Helpsheets ... continued 43 from homepage

Employees may pay for the fuel that they use for business journeys undertaken in their own car or in a company car. Often, an employer will reimburse this cost by paying a mileage allowance. However, where employees meet the costs themselves, they are able to claim tax relief. The relief available depends on whether the employee is using their own car or a company car. Employees are also able to claim relief if their employer pays a mileage allowance which is less than the tax-free rates set by HMRC.

Employees using their own car for business travel

Where an employee uses their own vehicle for business travel, they are able to claim tax relief using the approved mileage rates set by HMRC. A claim is not limited to cars – relief can also be claimed if an employee uses their van, motorbike or bicycle for business travel. The amount that they can claim is the amount at the approved rates less any amount received from their employer towards the costs. The approved rates, which are set out in the table below, include an element for deprecation, insurance and maintenance, as well as the cost of the fuel. For cars and vans, a higher rate applies to the first 10,000 business miles in the tax year.

Type of vehicle  Rate per mile

Cars and vans    First 10,000 business miles: 45p

                 Subsequent business miles: 25p"

Motorcycles      24p

Bicycles         20p

Example

Wendy uses her own car for business travel, driving 2,100 miles in the tax year. Her employer pays a mileage rate of 30p per mile.

The approved amount is £945 (2,100 miles @ 45p per mile). Wendy receives mileage payments of £630 from her employer (2,100 miles @ 30p per mile). Wendy is able to claim tax relief for the shortfall of £315.

Company car drivers

Company car drivers can claim tax relief for the cost of fuel or electricity used for business journeys in a company car to the extent that this is not reimbursed by their employer. They will need to keep records of the actual fuel or electricity costs. The approved mileage rates do not apply to company car drivers.

Making a claim

A claim can be made using HMRC’s online service or, where the employee needs to complete a Self Assessment tax return, in the employment pages of their tax return. A claim can also be made by post on form P87. The employee will need to provide evidence in support of their claim in the form of a mileage log. This must show:

• the reason for every journey;
• the postcode for the start point; and
• the postcode for the end point.

Where a claim is made for more than one employment, a copy of the mileage log must be provided for each claim.

Sometimes a business may have ceased trading but then receives income that has not been included in the final cessation accounts, e.g. an insurance payment may be received or a debt that the business owner thought would never be paid is paid. Such receipts would have arisen due to the previous carrying on of the trade. Any such income is charged to tax separately from the profit of the trade (i.e. the previous cessation period is not reopened) but the receipt is still taxed as trading income.

Similarly, a business that has ceased trading may pay expenses after cessation. Examples include costs related to debt collection where such debts were taken into account when calculating earlier trade profits or expenses incurred to remedy defective work done prior to cessation. For an expense to be allowable, the business must have ceased trading. A deduction is only allowed for an expense that, had the trade not ceased, would have been deductible in computing the trade profits or set off against those profits.

Methods of deduction

There are four ways in which post-cessation expenses can be relieved where they are  incurred by the self-employed and partnerships.

The legislation specifies the following order of priority of relief:

deducted from post-cessation receipts;

as losses which can be set against total income (known as post-cessation trade relief);

as losses which can be deducted from chargeable gains; or

carried forward.

Firstly, allowable expenses are offset against any post-cessation receipts. However, if there are no post-cessation receipts in the period (or the post-cessation expenses exceed the receipts), relief against total income (and/or capital gains) of the person who incurred the expense is available.

For the self-employed and partnerships, relief is given sideways against other income and/or capital gains of the same year and must be claimed by the first anniversary of the usual 31 January filing date for the tax year in which the payment was made, e.g. if a qualifying payment is made in 2024/25, relief must be claimed by 31 January 2027.

Companies can only deduct post-cessation expenses against post-cessation receipts from the same trade. If there are no such receipts, the expense is not deductible. No sideways loss relief is available.

If an expense cannot be fully relieved using any of these methods, it can be carried forward to offset against any future post-cessation receipts that may be received in the future, otherwise it is lost.

If post-cessation receipts arise within six years of cessation, the recipient can choose to carry back the receipts to the date of cessation.

Restricted relief

If there are insufficient post-cessation receipts against which to offset the post-cessation expenses (i.e. there is a loss), there is a restriction on the amount of claimable expenses that can be allowed against the other net income or the tax year in which they are paid. The set-off is subject to a cap of either £50,000 or 25% of the adjusted total income, whichever is lower. Once net income is utilised to claim the post-cessation expenses, any remaining excess can be set against capital gains of the same year. Anything remaining unclaimed can be carried forward to use against future post-cessation receipts.

Relief is further restricted by the amount of any unpaid debts owed by the trader at the date of cessation. If an unpaid debt restricted the amount of relief in an earlier tax year, it is not allowed in a later year either. If an outstanding debt (which limited relief for an earlier qualifying payment) is subsequently paid to the creditor, then the payment of that debt is considered a ‘qualifying payment’ which can be relieved.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is introduced progressively from 6 April 2026. It will require unincorporated traders and landlords whose income is over the trigger threshold to keep digital records and make quarterly returns and a final declaration to HMRC using MTD-compatible software.

The start dates for traders and landlords with trading and/or property income in excess of £30,000 have been known for some time (albeit they are now later than originally announced). At the time of the Autumn 2024 Budget, the Government stated that MTD for ITSA would be extended to apply to traders and landlord with trading and/or property income of £20,000 or more before the end of the current Parliament. At the time of the 2025 Spring Statement, it was announced that it will apply to them from 6 April 2028.

Start dates

The first start date is 6 April 2026. This is for individuals with income from an unincorporated trading and/or property business of at least £50,000.

The second start date is 6 April 2027. This is for individuals not already within MTD for ITSA with income from an unincorporated trading and/or property business of at least £30,000.

The final start date is 6 April 2028. This is for individuals not already within MTD for ITSA with income from an unincorporated trading and/or property business of at least £20,000.

As of yet, no date has been announced from which individuals with combined trading and property income of less than £20,000 will be brought within MTD for ITSA.

The income is the combined trading and property income from all sources before the deduction of expenses. An individual will be within MTD for ITSA if their total trading and property income exceeds the trigger threshold even if the income from each individual business is below it. The relevant income for assessing whether an individual is within the scope of MTD for ITSA from 6 April 2026 is that for 2024/25.

Once within MTD for ITSA, an individual must remain within it unless their income is below the prevailing threshold for three consecutive tax years.

Case studies

Abigail is a sole trader with trading income of £45,000 in 2024/25. She also receives rental income from a buy-to-let of £12,000. Although individually neither her trading nor her property income is more than £50,000, as her combined trading and property income at £57,000 is more than the threshold, she will be within MTD for ITSA from April 2026.

Billy has trading income of £35,000. As long as he remains at this level, he will be within MTD for ITSA from April 2027

Caitlin runs two small sole trader businesses. Her income from one is £15,000 a year and her income from the other is £7,000 a year. If her income remains at this level, she will be within MTD for ITSA from 6 April 2028.

It is important that traders and landlords are aware of their start date and plan ahead so that they are ready to comply from that date.

The circumstances in which the charge to capital gains tax can be deferred using ‘holdover’ relief.

‘Holdover relief’ (also known as ‘gift relief’) is a tax relief that allows individuals to defer paying capital gains tax (CGT) when an asset is transferred to someone else, typically in the context of business asset transfers although in some cases it can also apply in relation to property transactions.

When claiming this relief, a capital gain that accrues to the donor is deferred and passed on to the donee. The liability to pay CGT is therefore ‘held over’ and only crystallises when the donee disposes of the asset, usually through a sale. Essentially, both the gain and the asset itself are transferred to the recipient.

To ensure a claim is allowed, the transfer must be a gift with little or no consideration. If the donee does pay something, this amount must not exceed the donor’s allowable cost; where the consideration is more than the donor’s allowable costs, this reduces the gain that can be held over by the excess.

Types of holdover relief

There are two types of holdover relief available; the type of holdover relief available depends on the type of asset gifted and whether the gift involves a trust, but both operate similarly.

(a) Gifts of business asset

The most common type of holdover relief is gifts of business assets (under TCGA 1992, s 165), which defers CGT on gifts made by individuals or specifically qualifying business assets (e.g., property from which the business is run) used for a trade, profession, or vocation.

The asset must be used in a business that is carried on by the donor (either personally or as a member of a partnership or limited liability partnership); however, relief is also available if the business is carried on by the donor’s ‘personal company’ (i.e., one in which they personally own at least a 5% voting interest). Relief may also be available to trustees but, in this case, the business in which the asset is used must be carried on directly either by the trustees themselves or by a beneficiary with an interest in possession.

Unlike some other tax reliefs, no CGT liability arises when gifting a property or other valuable asset to a spouse or civil partner. However, when gifting to relatives, the gift is treated as a disposal at market value.

Note that property letting and other investment businesses are excluded from this relief, although agricultural cottages may qualify under specific conditions (see below).

(b) Transfer into a trust The alternative form of holdover relief (TCGA 1992, s 260) expands the concept of holdover relief under TCGA 1992, s 165 by applying to transfers of any asset (including property) immediately chargeable to inheritance tax (IHT) or which would be chargeable except for an exemption or the availability of the IHT nil-rate band.

Most lifetime gifts made between individuals are potentially exempt transfers (i.e., no IHT charge arises unless the donor does not survive seven years) and as such transfers are not chargeable to IHT, therefore holdover relief under TCGA 1992, s 260 cannot apply in this situation. The most common circumstance where a holdover claim is available under TCGA 1992, s 260 is where an asset is transferred into or out of a trust. Settling the property into a trust is a deemed disposal for CGT purposes and a holdover claim potentially cancels any CGT liability for the donor, reducing the trustees’ base cost of the property by the gain held over (effectively transferring the gain to the trustees). This is the only instance where holdover relief is available regardless of the nature of the asset.

On the transfer of property into a trust, the original owner of the property (the settlor) is treated as having gifted the property at market value. The ‘market value’ rule applies because the settlor and the trust are deemed to be ‘connected’ when the trust comes into existence.

To benefit from relief under TCGA 1992, s 260, the trust needs to have been created while the settlor is alive (assets transferred into a trust on death do not attract CGT) and where both sections apply, relief must be claimed under TCGA 1992, s 260 in priority to TCGA 1992, s 165.

Anti-avoidance rules

The availability of holdover relief under TCGA 1992, s 260 is subject to certain anti-avoidance rules. Specifically, neither relief can be claimed if the settlor retains an interest in the transferred property or if the trust established is classified as a ‘settlor-interested’ trust (i.e., broadly a trust from which the settlor, their spouse or civil partner, or minor children, can derive benefit).

Additionally, the holdover relief will be clawed back where a trust begins as a non-settlorinterested trust and is subsequently altered to a settlor-interested trust if the transfer is made within a specific timeframe (namely from the date of disposal and ending six years after the year of assessment in which the transfer was made).

Principal private residence relief

Claiming principal private residence (PPR) relief on a property transferred into a trust is possible, provided the trust’s provisions permit a beneficiary to reside in the property as their primary residence.

