an income tax benefit-inkind charge for the individual (and Class 1A NICs for the company). Thanks to ‘bed and breakfasting’ anti-avoidance rules, the section 455 charge is not returned in full if a loan is repaid but another over £5,000 is subsequently taken out again within 30 days (unless that loan is paid off by salary or dividend).

Once a shareholder has decided that the company has ceased trading, profits therein can be withdrawn by liquidating the company. Once a liquidator has been appointed, distributions from the company are taxed as capital, potentially with the benefit of BADR and the 10% (increasing to 14% from April 2025, and 18% from April 2026) CGT rate afforded to trading company shares where the BADR conditions are satisfied.

Practical tip

The shareholder or director’s personal tax position will usually dictate to what extent, and in what form, a company’s profits are withdrawn. An advantage of a limited company is that profits do not have to be withdrawn at all and are not subject to personal tax. Holding assets outside a company to draw a rent can have potentially adverse capital tax consequences and taking loans from a company can also have tax consequences for the company and individual.

​​C-19 Government support | Employer supportC-19 Job Retention Scheme   to 31.10 | from 1.11C-19 Company Directors & ShareholdersC-19 Self-employment income support scheme (SEISS)C-19 Deferring Income Tax paymentsC-19 Support for businesses in lockdownC-19 New grants for local COVID lock-down businesses​C-19 IR35 & Off-payroll workingC-19 Landlords & tenantsC-19 VAT Deferred PaymentsC-19 Grant funding for businessC-19 Working from homeC-19 Job Support Scheme - on holdC-19 Discretionary Grant Fund​C-19 Business ratesC-19 Insolvency & DirectorsC-19 Late payment interest rateC-19 Time to pay agreementC-19 Future Fund loan schemeC-19 Job Retention Bonus - on holdEmployer-provided PPE & testing​C-19 Loan FundingC-19 £4.6bn new grantsC-19 Kickstart SchemeC-19 Reduced rate VATC-19 Recovery Loan SchemeC-19 Restart Grant Scheme openedC-19 Test & trace/isolation support

If you are self-employed, you will pay tax on your taxable profit. In working out your taxable profit, you can deduct certain expenses that you have incurred in running your business. The basic rule is that expenses can be deducted if they are incurred wholly and exclusively for the purposes of the trade.

This rule precludes a deduction for private expenditure. Where possible, it is advisable to use separate bank accounts for business and personal expenditure to keep them separate and reduce the risk of missing business expenses or deducting private expenses in error.

Where an expense has both a private and a personal element, it is permissible to claim a deduction for the business part, as long as the business expenditure and the private expenditure can be identified separately. This may be the case, for example, where a car is used for both business and personal travel. Here a deduction for business travel could be claimed using the simplified rates published by HMRC. However, where it is not possible to separate the business and personal costs and the expenditure has a dual purpose, a deduction is not permitted. An example of this would be everyday clothes worn for work, as even if the clothes are only worn for work, they also provide the personal benefits of warmth and decency.

If you use the cash basis, you can claim a deduction for revenue expenditure and also capital expenditure where it is of a type for which a deduction is allowed under the cash basis. However, if you use traditional accounting, you can only deduct revenue expenditure; relief for capital expenditure is given in the form of capital allowances.

Typical expenses

A business may incur some or all of the following expenses, which can be deducted in calculating its taxable profit, as long as the costs are incurred wholly and exclusively for the purposes of the business:

Office costs, such as stationery and printing costs and phone bills

Travel costs, such as fuel, train, taxi and bus fares, or parking

Uniforms bearing the business’s logo or name (but not ordinary everyday clothing)

Goods purchased for resale

Raw materials

Costs related to the business premises, such as rent, light and heat

Insurance

Advertising or marketing costs.

Trading allowance

Rather than claiming a deduction for your actual expenses, you can instead opt to deduct the £1,000 trading allowance. This will be advantageous if your actual expenses are less than £1,000. If your gross trading income (before deducting expenses) is £1,000 or less, you do not need to pay tax on it, or report it to HMRC.

Simplified expenses

To save work, instead of deducting actual expenses in relation to vehicles and expenses incurred if you run your business from home, you can use simplified expenses to work out the deduction. You can also use simplified expenses to work out the private use disallowance if you live in your business premises (as might be the case, for example, if you run a Bed and Breakfast).

Records

It is important to keep good business records so that you can identify your expenses and take them into account when working out your taxable profit. If you overlook deductible expenses, you will pay more tax than you need to.

The VAT flat rate scheme is a simplified flat rate scheme which can be used by smaller businesses to save work. Under the scheme, businesses pay a set percentage of their VAT inclusive turnover to HMRC rather than the difference between the VAT that they charge and the VAT they suffer on the goods and services that they buy. The percentage that they need to pay depends on the sector in which they operate, and also on whether they are a limited cost business. The main advantage of the scheme is that it reduces the work in complying with VAT. For example, there is no need to record the VAT on purchases. However, for some businesses this may come at a cost, as the amount that they pay over to HMRC may be more than would be payable under traditional VAT accounting. Before joining the scheme, it is advisable to do the sums.