However, to counteract potential abuse of this relief where a claim is made under TCGA 1992, s 260, the donee will be barred from making a PPR relief claim for any subsequent disposal of the property. This same restriction applies if a property is transferred out of the trust to a beneficiary rather than being sold outright.

Agricultural let properties

As detailed above, in a claim under TCGA 1992, s 165, holdover relief is available “if the gift is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by:

 • The donor, or

 • Their personal company”

Therefore, the gift of agricultural buildings, including a farm cottage, does not usually qualify as a ‘business asset’ on its own, typically because it is let on a tenancy rather than used in a business. However, relief can be claimed if the property is transferred as one asset together with farmland let on a tenancy basis.

The provision that permits full holdover relief under TCGA 1992, s 165 in this instance is contained in TCGA 1992, Sch 7, paras 1 and 2, which states that where an asset is disposed of ‘which is, or is an interest in, agricultural property’ and holdover relief cannot be claimed under the usual TCGA 1992, s 165 rules as the asset is not used in a trade, a claim can be made if the property is transferred with some land. The requirement is that the property would usually be charged to inheritance tax (IHT). Therefore, should the donor own land let to a farmer for agricultural use, it would qualify as agricultural property and so qualify for holdover relief under TCGA 1992, s 165 despite not being used in the donor’s trade.

Note that IHT does not have to actually be paid, merely that an IHT liability arises, which would be the case should the value of the transfer be covered by the IHT nil-rate band.

Woodlands

Legislation specifically provides that the expression ‘trade’ under for the purposes of a holdover relief claim under TCGA 1992, s 165 includes the occupation of woodlands which the occupier manages on a commercial basis with a view to the realisation of profits.

Practical tip

Holdover claim can be advantageous because it allows the donor to pass on assets without any immediate tax burden, deferring any CGT charge, thereby making gifts more financially feasible.

Employers who provided taxable benefits and expenses to employees in the 2024/25 tax year need to meet compliance obligations in respect of those benefits. The obligations will vary depending on whether the benefits and expenses have been payrolled or not or included in a PAYE Settlement Agreement (PSA).

Payrolled benefits

Where an employer payrolled benefits in 2024/25, those benefits were taxed through the payroll and reported to HMRC under Real Time Information (RTI) on the Full Payment Submission (FPS). Consequently, they do not need to be reported to HMRC after the end of the tax year on the employee’s P11D. However, the employer will need to file a P11D(b) and include payrolled benefits when working out their Class 1A National Insurance liability for the year.

Employers must also provide employees with details of their 2024/25 payrolled benefits before 1 June 2025. This can be done on the employee’s payslip, by email or by letter.

P11D and P11D(b)

Taxable benefits and expenses which have not been payrolled or included in a PSA must be reported to HMRC on form P11D by 6 July 2025. The employer must also file a P11D(b) by the same date. This is the employer’s declaration that all required P11Ds have been filed. It is also the Class 1A National Insurance return.

Forms P11D and P11D(b) must be filed online – HMRC no longer accept paper forms. Employers can use either HMRC’s PAYE Online Service (employers with 500  or fewer P11Ds to file only) or a commercial software package. Penalties may be charged if the forms are filed later or are incorrect.

Employers must also provide employees with a copy of their P11D or details of the information contained therein by 6 July 2025.

PAYE Settlement Agreements

An employer can use a PSA to settle the tax due on a taxable benefit on an employee’s behalf. However, a PSA can only be used for items that are minor, which are provided irregularly or on which it is not practicable to operate PAYE.

Once made, a PSA is an enduring agreement and remains in place until cancelled by HMRC or by the employer. Where an employer already has a PSA, they should check that it is still valid. If they need to amend it or cancel it, this must be done no later than 5 July 2025. Employers who need to set up a new PSA for 2024/25 must do so by 5 July 2025.

Benefits included within the PSA do not need to be reported to HMRC on form P11D or included in the Class 1A calculation on the P11D(b).

Class 1A National Insurance

Employers must pay their Class 1A National Insurance bill by 22 July if they make the payment electronically. Where payment is made by cheque, it must reach HMRC by Friday 18 July 2025. Interest is charged on payments made late.

A rare win for the taxpayer in the construction industry scheme, and a potential lifeline for people caught out by it.

The case of Beech Developments (et al.) v HMRC [2024] EWCA Civ 486 is most welcome for those businesses that catch a nasty case of ‘accidental CIS’. Having been heard at the Court of Appeal, it effectively overturns numerous earlier cases heard only at the tribunals, and HMRC must abide by it. (In fact, HMRC’s guidance, such as in its Construction Industry Scheme Reform Manual at CISR83600, was only recently updated, in January 2025).

Some property-adjacent businesses may believe they do not fall within the scope of the Construction Industry Scheme (CIS), but a note of caution: HMRC is more than happy to lean on quite sweeping definitions in the legislation to style a humble property investment business foolhardy enough to pick up a trowel as falling within the scope of ‘construction operations’ as a mainstream contractor, thereby bypassing the more rarified ‘deemed contractor’ provisions that require a minimum £3m spend on construction activity in (up to) the last year, thence to be ‘caught’ by the CIS regime (readers may appreciate the irony that, outside the world of CIS, HMRC would rather sell their proverbial grandmother than suggest a landlord was actually a property developer!).

A brief introduction to CIS

Broadly, CIS is ‘PAYE-lite’, inasmuch as the contractor is obliged to withhold some of the labour element of any payment to a subcontractor and then to pay over that retention to HMRC on account of the subcontractor’s ultimate income tax liability. The contractor must check with HMRC whether the retention is 20% or 30% (or 0% where the sub￾contractor has ‘gross payment status’).

The problem typically arises when an established business suddenly finds it is within the scope of CIS on some or all of its payments, so it should have been retaining or paying across x% of its subcontractor payments for several months or even years.

The regime holds the contractor responsible and liable for those retentions; if they are not made, any shortfall has to be met out of the contractor’s own funds and profits.

However, if we suppose that our contractor wrongly failed to withhold CIS retentions for several years, what if the subcontractor has likewise been accounting for and paying income tax (or corporation tax) on those gross receipts, oblivious to CIS?

Protecting contractors from the risk of HMRC ‘double-dipping’

Just as with ‘real’ PAYE, there is a problem with making the contractor or employer responsible (and liable to account) for what is really an individual subcontractor or employee’s personal tax liability. HMRC could accidentally end up with tax from both the subcontractor and from enforcing collection rights against the contractor, on essentially the same subcontractor income.

The CIS regulations (SI 2005/2045) offer some respite: regulation 9 permits HMRC to make a direction, reducing the contractor’s liability where or to the extent of either of two ‘conditions’, in summary:

A. The contractor took reasonable care in relation to its CIS obligations but had made a mistake in good faith or genuinely believed that CIS tax did not need to be withheld on given payments.

B. The subcontractor has made a tax return incorporating that income from the contractor AND paid the tax due thereon (or does not owe any tax thereon in the first place).

Ignoring any hope that HMRC might entertain the notion that a contractor had been taking reasonable care in observing its CIS obligations yet somehow still disagreed with HMRC on whether CIS deductions should have been made, this leaves the contractor relying on HMRC to:

 1. find a given subcontractor’s tax record;

 2. satisfy themselves that the contractor’s payments have been included as income in that subcontractor’s tax returns – potentially for several years; and

 3. satisfy themselves that the subcontractor has, in fact, paid the tax due on the corresponding profits.

This could cover several years and for numerous subcontractors. The more recent the default, the less chance that subcontractors would have both submitted their returns and paid their payments.

Regulation 13 covers HMRC’s power to make a determination of any CIS withholding tax still due from the contractor, net of any adjustments (directions) made under regulation 9. Crucially, it had long been HMRC’s view that once a regulation 13 determination was made, no further regulation 9 directions (adjustments) could be incorporated.

Given the interval between paying a subcontractor and the subcontractor then including that payment on their own tax return and then paying the corresponding tax due, this would almost invariably mean a serious risk of tax being paid twice on the same incomes – particularly those amounts paid most recently. Ironically, the more compliant the sub-contractors and the faster HMRC worked, the greater the risk of HMRC enjoying a ‘windfall’ at the contractor’s expense.

A contractor might well worry that HMRC might not try too hard to trace every subcontractor, reconcile incomes, and check payments, etc. HMRC rightly refuses to divulge the particulars of a subcontractor’s affairs, on confidentiality grounds, so much of the process has to be taken on trust.

Legal challenge

HMRC’s position that a regulation 13 determination drew a line that could not be crossed had enjoyed support in numerous tribunal cases, such as Ormandi v HMRC [2019] UKFTT 0667 (TC), and North Point (Pall Mall) Ltd v HMRC [2021] UKFTT 0259 (TC).

Notably, the CIS regulations permit appeals to the tribunal only under Condition A above (reasonable care), not Condition B. To an extent, this is understandable, given that any findings under B – at least in terms of amounts – should be relatively uncontroversial, assuming we are dealing with a diligent officer acting reasonably and fairly. This meant that the Beech companies in this latest case were obliged to seek leave for judicial review (which is typically more expensive than a tribunal hearing). The companies lost that review but won at appeal, with key arguments being that tax liabilities should not be discretionary or fall to HMRC’s ‘munificence’, or allow HMRC to retain a ‘windfall’.

The Court of Appeal acknowledged the neat logic of HMRC’s arguments that basically inferred from the legislation that no adjustment to the CIS tax could be directed after a determination had been made, but worried over potential unfairness to the contractor and decided that “contextual considerations point clearly” towards the companies’ approach to the legislation. Of the several aspects discussed, note:

 • If a regulation 13 determination were intended to prevent any further regulation 9 direction adjustments, then regulation 9 should have clearly said so – there was no reference in regulation 9 to limitations being set by the later Regulation.

 • Based on HMRC’s long-standing interpretation, an HMRC officer could simply decide to cut off any appeal rights under regulation 9 (e.g., against condition A above) just by issuing a regulation 13 determination – even if an appeal had already been made: “That is an extraordinary result which would require clear words, [in the legislation], because it contravenes general principles of access to justice.”

 • The judges were unmoved by HMRC’s assurance that any kinks in the logic of its preferred interpretation could be smoothed over by HMRC’s using “collection and management powers”, quoting: “One should be taxed by law, and not untaxed by concession”.

Conclusion

While tailored advice is essential, it seems most contractors exposed to ‘accidental CIS’ like this will want to appeal a regulation 13 determination promptly when issued by HMRC and apply themselves assiduously to encouraging HMRC to match as much tax borne by the corresponding subcontractors as possible, under regulation 9 – bearing in mind that appeals can and do hold cases open for months and years.

A look at the relative tax positions for companies and unincorporated businesses and the tax implications of disincorporation.

As the tax benefits of trading via a limited company have been gradually whittled away, and in view of the additional administrative costs, business owners may be considering whether disincorporating is the right decision for them.

The basic tax position

The starting point for any disincorporation decision will usually involve a comparison of the tax liability when operating as a company against the equivalent position of being a sole trader. For example, if profits totalling £50,000 are fully extracted by a one-director company, after allowing for a salary equivalent to the personal allowance, more income will be retained if they were trading as a sole trader.

Illustration: 2025/26

                                                          Company     Sole Trader

Profit before salary                            50,000.00       50,000.00

Salary                                              (12,570.00)               -

Employer’s NICs                               (1,136.00)               -

Dividends/taxable profit                    36,294.00        50,000.00

Corporation tax (19%)                       (6,895.86)              -

Retained profits                                 29,398.14               -

Salary/profits                                     12,570.00        50,000.00

Dividends                                          29,398.00               -

Total income                                      41,968.00        50,000.00

Personal allowance                         (12,570.00)      (12,570.00)

Taxable income                                 29,398.00         37,430.00

Income tax @ 20%                                 -                  7,486.00

Dividends (after £500) @ 8.75%        2,528.58                 -

Class 4 NICs @ 6%                                  -                  2,245.80

Personal tax payable                          2,528.58           9,731.80

Retained profits                                39,439.43         40,268.20

Difference                                            (828.77)

However, this comparison does not tell the full story, as there will be other factors to consider in each case, so each decision must be reviewed based on its individual circumstances.

After considering the options available, if disincorporation is still the favoured approach, there are other tax consequences to be considered and planned for, as well as actions to take where they can be avoided or mitigated.

Capital allowances

Disincorporation will bring about the end of a chargeable accounting period. In the final period, writing-down allowances, first-year allowances and the annual investment allowance cannot be claimed. Instead, a disposal value is brought into account, which for connected transactions is deemed to be equal to the market value of the assets disposed of and deducted from the capital allowance pool value.

This will crystalise either a balancing charge or allowance. Whilst a balancing allowance would result in a reduction of profits or create a loss, a balancing charge will do the opposite and thus may result in creating or increasing a corporation tax charge on cessation.

Where there is a business succession between connected parties, a balancing charge or allowance can be avoided by making an election under CAA 2001, s 266. The effect of this election is for any actual or deemed disposal proceeds to be ignored and for the capital allowance pool to be transferred at its tax written-down value.

For an election to be valid, it must be made jointly by the transferor and transferee within two years of the date of succession. The succeeding business will then include the transferor’s closing tax written-down value as an addition in its opening capital allowance pool.

VAT – Transfer of a going concern - On disincorporation, if the company is VAT￾registered, the ‘transfer of a going concern’ (TOGC) rules need to be considered. Where the qualifying criteria for a TOGC in The Value Added Tax (Special Provisions) Order 1995 are met, and both businesses are a ‘taxable person’, application of the TOGC rules is mandatory, with the effect that no VAT is chargeable on transferred stock and assets.

A taxable person is a business which is, or is required to be, VAT-registered. The succeeding business may not meet this definition, either because it qualifies for an exception to registration using the ‘look forward’ test or does not meet the requirement for compulsory registration as the company’s taxable turnover for the previous twelve months was below the VAT registration threshold. In either case, if as a result of the transfer, the succeeding business is not (nor required to be) VAT-registered, the TOGC rules will not apply.

Where the TOGC rules do not apply, output VAT is chargeable on the disposal of assets from the company in the normal way. Therefore, whilst the possibility of de-registering for VAT post disincorporation might be beneficial for some businesses, this should be planned for where a VAT charge will crystallise.

Opted land and buildings - The TOGC rules do not automatically apply to land and buildings (e.g., in London) which have an option to tax or for commercial properties which are less than three years old. A disposal of these assets on disincorporation will remain subject to VAT at the standard rate unless the buyer makes their own valid option to tax election, and notifies the seller that the option will not be disapplied prior to the transfer.

Whilst a VAT charge on disincorporation may not be a problem where full input VAT can be claimed by the buyer, it will increase any stamp duty land tax payable, which is calculated on the VAT-inclusive price.

Where an option to tax election has been made by the buyer and the TOGC provisions apply, the buyer will inherit any further adjustments required under the ‘capital goods scheme’. The capital goods scheme broadly applies where a building is purchased or constructed with a VAT-exclusive value of £250,000 or more.

Therefore, where the taxable use of the building decreases post-disincorporation and within the ten-year clawback period, the buyer will have to repay a proportion of the input VAT claimed on the original purchase, despite the fact that the VAT claim was not made by them.

Capital assets - Where capital assets are owned by the company (e.g., land, buildings and goodwill) on disincorporation, whether these are sold to the owners or otherwise disposed of, a chargeable gain will arise as if full market value had been received by virtue of TCGA 1992, s 18. Where a chargeable gain is made, this will trigger a corporation tax charge.

Unlike for assets subject to capital allowances, there are no reliefs available to hold over any gains. In addition, where the purchase of the asset was itself subject to a rollover relief claim, this will reduce the taxable base cost of the asset and result in an increased chargeable gain on disposal.

For chargeable assets and pre-31 March 2002 goodwill, indexation allowance is available from the date of purchase up to December 2017 to reduce the chargeable gain, although there are limits to this relief as indexation cannot create or increase a loss on disposal.

Post 1 April 2002, goodwill is treated differently, with any credit on disposal taxed as business income, with no indexation allowable on the cost. As a further consideration, the ‘new’ goodwill may already have received corporation tax relief where it has been expensed in the company accounts, which will reduce the allowable cost and increase the chargeable gain on disposal.

Implications for shareholders - Once the company’s assets have been sold or distributed, the shareholders will still need to extract any remaining reserves prior to closing the company down. If the reserves are withdrawn as dividends, the shareholders will incur an income tax charge at their marginal rate of tax.

If the company is liquidated, however, subject to the anti-phoenix legislation within ITTOIA 2005 s 396b, the shareholders will pay capital taxes on the distributions.

For higher-rate and additional-rate taxpayers, capital treatment will be preferable to a dividend due to the lower tax rates applicable to capital gains. However, for basic-rate taxpayers, it may be preferable to receive dividends taxed at the basic rate of 8.75% rather than a capital distribution, which, even with business asset disposal relief available, attracts a minimum capital gains tax charge of 14%.

Where reserves are £25,000 or less, the company can be liquidated relatively simply via a voluntary strike-off procedure. If reserves are in excess of £25,000, for capital treatment to apply, a liquidator would have to be appointed to close down the company which will increase the cost of disincorporation.

What is a PET? A PET is a lifetime gift that satisfies three conditions: it is made by an individual (on or after 18 March 1986); it would otherwise be a chargeable transfer; and it is broadly a gift to another individual or certain categories of trust.

A PET is assumed to be an exempt gift when made, so no immediate IHT liability arises (unlike, say, a gift into a discretionary trust, which is immediately chargeable). If the donor survives for seven years or more thereafter, the gift becomes actually (i.e., no longer potentially) exempt.

Not a PET

Certain types of gift cannot qualify as PETs, in addition to gifts into most types of trust (see above). These include gifts to a company (i.e., because the recipient is not an individual), and deemed dispositions on alterations in the capital or share rights of close (i.e., broadly closely controlled) companies. However, the remainder of this article focuses on gifts to individuals.

Does it qualify?

A gift to another individual is capable of qualifying as a PET to the extent that it satisfies one of two alternative conditions. The first condition is that the value of the gift becomes comprised in the estate of the recipient individual. For example, if a parent transfers £100,000 to their daughter’s bank account, the value of the gift becomes comprised in the daughter’s estate. By contrast, if a grandparent directly pays the private school fees of a grandson, that is not a PET because the gift does not become comprised in the grandson’s estate (however, the grandparent could instead consider making a cash gift to the grandson’s parents to enable their son’s school fees to be paid). The alternative condition for PET treatment applies to the extent that the transfer results in the other individual’s estate being increased.

Example: I ‘forgive’ you… Eric lent his best friend Ernie £250,000 nearly five years ago, as Ernie was going through a messy divorce. Eric now decides that he does not need the money to be repaid and forgives Ernie’s debt. This does not satisfy the first condition for PET treatment, as the forgiveness of the debt does not become comprised in Ernie’s estate. However, the alternative condition for PET treatment is satisfied, as Ernie’s estate is increased due to no longer owing money to Eric. The PET rules refer to a ‘transfer of value’ as opposed to a ‘gift’, so the scope of the rules is seemingly wider. For example, if parents sell a house worth £500,000 to their son for £100,000, the transaction is strictly a sale rather than a gift, but the son’s estate is increased by the transfer of value so it qualifies as a PET by the parents.

Practical tip

As a PET is assumed to be exempt when made, there is no immediate need to inform HM Revenue and Customs. However, records of all gifts and transfers should be kept, in case the donor dies within seven years.

For many of HMRC's 'customers' who have spent more than 30 minutes trying to get through on the phone, the thought of making a formal complaint to someone about the service may seem attractive, especially if some recompense may be forthcoming. There is someone to contact but unfortunately their remit is restricted to specific cases.

HMRC operates a two-tier complaints system. The first tier involves the taxpayer lodging a complaint with HMRC's own internal process. After a decision has been made, if the taxpayer feels their complaint has not been handled correctly or satisfactorily, they can escalate it to a second tier. Tier two is HMRC’s final review and will be conducted by a different review handler. If the taxpayer is still dissatisfied after the second review the next and final stage is to ask for an independent review by  the Adjudicators Office (AO).

The role of the Adjudicator’s Office

The AO is an independent body that provides an impartial and independent review of complaints that have already been through the internal complaints process of the department involved. Being independent, the AO cannot enforce decisions – it can only make recommendations to resolve disputes, such as apologies, financial redress or process changes. The AO’s role is not to review or alter decisions made by the relevant government department but rather to assess whether that department has handled the complaint ‘appropriately and given a reasonable decision’ in line with its policies and procedures.

The AO can only consider and rule on specific types of complaints, namely:

‘mistakes’;

unreasonable delays;

poor and misleading advice;

processes;

inappropriate staff behaviour;

whether a policy has been followed; and

the correct use of ‘discretion’.

If a complaint involves HMRC’s use of discretion, the Adjudicator will evaluate the process concerning that discretion and whether the judgement reached was reasonable. The Adjudicator is not allowed to substitute their judgement for a reasonable judgement reached by HMRC.

The complaints process

Any complaint must first be made to the relevant government agency before the case can be transferred to the AO. A first and second review from HMRC must have been made before it can be transferred to the AO. The AO typically accepts complaints up to six months after the second review by HMRC. Once it reaches the AO, the review process usually takes around three to six months to complete, although this timeframe may vary based on the complexity of the case and the volume of complaints being processed. It is important to note that it may take many months of phone calls, letters and interactions with the relevant HMRC department to reach this stage.

The AO's 2023/24 annual report indicates that, for the financial year 2023/24, it received 1,046 complaints concerning HMRC, an increase from 950 the previous year. It upheld 41% of these complaints either fully or partially, a decrease from the previous year’s rate of 47%.