Eligibility

A business is eligible to join the scheme if it is VAT registered and it expects its VAT taxable turnover to be £150,000 or less in the next 12 months. This is everything that is sold that is not exempt from VAT. However, a business is not allowed to rejoin the scheme if it has used it previously and left within the previous 12 months. The VAT flat rate scheme cannot be used by businesses that use a margin or capital goods scheme, nor can it be used with the cash accounting scheme; instead, the flat rate scheme has its own cash-based method to determine turnover.

A business must leave the scheme if, on the anniversary of joining, its turnover in the last 12 months was more than £230,000 including VAT, or it is expected to be so in the next 12 months. A business must also leave if they expect their turnover in the next 30 days to be more than £230,000 including VAT.

The flat rate

The flat rate depends on the type of business. The percentages can be found on the Gov.uk website at www.gov.uk/vat-flat-rate-scheme. A business benefits from a discount of 1% in its first year of VAT registration.

Businesses that are classed as a limited cost business pay a higher rate of 16.5% regardless of the sector in which they operate. This is a business whose spend om relevant goods is less than either 2% of its turnover or £1,000 a year (£250 a quarter) if more than 2% of turnover. Where costs are close to 2% of turnover, the business may need to perform the calculation each quarter to ascertain whether they need to use the limited cost business percentage of 16.5% or that for their sector.

Not everything that a business purchases counts as ‘goods’ for the purposes of the calculation – only ‘relevant goods’ count. The main exceptions are services, such as accounting and advertising, car fuel (unless the business operates in the transport sector) and rent. Where a business incurs significant costs on services or fuel but their other goods amount to less than 2% of their turnover, they may be better off using traditional accounting. The limited cost business percentage of 16.5% of VAT inclusive turnover equates to 19.8% of VAT exclusive turnover, leaving only a narrow margin to cover any VAT suffered.

Example

A photography business joins the VAT flat rate scheme and in its first quarter has VAT inclusive turnover of £24,000 (£20,000 plus VAT). Its relevant goods in the quarter are £1,250. As this is more than 2% of the turnover, the business is not a limited cost business.

The flat rate percentage for its sector is 11%. However, as it is in the first year as a VAT registered business it benefits from a discount of 1%. Therefore, it must pay VAT of £2,400 to HMRC (10% of £24,000).

Capital goods

If you opt for the flat rate scheme, you will not normally be able to claim back VAT separately on capital goods unless they cost more than £2,000 and you do not intend to resell them.

One of the more unpopular Budget announcements was the rise in employer’s National Insurance from 13.8% to 15% from 6 April 2025. The Class 1A rate and Class 1B rate are similarly increased, meaning that it will hit employers on the provision of both cash pay and taxable benefits. It will also make it more expensive for employers to settle an employee’s tax liability through a PAYE Settlement Agreement; Class 1B contributions apply on both the items included in the agreement in place of the Class 1 or 1A liability that would otherwise arise, and also on the tax due under the agreement.

Consider a salary sacrifice arrangement

The introduction of the alternative valuation rules from 6 April 2017 stripped away the advantages of using a salary sacrifice arrangement for all but a handful of benefits. However, for those benefits which remain outside the alternative valuation rules, including pension savings, the use of a salary sacrifice arrangement provides the opportunity for National Insurance savings for both the employer and the employee.

Assume an employee wishes to top up their pension by making additional contributions of £500 a month. While pension contributions attract tax relief, there is no equivalent relief for National Insurance, so National Insurance must be calculated on gross pay before the deduction of those contributions. For the employee, this will mean a National Insurance hit of £40 a month where those earnings fall between the primary threshold and the upper earnings limit, and £10 if they fall above the upper earnings limit. For the employer, the hit is £69 a month for 2024/25, rising to £75 a month for 2025/26.

If instead the employee enters into a salary sacrifice arrangement with their employer to give up £500 of their cash salary each month in return for the employer making a contribution of £500 into their pension scheme, the employee’s gross pay will fall by £500 a month, saving them between £10 and £40 a month in employee contributions. The employer will save employer contributions, which for 2025/26 on £500 a month equates to an annual saving of £900. The employee’s pension still receives a contribution of £500 a month, but both the employee and the employer save National Insurance contributions in the process.

A salary sacrifice arrangement can also be used to similar effect to provide tax-free benefits that fall outside the alternative valuation rules, such as employer-provided cycles and cycling safety equipment.

A word of caution: for a salary sacrifice arrangement to be effective, the employee’s contract must be amended to reflect their lower cash pay and the provision of the benefit. The employee must not be able to revert to the higher salary at will.