Ruling on compensation

If a case is reviewed by the AO and determines in the claimant's favour, it has the authority to recommend awards compensation should they rule that the claimant has lost money or experienced anxiety or distress due to HMRC's error or delay. The AO annual report states that it recommended redress payments of £103,063 for the 2023/24 year. The most recent information available shows that in the 2022/23 financial year, HMRC paid out a total of £718,000 in compensation to taxpayers, distributed amongst 4,742 individuals who had lodged complaints regarding delays and poor service. The average compensation was £136, with those escalating their complaints receiving an average of £371.

Practical point

Many taxpayers who make a complaint can find the process to be administratively burdensome, requiring detailed evidence such as receipts and invoices to substantiate their claims. If you decide to file a complaint, be prepared for the process to take months rather than weeks and understand that any award may not adequately compensate for the time spent.

The changes to the employment allowance for 2025/26 and how to claim.

Alongside the October 2024 Budget announcement of National Insurance contributions (NICs) hikes for employers from 6 April 2025, there was a nugget of good news – the employment allowance was also increased from the same date.

This is particularly helpful for the employers at the smaller end of the scale who are eligible to claim the allowance, as despite the increase in the secondary rate and the fall in the secondary threshold; they find that they actually pay less in secondary Class 1 NICs in 2025/26 than in 2024/25.

Secondary Class 1 NICs rates and thresholds - For 2025/26, the rate of secondary Class 1 NICs payable by employers is set at 15%, up from 13.8% for 2024/25. To compound matters, the secondary threshold is reduced to £96 per week (£417 per month; £5,000 a year) for 2025/26 from £175 per week (£758 per month; £9,100) for 2024/25. This will mean that employers will pay secondary contributions at a higher rate on more of an employee’s earnings.

There is no change to the upper secondary thresholds for under 21s, apprentices under 25 and veterans in the first year of their first civilian employment, which remain at £967 per week (£4,189 per month; £50,270 per year). Where an employer has physical premises in a special tax site (such as a freeport or an investment zone), the secondary threshold applying to the earnings of a new employee in their first three years of employment in the special tax site remains at £481 per week (£2,083 per month; £25,000 per year).

Employment allowance - The employment allowance enables eligible employers to reduce the amount of the secondary Class 1 NICs they pay over to HMRC.

To partly offset the impact of the employer NICs increases applying from 6 April 2025, the employment allowance has risen to £10,500 (up from £5,000 for 2024/25). Where the employer’s secondary Class 1 NICs liability for the year is less than the allowance, the allowance is capped at the amount of the liability. For example, for 2025/26, if an employer had a secondary Class 1 NICs liability of £9,000, their employment allowance would be capped at £9,000 and would fully offset their liability for the year, so that they have nothing to pay to HMRC.

Not all employers are eligible for the allowance, the main exclusion being personal companies where the sole employee is also a director. However, at the other end of the scale, for 2025/26 larger employers whose secondary Class 1 NICs bill in 2024/25 was £100,000 or more can claim the allowance – previously, it was restricted to employers with a secondary Class 1 NICs bill in the previous tax year of less than £100,000. Where an employer operates more than one payroll, they are only able to claim one employment allowance – not one per payroll. Similarly, groups of companies can only claim one employment allowance for the group.

The employment allowance must be claimed – it is not given automatically. This can be done through the employer’s real time information software. The sooner the allowance is claimed, the sooner the employer is able to benefit from it. However, the allowance can be claimed at any point during the tax year. Where the employer was entitled to the allowance for the previous tax year, a claim can be made until four years after the end of the tax year (e.g., by 5 April 2029 for claims for 2024/25).

Giving effect to the employment allowance - Where an employer is entitled to the employment allowance, it is set against their secondary Class 1 NICs liability each month until it is used up.

Example 1: Gradual use of the employment allowance An employer has a monthly secondary Class 1 NICs liability of £3,000 in 2025/26. The employer has claimed the employment allowance. In month 1 (to 5 May 2025), £3,000 of the employment allowance is set against the secondary Class 1 NICs liability for the month, meaning that the employer has no secondary Class 1 NICs to pay over to HMRC in that month. The remaining £7,500 of the employment allowance is carried forward. In month 2 (to 5 June 2025) a further £3,000 of the employment allowance is set against the liability for the month, meaning that the employer has no secondary Class 1 NICs to pay over to HMRC that month. The remaining £4,500 of the employment allowance is carried forward.

In month 3 (to 5 July 2025), a further £3,000 of the employment allowance is set against the liability for the month, meaning that the employer has no secondary Class 1 NICs to pay over to HMRC that month. The remaining £1,500 of the employment allowance is carried forward.

In month 4 (to 5 August 2025), the remaining employment allowance (£1,500) is less than the secondary Class 1 NICs liability for the month of £3,000. The balance of the employment allowance is set against the secondary Class 1 NICs liability for the month, reducing the amount that the employer needs to pay over to HMRC to £1,500. The employment allowance has now been used in full.

For months 5 onwards, the employer must pay the full secondary Class 1 NICs liability of £3,000 per month over to HMRC.

Impact of the change in the employment allowance

The extent to which an employer is better off or worse off in 2025/26 as compared to 2024/25 as a result of the changes to employer’s NICs will depend on the secondary Class 1 NICs liability and whether they are eligible to claim the employment allowance.

Personal companies who are not entitled to the allowance and who pay the director a salary equal to the personal allowance of £12,570 will pay secondary Class 1 NICs of £1,135.50 (i.e., 15% (£12,570 - £5,000)) in 2025/26 – an increase of £656.64 on their 2024/25 bill of £478.86 (i.e., 13.8% (£12,570 - £9,100)).

At the other end of the scale, for very large employers, the availability of the employment allowance will not make much difference, and they will face substantial rises in their secondary Class 1 NICs bill.

For employers at the margin who want to know how the changes will affect them, there is no substitute for ‘doing the sums’.

Example 2: Contrasting fortunes

A Ltd is a small company with three employees who are each paid £40,000 a year. They are eligible to claim the employment allowance.

In 2024/25, the secondary Class 1 NICs liability was £4,264.20 (i.e., 13.8% (£40,000 - £9100)) per employee – a total for the company of £12,792.60. The employment allowance (set at £5,000 for 2024/25) reduces the amount that they pay over to HMRC to £7,792.60.

In 2025/26, the secondary Class 1 NICs bill per employee before taking account of the employment allowance is £5,250 (i.e., 15% (£40,000 - £5,000)) – a total of £15,750. For 2025/26, the employment allowance is £10,500. The allowance reduces the amount that the company must pay to HMRC to £5,250.

The increase in the employment allowance more than offsets the rate rise and the reduction in the secondary threshold, meaning A Ltd pays less in Class 1 NICs than in 2025/26.

B Ltd has seven employees, each of whom is paid £40,000. For 2024/25, they must pay £24,849.40 to HMRC (i.e., (7 x £4,264.20) - £5,000). For 2025/26, they must pay £26,250 (i.e., (7 x £5,250) - £10,500) to HMRC. This is £1,302 more than in 2024/25.

The increase in the employment allowance is not sufficient to offset the combined impact of the increase in the rate of employer’s NICs and the fall in the secondary threshold. Employers whose secondary Class 1 NICs bill will rise in 2025/26 could look to take on more part￾time and fewer full-time workers (which will enable them to access more NICs-free bands) and also consider taking on younger workers under the age of 21 and armed forces veterans who have recently left the armed forces to benefit from the upper secondary thresholds. This will mitigate some of the rises.

Practical tip

Employers who are eligible to claim the employment allowance should make sure that they make the claim as this can reduce the amount of their secondary Class 1 NICs bill by up to £10,500 in 2025/26. The claim can be made via their payroll software package.

For most employees, National Insurance contributions (NIC) earnings periods are calculated based on their regular pay intervals. In contrast, all directors have an annual earnings period, regardless of their actual pay intervals, where contributions for the year are calculated by reference to the annual NIC thresholds.

There are two methods of calculation – the annual earnings period basis and the alternative basis. While both methods result in the same total NIC amount owed by both the director and the employer over the fiscal year, the timing and pattern of deductions differ.

Annual basis – the default method

Under this method, NICs are calculated on the director's cumulative earnings for the whole tax year. Rather than calculating NICs on each pay period, this method treats the director's NICs as accruing gradually over the year, allowing for variable or irregular pay. The contributions due are found by calculating the liability on earnings to date for the tax year using the annual thresholds and deducting contributions already paid during the year. The balance is the contributions due on the current payment.

For the 2025/26 tax year, no contributions are owed until the primary threshold of £12,570 is reached. Once this threshold is surpassed, contributions are payable at 8% until the upper earnings limit of £50,270 is reached, after which the rate drops to 2%. Secondary contributions paid by the employer are calculated similarly. If employer NICs are due (because the Employment Allowance (EA) cannot be claimed), no contributions are payable until the secondary threshold (or upper secondary threshold for employees under 21, if applicable) of £5,000 is reached, at which point the contributions rate is 15%.

Alternative method (regular earnings method)

This method is optional and often used when a director is paid on a regular basis. NICs are calculated in the same way as for regular employees, allowing the director’s NICs to be calculated using weekly or monthly thresholds, as relevant. At the end of the tax year, a reconciliation is performed in the final pay period using annual thresholds, and any outstanding contributions deducted from the final payment. If the final payment is insufficient to cover the primary contributions due, the employer must pay these amounts.

Since this method is optional, it can only be used if the director agrees. Additionally, the director must usually receive their earnings in a payment pattern for which a regular earnings period can be established, and those payments should exceed the lower earnings limit for the relevant pay period.

Which to use?

The choice of method depends on how and when the director is paid, and the company's administrative preferences – both have pros and cons.

If the director receives irregular payments, perhaps being paid only a few times a year, then the annual method may be preferable. NIC payments will be lower early in the year when earnings are reduced, and this method can allow for tax planning, minimising the risk of overpayment.

However, using annual rates and thresholds can lead to considerable variation in deductions, even if gross salary payments remain constant. To enable more consistent contributions throughout the year, the director may prefer to opt for the alternative method.

Practical point

For 2025/26, the personal allowance and employee's NIC primary threshold are both set at £12,570, the employee’s NI lower earnings limit  is £6,500 and the employer's NIC secondary threshold is £5,000. Therefore, any director can withdraw an amount as salary up to the secondary threshold of £5,000 (whether EA is available or not) without incurring tax or NIC charges for either the employee or employer. However, be aware that the year will not count as a qualifying year towards their state pension.

Profits arising from land or property are treated as arising from a property business. For tax purposes, profits from land and property in the UK are kept separate from those arising from land and property overseas. Thus, a person who has, for example, rental property both in the UK and abroad will have two property businesses – a UK property business and an overseas property business.

UK property business

A person’s UK property business consists of every business which that person carries on for generating income from land in the UK and every transaction which that person enters into which produces rents or other receipts from that land or property.

Landlords often use an agent to manage their let. However, a person will still carry on a property business where that business is handled by an agent – they carry on the business through the agent.

Where a person owns more than one property in the same legal capacity, the income from all land and property owned by that person in that capacity in the UK is treated as part of the same property business and the income and expenses are amalgamated to work out the profit or loss for the property business as a whole.

For 2024/25 and earlier tax years, separate rules applied to furnished holiday lettings (FHLs) and UK FHLs represented a separate stream within a UK property business – they were not a separate property business. However, profits from FHLs were calculated separately from other property profits, and losses from one stream could not be set against profits from the other. With the abolition of the FHL regime from 6 April 2025, for 2025/26 and later tax years, the income and expenses from furnished holiday lets are amalgamated with income and expenses from other lets to work out the profit or loss for the property business.

Property can be owned in different legal capacities. Income from UK land and property forms part of the same property business where activities are carried on by the same person acting in the same legal capacity. Where a person owns properties in different legal capacities they will have different property businesses.

Example

John owns two buy-to-let properties in the UK and also a furnished holiday let in the UK. He is a member of a partnership which owns a commercial property that it rents out.

The buy-to-lets and furnished holiday let owned by John personally form a UK property business. The income and expenses from each property are amalgamated to calculate the profits of that property business. For 2024/25, the profit or loss for the FHL had to be determined separately.

The property let by the partnership forms a separate property business.

Overseas property business

Income from overseas land and property forms part of a separate overseas property business. The profits or losses from an overseas property business are not combined with those from a UK property business. Losses from an overseas property business cannot be set against profits from a UK property business and vice versa.

For 2024/25 and earlier tax years, profits from furnished holiday lettings outside the UK but in the EEA were calculated separately. However, profits from overseas holiday lets outside the EEA were amalgamated with the income and expenses from other overseas properties (excluding EEA FHLs). For 2025/26 and later tax years, the income and expenses for all overseas properties owned in the same legal capacity are amalgamated to work out the profit or loss for the overseas property business.

Example

Anne owns four residential properties in the UK and a commercial property which she lets out and also two properties on the UK coast which she lets out. She also has a flat in Paris which is let on a long-term let and an apartment in Miami which is let as a holiday let.

Anne has two property businesses –- a UK property business comprising the UK residential and commercial lets and the UK holiday lets and an overseas property business comprising the Paris flat and the Miami apartment.

In a post on X, HMRC recently warned taxpayers ‘not to get caught out by ads promising quick refunds for working from home’, urging taxpayers to check that they were eligible before making a claim.

So what relief is available to employees who sometimes or always work from home?

The rule

A deduction can be claimed for employment expenses to the extent that they are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. In relation to expenses incurred when working from home, HMRC accept that this test is met in the following circumstances:

The duties that the employee performs at home are substantive duties of the employment. These are duties that an employee has to carry out that represent all or part of the central duties of the employment.

The duties cannot be performed without the use of the appropriate facilities.

No such appropriate facilities are available to the employee at the employer’s premises or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect the employee to travel to the employer’s premises daily.

At no time before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

Personal choice

The test is not met where an employee works from home through personal choice rather than because they are required to work from home. For example, where an employer operates a flexible working policy whereby employees must work from the employer’s premises on certain days and can choose whether to work at the employer’s premises or at home on the other days, the employee cannot claim tax relief for additional household costs on the days that they choose to work from home, even if they do the same work on these days that they would have done at the employer’s premises. However, where an employee is contractually obliged to work from home, they are able to claim a deduction for additional household expenses incurred as a result.

Making a claim

Where the conditions are met, the employee can claim a fixed deduction of £6 per week for the weeks when they work at home at least some of the time. Alternatively, they can claim the actual additional household costs, such as additional electricity, gas and cleaning costs, that they incur as a result of working from home. A claim based on actual expenses is only worthwhile where the amount claimed is more than £6 per week.

A claim can be made online (where the total claim in respect of employment expenses is not more than £2,500), in a Self Assessment return or by post on form P87. The employee must supply evidence to show that they are required to work from home, such as a copy of their employment contract. Where the claim is based on actual amounts, evidence, such as copies of bills, must be provided in support of the amount claimed.

Inheritance tax annual exemption should not be overlooked or underestimated.

The inheritance tax (IHT) annual exemption is often overlooked. This is probably because the exempt amount is a relatively modest £3,000 (for 2025/26). However, as the well-known slogan from the popular supermarket goes, ‘every little helps’! For example, £3,000 given away in every tax year for seven years can shelter £21,000 from a possible IHT liability of £8,400 on death; for a married couple (or civil partners), the potential IHT saving doubles to £16,800, for very little effort or planning.

Give…give…give!

Any unused annual exemption can be carried forward to the following year, but not beyond (IHTA 1984, s 19). The annual exemption for the later year must be used completely before any used amount from the previous year; and if any amount brought forward is left unused, it is lost.

Example: Too late!

Charlotte made lifetime gifts as follows:

Tax year.   Gift   Exemption available  Carried forward

2023/24    2,000             3,000.                     1,000

2024/25    2,500             4,000                         500

2025/26    5,000             3,500                           Nil

Note that in 2025/26, Charlotte cannot claim brought forward annual exemption of £1,500; the £1,000 carried forward from 2023/24 was unused and is therefore lost. The annual exemption applies to lifetime gifts only (i.e., not to an individual’s estate on death). It can be used for larger gifts; so, on a gift of (say) £10,000 the first £3,000 is exempt, leaving £7,000 within the scope of IHT (unless other exemptions are also available).

PETs and the annual exemption

Most types of lifetime gifts (e.g., from one individual to another) are potentially exempt transfers (PETs). A PET made at least seven years before death becomes an exempt transfer. Conversely, a PET becomes a chargeable transfer for IHT purposes if made within seven years of death. The annual exemption is set against any immediately chargeable gift (e.g., into a discretionary trust) and not against any PET made earlier in the same tax year. If the donor dies within seven years (i.e., the PET becomes chargeable), for annual exemption purposes it is treated as having been made later than the immediately chargeable gift; in other words, the immediately chargeable gift keeps the annual exemption. HMRC’s guidance (in its Inheritance Tax Manual at IHTM14143) states (rather confusingly): ‘If the transferor has made transfers to more than one liable person on different days in the same tax year, then apply the annual exemption to the earliest transfer first. It does not matter whether the transfers are potentially exempt or immediately chargeable.’ For the avoidance of any doubt, chargeable lifetime transfers (CLTs) should therefore be made before PETs in the same tax year, if possible.

CLTs and the annual exemption

As indicated, gifts which are PETs may result in the annual exemption being wasted, if the donor survives for at least seven years.

Conversely, CLTs generally ‘capture’ and retain the annual exemption. Gifts into most types of trust are CLTs. Consideration could therefore be given to gifting assets into an appropriate trust. Whilst relatively small gifts into trust are sometimes troublesome because they can affect the IHT rate, additions at or below the annual exempt amount should generally prevent such problems arising.

Practical tip

If gifts are also made on which the ‘normal expenditure out of income’ exemption is being claimed, make sure that other gifts are made from capital rather than income to ensure that the annual exemption is also available.

The VAT recovery rules for business gifts and when output tax is due. Many businesses give gifts to customers and staff, or to promote their business. The rule relating to free gifts not only relates to promotional items and Christmas gifts but also (among others) to:

 • ‘executive presents’;

 • long service awards;

 • retirement gifts;

 • items distributed to trade customers;

 • prizes from amusement machines, etc.;

 • prizes in betting gaming and lotteries;

 • Christmas gifts; and

 • goods supplied to employees under attendance or safety at work schemes.

Check the small print!

To take advantage of these rules, the gifts must not be part of a series of gifts to the same person where the total cost of the goods in any 12-month period is more than £50, exclusive of VAT. Unlike direct taxes, a business is not required to have any form of promotional advertising on the gift (e.g., a pen with the company name on it) in order to make a deduction.

Take the example of a pharmaceutical company that wants to give its customers a case of wine worth £30 plus VAT of £6. In addition, carriage of the wine to the customers will be £9.50. The total cost of supplying the free gift will therefore be £45.50. The company is expecting to give away 1,000 cases with a total VAT cost of £6,000.

The £50 limit for the cost of the goods does not include any administrative costs, including post and packaging. In this example, the cost price of the goods was £30, not £45.50 as this includes VAT and carriage.

The first point to consider is that a business is entitled to recover all the VAT on a business gift at the time of purchase. However, above the £50 limit, the business must account for output VAT equal to the cost of the goods to it (i.e., equal to the input tax reclaimed at the time the gift is given away). By concession, HMRC will allow a business to simply not reclaim the VAT it was charged on the purchase.

If the cost of the goods exceeds the current monetary limit, and there is a reasonable time between purchasing the free gifts and giving them away, a business should claim the VAT back and take advantage of the cash flow benefit.

In this example, the pharmaceutical company could recover all the VAT on the purchase of the promotional gifts at the time of purchase, and because the value of each individual gift was less than £50, they need not account for any output VAT when the gifts were sent to customers. This will save them up to £6,000.

Looking back…

If a business has not claimed the VAT back on these types of gifts and it still has the original purchase invoices, it can claim the VAT back covering the previous four years. If the amount is less than £10,000, it can adjust for it on its next VAT return, otherwise, it will have to inform HMRC separately by making a voluntary disclosure using the form VAT 652.

If a business provides a service to a customer free of charge, there is usually no supply, so no VAT is due. If it has bought in the supply of services, any VAT incurred is input tax and therefore may be reclaimable subject to the normal rules. In that case, output tax is due on the services it passes on free of charge.

If the business simply pays for a third party to provide services to someone else, any VAT incurred is not deductible by the business as input tax since the supply is not to the business.

Practical tip

Businesses can recover the VAT on business gifts that they purchase, but if the cost to any individual in a 12-month period is more than £50 VAT exclusive, an equal amount of output VAT has to be accounted for.

The October 2024 Autumn Budget confirms consigning forms P11D and P11D(b) to the legacy dustbin – Almost.

On 16 January 2024, there was a HMRC ‘simplification update’ announcing the mandation of payrolling benefits-in-kind (BIKs) from tax year 2026/27.

Example: Payrolling of medical benefit

The payroll department is advised that Roger has a medical benefit of £3,000 per year. He is paid monthly, so to account for the income tax and Class 1A National Insurance contributions (NICs), £250 is processed as a notional payment each month. HMRC held meetings with representative bodies; silence and a general election followed and there was no confirmation this would be pursued, until…

The October 2024 Autumn Budget

This contained the following statement:

‘The government confirms that the use of payroll software to report and pay tax on benefits in kind will become mandatory, in phases, from April 2026. This will apply to income tax and Class 1A National Insurance contributions (NICs).’

Until this, the announcement in January 2024 issued by the previous government was meaningless. Most would have predicted that payrolling would be a disaster if pursued in a ‘big bang’ way, so I was encouraged to read that the move to mandation was to be done in a phased way. I imagined, perhaps, medical benefit being mandated in 2026, followed by cars and vans in 2027 or something similar to the way we became used to auto-enrolment with staging dates.