Where an employee has more than one job, they may be able to defer the payment of Class 1 National Insurance contributions in one or more of those jobs to ensure that the contributions that they pay for the year do not exceed the annual maximum.

If earnings in one job are at least equal to the upper earnings limit, the employee will pay primary contributions on that job at the main rate on all earnings between the primary threshold and the upper earnings limit. Where this is the case, they only need to pay contributions at the additional rate of 2% on earnings from other jobs where these exceed the primary threshold. To prevent an overpayment from arising, the employee can apply for a deferment. A person with two jobs can make a deferment application if they earn at least £967 per week from one job and at least £242 per week from the other job.

Where a person has multiple jobs, it may still be possible to apply for a deferment where the earnings are less than £967 per week in all jobs if instead the earnings test is met. The earnings test is found by applying the formula:

UEL + (E – 1) WPT

Where UEL is the weekly upper earnings limit (set at £967 for 2024/25 and 2025/26), E is the number of employments and WPT is the weekly primary threshold (set at £242 for 2024/25 and 2025/26). The following table summarises the earnings criteria for between two and six employments.Contributions can be deferred for any jobs not taken into account in reaching the earnings criterion.

Number of employments    Weekly earnings needed for deferment to be possible

• 2                             £1,209
• 3                             £1,451
• 4                             £1,693
• 5                             £1,935
• 6                             £2,177

Example

Jack has three jobs. In job 1 he earns £800 per week, in job 2 he earns £750 per week and in job 3 he earns £400 per week. As his total earnings from job 1 and 2 of £1,550 per week exceed the earnings criterion of £1,451 for three jobs, he can apply for a deferment for job 3. If this is granted, he will pay Class 1 NICs at 2% on earnings in excess of £242 per week rather than at 8%.

A deferment application can be made online or by post on form CA72A. Ideally, the application should be made before the start of the tax year, although postal applications will be accepted if received by 14 February in the tax year. Where the application is received after 14 February but before the end of the tax year, it will only be considered with the agreement of the employers in respect of which deferment is sought.

If an application is made too late and contributions are paid in excess of the annual maximum, a refund can be claimed after the end of the tax year by writing to HMRC.

The favourable tax regime for furnished holiday lettings is to come to an end on 5 April 2025. This will mean that landlords of furnished holiday lettings will lose access to a range of valuable capital gains tax reliefs, including gift hold-over relief.

Nature of the relief

Gift hold-over relief is a capital gains tax relief that may be available on gifts of business assets. Where the relief is claimed, the capital gains tax that would otherwise be payable on the gift is deferred until the recipient sells or otherwise disposes of the business asset. Effect is given to the relief by reducing the transferee’s base cost of the asset by the amount of the gain held over. The relief may also be available where an asset is sold for less than it is worth to help the buyer.

As regards business assets, to qualify, the person giving away the assets must be a sole trader or a partner in a business, or have at least 5% of the voting rights in a personal company. The assets given away must be used in the business or by the personal company.

The relief must be claimed jointly by the transferor and the transferee by completing a claim for hold-over relief form. The form must be submitted with their Self Assessment tax returns.

Application to furnished holiday lets

From an inheritance tax perspective, it can be beneficial to give away a property during the transferor’s lifetime. As long as they survive seven years from the date of the gift, there will be no inheritance tax to pay. However, in the absence of a relief, a capital gains tax charge may arise on the gift. The capital gains tax payable on a gift to a connected person is calculated on the market value of the asset. Consequently, without relief, there may be tax to pay but no proceeds from which to pay it. Claiming gift hold-over relief overcomes this, delaying the capital gains tax bill until the recipient sells the asset. This is useful if, say, a landlord wants to pass on their holiday let to a son or daughter.

However, time is running short to take advantage of this. From 6 April 2025, holiday lets will be treated in the same way as other residential lets, and will not be able to benefit from the relief. Consequently, the gift must be made on or before 5 April 2025 to access the relief.

Example

Betty has had a holiday let for many years. She is planning on retiring and wants to give her holiday let to her daughter, Lucy. Betty purchased the cottage in 2004 for £120,000. Its current market value is £380,000.

If Betty makes the gift before 6 April 2025 and Betty and Lucy claim gift hold-over relief, Betty will have no capital gains tax to pay on the gain of £260,000. The gain is held over. Lucy’s base cost is reduced by the amount of the held-over gain to £120,000 (£380,000 – £260,000). When Lucy sells the cottage, her gain will be worked out as if the cottage had cost her £120,000, rather than by reference to its market value when she acquired it.

If Betty does not make the gift until after 5 April 2025, she will not be able to claim gift hold-over relief and will pay capital gains tax on the gain of £260,000. If she is a higher rate taxpayer, the bill will be £62,400 (24% of £260,000), assuming she has already used her annual exempt amount. She will need to pay this within 60 days of completion.