The phasing reality

Then I read HMRC’s accompanying policy paper, ‘Confirming plans to mandate the reporting of benefits in kind via payroll software from April 2026’ and November 2024’s Agent Update, which detailed phasing in a way I never imagined. From April 2026, taxable values of all BIKs must be processed via the payroll with the exception of employment-related loans and accommodation, to be mandated later. Although, these can be processed on a voluntary basis if the employer is comfortable, they can calculate and process the taxable value each time the payroll is run. This is not a phased mandation. This is a mandation of the current voluntary system.

HMRC concessions

HMRC has introduced two concessions as a result of stakeholder engagement following the January 2024 announcement:

1. In recognition that employers will need time to adjust in tax year 2026/27, HMRC will ‘monitor the penalty position’ in the first year of mandatory payrolling.

2. Although HMRC expects correct taxable values to be payrolled, an ‘end of year’ process will be introduced to amend any errors in the tax year – whilst details are unknown, given the P11D will be for loans and accommodation only, this sounds like a ‘P11D by payroll’ process to me.

The reality in practice

As a payrolling advocate, having implemented it and been on the receiving end as an employee, I do not want to be negative about a proposal I broadly support. However, from experience, it is time to be realistic about this, always considering full details are not known at the time of writing.

Things to be aware of include the following:

 • It’s not only benefits (and taxable expenses) that will be processed in real-time but also the calculation of Class 1A NICs, payable with the monthly PAYE remittance.

 • Forms P11Ds and the P11D(b) may be consigned to HMRC’s legacy pile of forms; however, this does not change the requirement for taxable benefits knowledge.

 • To enable HMRC to report benefits provided by employers UK-wide, they will expect a granular breakdown of benefit information per employee, per pay period; however, this only matches our desire to provide detailed payslips, all facilitated by payroll software.

 • BIKs that are ‘made good’ by the employee and those that will send the employee over the 50% allowable tax deduction are issues to be overcome.

 • Communication with employees about the issues involved.

Practical tip - Vitally, aside from the above considerations, accurate payrolling in real time depends on the real-time provision of information. Gone are the days when providers could give taxable values after the end of the year. From April 2026, we need this information when the payroll is processed (and by the cut-off).

Significant IHT savings are possible simply by making regular use of available reliefs and exemptions, such as the annual exemption, the IHT nil-rate band, and potentially exempt transfers (PETs).

1. Annual exemption

Transfers of value (e.g., gifts) are generally exempt from IHT, up to a maximum of £3,000 per tax year. Any unused annual exemption can be carried forward to the following tax year (but not beyond).

2. Nil-rate band

Every individual is entitled to an IHT threshold (or ‘nil-rate band’). Where chargeable lifetime gifts (and the individual’s death estate) do not exceed the available nil-rate band (£325,000 for 2025/26), there is no IHT liability.

3. PETs

Most types of lifetime gifts (e.g., from one individual to another) are PETs. A PET made more than seven years before death becomes an exempt transfer for IHT purposes. Conversely, a PET becomes a chargeable transfer if made within seven years of death. Chargeable transfers within the seven-year period ending with the latest chargeable transfer are cumulated, for the purpose of determining the IHT position (although if the individual made a PET just within seven years before death which therefore becomes chargeable, it may be necessary to take into account chargeable transfers within the seven years before that, making up to 14 years in total).

Doubling up the savings

The IHT savings may be doubled if married couples (or civil partners) make use of these elements, and substantial combined IHT savings can be achieved over a relatively short period of time.

Example: £1,354,000 given away – IHT-free

Husband and wife make the following cash gifts to their adult children:

(a)Husband - £677,000

 • Year 1 – Gifted £325,000 nil-rate band plus £3,000 annual exemption for current tax year and previous year brought forward – Total £331,000

• Year 2-7 – Gifted annual exemption £3,000 x 6 years – Total £18,000

• Year 8 – Gifted nil-rate band £325,000 plus annual exemption £3,000 – Total £328,000

(b)Wife (As above) - £677,000

Thus, in a little over seven years, husband and wife will have managed to reduce their estates by a total of £1,354,000, resulting in a potential IHT saving of £541,600 (i.e., £1,354,000 x 40%).

This planning strategy might seem obvious, and rather ‘vanilla’ compared to some IHT saving techniques; yet in practice, it is often overlooked.

Is it affordable?

It must be borne in mind that if gifts are made, the donor will lose the income (if any) generated by the gifted assets, as well as the underlying assets. If the asset is gifted but income generated by the asset is retained, the ‘gifts with reservation’ anti-avoidance rules will need to be considered. If ‘caught’ by those rules, the IHT savings may be wholly or partly lost.

Practical tip

Other IHT reliefs (e.g., business property relief) and exemptions (e.g., normal expenditure out of income) could also be considered, if appropriate. Where assets are being given away instead of cash, other taxes (e.g., capital gains tax) may need to be addressed. Above all, IHT (and other tax) mitigation should never take precedence over personal circumstances and financial needs.

Some key issues to address when considering the disincorporation of a business.

It may now be fiscally attractive for some owner-managed businesses to disincorporate. Here are some further considerations.

No ‘disincorporation relief’

Unlike with an incorporation (where, for example, TCGA 1992, s 162 allows gains on qualifying business assets to be rolled over into the cost of the shares being issued), there are no special tax reliefs available on a disincorporation.

George Osborne did introduce such a relief in April 2013, which allowed land and buildings and goodwill to be transferred to the shareholders at the company’s capital gains base cost, thus avoiding a corporation tax charge on any gain made by the company. However, the relief was limited in scope (the total market value of the qualifying assets could not be more than £100,000), got little takeup, and was abolished in March 2018.

Getting rid of the company

The easiest and cheapest way of doing this will be a striking-off if the company can satisfy all the relevant conditions (e.g., it has not traded for three months). Once approved by the directors, form DS01 (striking-off application by a company) must be completed and submitted to Companies House, along with a fee of £33 for an online application.

As this is not a formal winding-up, any amounts received are treated as an income distribution unless the total amounts distributed are up to £25,000, in which case it can generally be treated as a capital distribution. Companies with larger distributable reserves will probably want to incur the much more substantial fees of a member’s voluntary liquidation, as this will automatically be treated as a capital distribution (potentially with business asset disposal relief available), unless caught by anti-avoidance.

‘Anti-phoenixing’ rules

Four key conditions must be met for ‘antiphoenixing’ tax rules to apply:

a. The individual (S) has at least a 5% interest in the company.

b. The company is a close company.

c. Within two years of that distribution, S (or their connected persons) continues to be, or becomes, involved in a similar trade or activity. Crucially, for a disincorporation, this can include as a sole trader.

d. It is reasonable to assume, having regard to all the circumstances, that the main purpose (or one of the main purposes) of the windingup is the avoidance or reduction of a charge to income tax.

Where the conditions are met, amounts received in the liquidation will be treated as income distributions. Unfortunately, HMRC will not give clearance on this anti-avoidance legislation.

On a disincorporation, the main reason for the liquidation is to change business structure to a simpler form. However, HMRC may seek to argue, where there are significant distributable reserves, that condition D is met (i.e., one of the main purposes of the winding-up is a reduction in income tax that would otherwise be paid on distributions).

In its guidance published on 25 July 2018, HMRC states that:

 1. ‘A decision not to make an income distribution prior to the company’s winding up does not, of itself, mean that Condition D has been met.’

 2. ‘If the recipient of the distribution believes that Condition D was not met, they should self-assess on that basis. HMRC can only displace this where the individual’s decision was not a reasonable one.’

Transfer of VAT registration

Many businesses seem to have incurred long delays in transferring a VAT registration recently, so it may be simpler to just de-register your company and seek a new VAT registration as a sole trader.

Practical tip

Seek clearance under the transactions in securities rules (ITA 2007, s 701) before winding up the company. If given, this should give some comfort that the TAAR is unlikely to apply.

As the 2024/25 tax year has now come to an end, individuals who need to file a Self Assessment tax return for that year can now do so. Although the return does not have to be filed online until 31 January 2026, there are benefits of filing early.

Get it out of the way

There is something very satisfying about ticking an item off a ‘to do’ list. Filing your 2024/25 tax return sooner rather than later will get it out of the way and mean that is no longer hanging over you. This will give you peace of mind.

Certainty as to your tax bill

Once you have filed your 2024/25 tax return you will know how much tax you need to pay. This will give you plenty of time to set funds aside to pay the January 2026 bill, and also to set up a Time to Pay arrangement if you will need to pay in instalments.

Code out underpayments

If you are a PAYE taxpayer and you owe £3,000 or less, as long as you file your 2024/25 tax return by 30 December 2025, you can opt to have the tax that you owe collected through your 2026/27 tax code. This delays the payment date and effectively gives you an interest-free instalment plan.

Get a repayment sooner

If you have overpaid tax for 2024/25, the sooner you file your tax return, the sooner you will be able to receive a refund of the overpaid tax.

Review your payments on account

The final payment on account for the 2024/25 tax year is due by 31 July 2025. If you already know your 2024/25 liability, you can review your payments on account and reduce them to the correct level if they are too high, so you do not pay more than you need to in July.

Ascertain whether you are within MTD for ITSA from April 2026

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) applies from 6 April 2026 onwards to individuals running unincorporated trading and/or property businesses with trading and/or property income of £50,000 or more. The relevant income is that for 2024/25. Once the 2024/25 tax return has been filed, traders and landlords will be able to determine whether they must comply with MTD for ITSA from April 2026. The earlier they know, the longer they have to prepare.

Assess transitional profits

Self-employed earners with an accounting date other than one between 31 March and 5 April may have transition profits in 2023/24. These profits are normally spread over five years (2023/24 to 2027/28 inclusive) unless the trader elects for these to be assessed earlier. Once the 2024/25 return has been filed, you will know your profits and marginal rate of tax for this year and can assess whether it would be beneficial to bring forward some transition profits to 2024/25. This will be advantageous if they will be taxed at a lower rate in 2024/25 than in later years, or if the personal allowance has not been fully used.

Proof of income

Your tax return calculation provides you with proof of income which may be needed if you want to apply for a mortgage or a loan.

Assist with tax planning

Filing your 2024/25 tax return will provide you with information to enable you to review your tax affairs and take advantage of planning opportunities to save tax going forward.

Earn brownie points with your tax adviser

The run up to the 31 January deadline is a very busy time for accountants and tax advisers. They are likely to look favourably on clients who provide their tax return information early in the following tax year, allowing them to file the return ahead of the January rush.

Mixing business and private transactions through the same bank account can have some unfortunate consequences.

It may often be tempting for self-employed individuals to use their private bank accounts for business transactions, perhaps for reasons of convenience, or possibly to reduce bank charges. However, even if the business owner meticulously identifies business transactions, difficulties invariably arise when using private bank accounts for business.

The dreaded ‘brown envelope’

For example, if HM Revenue and Customs (HMRC) opens an enquiry into the self-employed individual’s tax return, this will often be followed by a request for access to the business records, including statements for all bank and credit card accounts through which business transactions were made. The question arises: is the individual obliged to hand over private account statements (which could extend the scope of HMRC’s enquiries)?

They can’t do that…can they?

HMRC has extensive information and inspection powers, subject to certain (albeit somewhat limited) restrictions (FA 2008, Sch 36). The taxpayer has a general right of appeal against HMRC’s information notices, such as if the information requested is not considered to be ‘reasonably required’. However, there is no right of appeal if the information or document forms part of the taxpayer’s ‘statutory records’ (i.e., broadly, records that the law requires taxpayers to keep). For example, a self-employed taxpayer is required to keep and preserve (among other things) records of the following (TMA 1970, s 12B(3)):

 • All receipts and expenditure ‘and the matters in respect of which the receipts and expenditure take place’; and

 • All sales and purchases of goods (in the course of a trade involving dealing in goods).

In Beckwith v Revenue and Customs [2012] UKFTT 181 (TC), over 90 business transactions went through the taxpayer’s personal account during the tax year under enquiry. The personal account was therefore held to be a ‘business record’ and formed part of the taxpayer’s statutory records, so the taxpayer had no right of appeal against HMRC’s information notice request for his personal bank statements.

Reasonably required?

Even if the business owner’s private statements do not constitute statutory records, there is still a requirement to provide information or produce a document that is ‘reasonably required’ to check the taxpayer’s tax position. However, one of the statutory restrictions on HMRC’s information powers is that the taxpayer is not required to provide or produce ‘personal records’, which are narrowly defined (in PACE 1984, s 12); but even if a private bank or credit card statement constitutes a ‘personal record’, HMRC may still issue an information notice requiring the taxpayer to produce the personal record, but omitting any personal information. For example, in Smith v Revenue and Customs [2015] UKFTT 200 (TC), the taxpayer received property rental income, but did not operate separate business and private accounts. On appeal against an HMRC information notice requesting private bank and credit card statements, the First-tier Tribunal held that the taxpayer must provide private bank and credit card statements, but could redact any personal information. HMRC’s Enquiry Manual states (at EM3560): ‘You should not routinely call for [private bank account statements] in the opening letter of an enquiry. Exceptional circumstances might be a voluntary disclosure of undisclosed business receipts into a private account.’

Practical tip

Whether private records are ‘reasonably required’ has caused many disagreements between taxpayers and HMRC. Keeping business and private transactions in entirely separate accounts should help to prevent such disputes.

One success story to come out of HMRC is the ‘time to pay’ (TTP) arrangement. Set up in 2018, HMRC statistics show that over 90% of TTP arrangements are completed successfully, and by the end of November 2024, more than 15,000 self￾assessment customers had set up a TTP payment plan for the 2023/24 tax year.

What is a TTP arrangement?

TTP is a service designed to help taxpayers who are struggling to pay their taxes, rather than for those who may be able to pay their tax bill but want more time to do so. It allows taxpayers to spread their tax payments over a period of time (usually 12 months) rather than paying the full amount in one go.

A TTP arrangement can cover all outstanding amounts, including penalties and interest, but is typically only considered for past liabilities after the accounting period/year has ended. This is based on HMRC’s belief that the taxpayer is unlikely to be able to see into the future and prove that future liabilities cannot be paid.

Applying online

Until recently, taxpayers had to call HMRC to set up a TTP arrangement. From February 2025, taxpayers with outstanding self-assessment, PAYE or VAT liabilities can apply online but only in specific circumstances. For example, a self-assessment liability must be for £30,000 or less and the taxpayer must have no other payment plans in place or other outstanding tax liabilities.

Tax returns must be up-to-date and, importantly, the application must be submitted within 60 days after the payment deadline. As the agreement will need to be in place before the 60-day deadline, no penalties will be incurred.

Any other liabilities or those taxpayers who have missed the 60-day application window can still apply but via a phone call, as must VAT-registered taxpayers who use any of the special VAT schemes (e.g., the VAT cash accounting scheme or annual accounting scheme).

Application via phone

When phoning, the taxpayer will be put through to a specialist debt department representative trained to assess whether the taxpayer falls under the category of ‘won’t pay’ (refusing to pay despite having the means) or ‘can’t pay’ (unable to pay due to financial circumstances).

HMRC uses a series of ‘negotiating frameworks’ to collect relevant information needed to evaluate TTP requests.

These ‘frameworks’ aim to determine:

 • why the taxpayer cannot pay;

 • what actions have been taken to raise the money;

 • what their proposed payment arrangements are;

 • what assets are available; and

 • what changes are being made or actions taken to ensure that they can afford the repayments and ongoing liabilities. Practicalities

Regardless of how the application is made, a TTP agreement is a formal agreement and confirmation of HMRC’s acceptance will be in writing. Should HMRC agree to the TTP request, a proposal or confirmation of the payment terms will be issued to include:

 • the amount of tax to be paid;

 • the period over which payments will be spread; and

 • any additional charges, i.e., interest (8.5% from 6 April 2025) or potential penalties.

 • TTP arrangements exceeding 12 months are exceptional, although HMRC’s system might suggest a shorter term based on the size of the debt.

Practical tips

 • HMRC can collect debts of £2,999.99 or less through a taxpayer’s tax code on a mandatory basis if the customer is in PAYE employment or receives a UK-based pension.

 • When applying online, there is no requirement to provide a reason for the application, while phone applications will necessitate an explanation of why the application is being made.

Details of the scheme can be found in the ‘Debt Management and Banking Manual’ (www.gov.uk/ hmrc-internal-manuals/debt-management-and￾banking).

Workers who have undertaken work arranged by an employment agency may have found themselves working for an umbrella company.

Generally, the recruitment agency would employ a worker who would undertake work for a client of the agency; however, it is increasingly common for the worker to be employed by another business, commonly known as an umbrella company. So, the client company pays the recruitment agency for the services of the worker; the agency then deducts its fee and pays the umbrella company, which then pays the worker for the services they render to the end client.

In this way, the deduction and paying of income tax and Class 1 National Insurance contributions (NICs) from the worker’s salary under the pay-as-you￾earn (PAYE) system becomes the responsibility of the umbrella company. The employment rights of the workers have simply moved from the agency to the umbrella company.

A note of caution

In itself, there is nothing inherently wrong with such an arrangement. However, the fact that this is not always the case is evidenced by the Treasury’s recent response to a consultation on tackling non￾compliance by umbrella companies with regard to payroll obligations.

The government believes that action is required to protect vulnerable workers and intends to make the recruitment agency (or the end client) rather than the umbrella company responsible for the income tax and NICs liabilities.

The reason for these changes is that there have been cases of umbrella companies failing to correctly operate the PAYE system. Last year, HMRC flagged up its concerns about umbrella companies; for example, that they: offer financial incentives significantly higher than industry standards; provide the workers and agency with different versions of the payslip; make payments to workers that are higher than the amount on their payslips; make payments through third parties; and are based outside the UK.

Umbrella company workers should check whether any of the above points apply. Further, a worker who is contracted through an umbrella company should receive from the recruitment agency a key information document – including the name of the umbrella company, the minimum assignment rate, deductions to be made by the umbrella company, and the minimum gross pay – as well as a payslip and possibly a reconciliation statement detailing how the gross pay is calculated.

Warning signs

Workers who are employed by an umbrella company have the same employment rights as others. They should be paid at least the national minimum wage or national living wage, be enrolled in a pension scheme if they are eligible, and be entitled to paid holidays.

In its Spotlight 60 (tinyurl.com/3fxksz5p), HMRC warns that a non-compliant umbrella company could leave workers at risk of being involved in a tax avoidance scheme. Ultimately, individuals are responsible for their tax affairs and payment of the correct income tax and NICs liabilities. Such liabilities could arise if the umbrella company were to use a tax avoidance arrangement. These commonly disguise the salary or part of it as a loan, advance or other payment which is claimed to be non-taxable. The PAYE rules oblige the employer to deduct and pay income tax and NICs but if this is not done, HMRC may, in some circumstances, recover the liabilities directly from the worker. An interest and penalty charge may also apply. HMRC has published examples of workers who have fallen foul of the rules (at: tinyurl.com/yeymrc7h).

Conclusion

Although, as mentioned above, there is nothing inherently wrong with using an umbrella company, the fact that the government is consulting on them and HMRC is warning of tax avoidance means that workers should be aware of their rights and the potential issues.

Practical tip

Workers who find that they are employed by an umbrella company that is believed to be operating a tax avoidance arrangement are advised to move to a compliant company as soon as possible. Non-compliant companies can be reported anonymously to HMRC at: www.gov.uk/report￾tax-fraud or by phone: 0800 788 887

A look at the rules for claiming back VAT on clothing.

The recovery of VAT on clothing bought by a business for its staff can result in disputes with HMRC.

HMRC states that the VAT incurred by a taxable person on uniforms or protective clothing such as helmets and safety boots worn by themselves or their employees in the performance of their duties can be treated as input tax because it is a legitimate business expense.

The wig, gown and bands that a barrister is required to wear in court are considered to be a uniform and the VAT incurred is input tax. It is also a court requirement that barristers wear dark clothing.

For example, male barristers may wear striped trousers, a black jacket and a waistcoat with a white wing collar, and a female barrister, a dark (black, navy or grey) suit and a white blouse. If barristers claim that this clothing would not have been purchased if they did not have to attend court, HMRC accepts that the VAT may be deducted as input tax.

One common source of confusion is the question of whether suits qualify as a uniform; after all, surely, if the workplace requires staff to wear a suit, that is a workplace uniform? Unfortunately for office workers everywhere, HMRC has stated categorically that this is not the case.

Wearing a suit to work counts as presenting a professional image rather than actually having a workplace uniform, and even if it is a specific requirement of the workplace, this does not qualify for tax relief under the current rules.

Cases involving VAT recovery on clothing

However, claiming the VAT back on other clothing might not be so simple. In B J Brown (LON/90/1681), the Tribunal dismissed the taxpayer’s argument that an art consultant required a high standard of dress to ‘create a professional image’ in order to attract business. The provision of clothing is normally a personal responsibility. In Ms J K Hill and Mr S J Mansell, t/a J L Hill and Co (LON/86/472Z) two retailers claimed back the VAT on suits they wore for work. The Tribunal found that “to dress well in order to conform with the standards of a particular lifestyle” was not a business expense, so buying a nice suit on the business is out!

One classic case involved a musician who claimed the VAT back on a wig! HMRC paid him a visit and, not surprisingly, disallowed the VAT. The taxpayer claimed that the wig was necessary to maintain his image as a musician.

Photographs, posters, record covers, press releases and artwork (upon which his business relied) would all need to be reprinted if his appearance altered. So, he appealed to the VAT Tribunal, and they decided that the wig had indeed been purchased for the purpose of his business and he could reclaim the VAT! (JM Collie Tribunal LON/90/1382).

The VAT on clothing used solely as stage costumes is also input tax. Ordinary clothing worn by an entertainer or TV personality will usually be worn privately as well, in which case the VAT cannot normally be reclaimed.

Business gifts rules

Businesses can use the rules relating to business gifts in order to recover the VAT on ‘perk’ clothing (i.e., not uniforms or protective clothing). Perks are an accepted business expense; therefore, if employers decide to provide their employees with clothing, the VAT incurred is input tax.

However, if the cost of the clothes exceeds £50 in any twelve-month period, the business must account for output VAT on their value. Therefore, make sure the clothes are worth less than £50 excluding VAT in order to recover the VAT.

Practical tip

In some circumstances, businesses can recover the VAT on clothing as a legitimate business expense, particularly on uniforms and protective clothing.

Most lifetime gifts of a residential property (e.g., from a parent to adult offspring, where the parent is going into a nursing home) are straightforward ‘potentially exempt transfers’ (PETs) for inheritance tax (IHT) purposes, which become exempt gifts if the parent (in this example) survives at least seven years thereafter.

Trapped in the IHT net?

However, what if the parent returned to live in the gifted property within seven years? Anti-avoidance rules (‘gifts with reservation’ (GWR)) are broadly designed to prevent ‘cake and eat it’ situations whereby individuals seek to reduce exposure to IHT on their estates by making lifetime gifts of assets (which they hope to survive by at least seven years) whilst continuing to have the use or enjoyment of those assets. If the donor is ‘caught’ by the GWR rules, the gifted (or possibly substitute) property is treated as remaining part of their estate for IHT purposes. In the above example, does this mean that the parent cannot later reoccupy the property, or occasionally stay with their offspring in the property, after giving it away? As with most tax questions, the answer is: ‘It depends’.

Welcome back…for now!

HM Revenue and Customs guidance (Revenue Interpretation 55) indicates that a property donor will not be ‘unreasonably prevented from having limited access to property they have given away’. This includes circumstances where a house becomes the donee’s residence but where the donor subsequently stays with the donee for less than one month each year, or in the donor’s absence for not more than two weeks each year. Temporary stays for a short-term purpose may also be allowed (e.g., while the donor looks after the donee convalescing after medical treatment).

Another GWR let-out potentially applies where the donor continues living in the property after it has been given away, but they pay the donee a market rent for their continued occupation. The donor’s occupation or use of the land is disregarded for GWR purposes if full consideration is paid for it in money or money’s worth. However, the donee will generally be liable to income tax on the rent received.

A further possible escape from an IHT charge on death under the GWR rules applies if the following conditions are all satisfied:

 • The occupation results from an unforeseen change in the donor’s circumstances.

 • The donor is unable to maintain themself through old age, infirmity or otherwise.

 • The occupation represents reasonable provision by the donee for the donor’s care and maintenance.

 • The donee is a relative of the donor or the donor’s spouse (or civil partner).

However, in each case, care is needed to ensure that the donor’s stays in their former residence do not escalate beyond permissible levels into more significant ones (e.g., where the donor increases their overnight visits to stay with the donee at the residence from one month to three months a year). Such longer stays may be caught by the GWR rules.

Practical tip

Consider the potential implications of gifting the family home for taxes other than IHT (e.g., capital gains tax), as well as non-tax legal implications (e.g., security of tenure), in advance of making any such gifts.

Wheels – True perk or expensive? A look at the taxation of company vehicles.

When an employer’s car is available for an employee’s personal use, there is an income tax charge on the employee – but that charge depends on what the vehicle is.

Class 1A National Insurance contributions (NICs) are payable by the employer on the value of the benefit on these vehicles. 1. Cars

Employers cannot claim annual investment allowance (AIA) on cars, but writing down allowances are available depending on the CO2 emissions – cars below 50g/km qualify for the main pool rate of 18%.

For the employee, the income tax charge depends on the car’s list price (not the actual purchase price) applied to a percentage (which increases with the car’s emissions – and increases each year); purely electric cars and hybrids capable of 130+miles under battery power attract a 2% rate, with the percentage increasing as the range decreases; combustion engine cars with CO2 emissions below 50g/km have a 14% rate, which increases by 1% in increments of 5g/km.

Diesel engines attract an additional 4% surcharge, though the maximum percentage on any vehicle is 37%.

2. Vans

Goods vehicles (i.e., those whose construction ‘is primarily one for the conveyance of goods or burdens of any description’ per ITEPA 2003, s 115) are subject to income tax based upon a fixed value (£4,020 for 2025/26) – no list prices, no CO2 percentage. If a vehicle is not a goods vehicle and has more than two wheels, it will be a car. As vans, they are not cars; they are eligible for the AIA for the employer.

If a ‘van’ has a row of seats behind the driver, it’s more likely to be a car. The Court of Appeal in Payne & Ors v HMRC [2020] EWCA Civ 889 held that Vauxhall Vivaros and VW Kombis were cars for income tax purposes, as a second row of seats could be fitted in each and thus they were capable of carrying people so the carriage of goods was not a primary purpose – ‘primary’ meaning ‘first and foremost’ not just ‘on a narrow balance’; the vehicle also needs to be looked at in its modified form, rather than how it came off the production line.

3. Double-cab pickups

Following the Payne case, the status of those pickups with two rows of seats was seemingly called into question. HMRC has historically regarded such vehicles as vans, provided they meet the definition of a van for VAT purposes (i.e., a one-tonne+ payload). In February 2024, HMRC announced that these pickups would be taxed as cars, in line with the reasoning in Payne – but a week later, they changed their mind.

However, in the October 2024 Budget, the change was reinstated for those vehicles ordered or purchased after 6 April 2025, with April 2029 bringing universal application for all vehicles.

4. Fuel

For the provision of private fuel for cars, the same percentages applying to the car’s list price are applied to a fixed amount of £28,200 (for 2025/26) – so the provision can be as expensive as the car itself! If private fuel is provided, only reimbursement in full for any private use (based on authorised fuel rates) will nullify this charge.

The benefit of van fuel is a flat £729 for 2025/26.

5. Motorbikes Motorbikes are neither cars nor vans, and are therefore treated like any other piece of machinery.

Employees are subject to the rules for using employer’s assets, i.e., they are taxed upon 20% of the asset’s value.

Practical tip

The provision of a company car for private purposes is expensive for both employers and employees, especially with expensive and more polluting cars; vans are certainly cheaper, but to qualify as goods vehicles, they must have no additional seating for passengers beyond those sitting by the driver.

Employer’s National Insurance rose considerably from 6 April 2025. Not only did the rate increase from 13.8% to 15%, but the secondary threshold also fell from £9,100 to £5,000. This is the amount that an employer can pay before a liability to secondary Class 1 National Insurance contributions arises. For 2025/26, the secondary threshold is equivalent to only £96 per week and £417 per month.

For employers who are able to benefit from the Employment Allowance, there is an element of relief as this was increased to £10,500 for 2025/26. However, this does not help personal companies where the sole employee is also the director as they are not entitled to the Employment Allowance.

NIC hit on a small salary

For 2025/26, at £96 per week the secondary threshold is now less than the lower earnings limit, which has increased to £125 per week for 2025/26. For a year to be a qualifying year, an individual must receive earnings of at least 52 times the weekly lower earnings limit. For 2025/26, the minimum salary to achieve this is £6,500.

In the absence of the Employment Allowance, a secondary liability of £225 will arise on a salary of £6,500. However, there are no employee contributions to pay as where earnings are between the lower earnings limit and the primary threshold, the employee is treated as paying contributions at a zero cost. If the director is paid a salary equal to the personal allowance of £12,570, the associated secondary liability is £1,135.50.

Access the Employment Allowance

By taking on an employee and paying them earnings in excess of the secondary threshold, a personal company is able to access the Employment Allowance, which can be set against their secondary Class 1 National Insurance liability. The eligibility test is simply that the secondary contributor incurs liabilities to pay secondary contributions in respect of the employee – there is no minimum period for which these liabilities need to be incurred; employing another employee for £97 for one week will do the trick. However, a safer option to avoid unwanted attention from HMRC may be to take on, say, a student during the summer holidays to do some work, or to employ a spouse on a part-time basis.

The other way to access the Employment Allowance is to ensure that the sole employee is also not a director. Resigning as director and appointing a spouse as the director instead will access the Employment Allowance without needing to take on another employee.

Accessing the Employment Allowance will shelter the secondary liability that would otherwise arise, allowing the director to be paid a salary of up to £12,570 for 2025/26 free of tax and National Insurance.

Self-employed earners whose earnings exceed the lower profits limit (set at £12,570 for 2025/26) must pay Class 4 National Insurance contributions on their profits. These are payable at the rate of 6% on profits between the lower limit and the upper limit, set at £50,270 for 2025/26, and at a rate of 2% on profits in excess of the upper profits limit. It is the payment of Class 4 National Insurance contributions which provides a self-employed earner with a qualifying year for state pension purposes.

Where profits from self-employment are below £12,570 for 2025/26, a self-employed earner will not have to pay Class 4 National Insurance contributions for that year. However, if their profits are at least equal to the small profits threshold, which is set at £6,845, the self-employed earner receives a National Insurance credit which provides them with a qualifying year for state pension purposes without them having to pay anything for it.

However, self-employed earners whose profits are below £6,845 do not benefit from the credit. This means that unless they receive other credits, for example, because they receive child benefit, or have paid sufficient Class 1 contributions, they will need to pay voluntary contributions for 2025/26 to be a qualifying year.

Voluntary Class 2

Self-employed earners whose profits are less than the small profits threshold can pay voluntary Class 2 contributions instead of paying Class 3 voluntary contributions. This is a much cheaper option – for 2025/26, voluntary Class 2 contributions are payable at a rate of £3.50 a week whereas Class 3 contributions are £17.75 a week. Paying voluntary Class 2 contributions rather than Class 3 contributions for 2025/26 will save the individual £741.

Although paying voluntary Class 2 contributions will only cost £182 for 2025/26, before opting to pay them, it is important to check whether it will be worthwhile.

To receive a full state pension, a person needs 35 qualifying years. If they have this already or will do so by the time that they reach state pension age, there is no point in making the contributions. A person can check their state pension forecast by visiting the Gov.uk website at www.gov.uk/check-state-pension.

A person who has less than 35 qualifying years but at least ten will receive a reduced state pension. Paying voluntary contributions is worthwhile if after doing so a person will have a least ten qualifying years. If after making the contributions they will still not have reached ten qualifying years and are unlikely to do so by the time they reach state pension age, making voluntary Class 2 contributions is not worthwhile.

Contributions are paid through the Self Assessment system. There is a six-year window in which to pay the contributions.

Employers are able to provide employees with a range of health and welfare benefits without giving rise to a tax charge under the benefits in kind legislation.

Health screening and medical check-ups

Employees can benefit from one health screening assessment or medical check-up each tax year free of tax. A health screening assessment is an assessment to identify employees who may be at particular risk of ill health, while a medical check-up is a physical examination of the employee by a health professional for the sole purpose of determining the employee's state of health.

Eye tests and corrective appliances

Employees who are required to have an eye test under regulations made under the Health and Safety at Work Act 1974 (which is the case where employees use display screen equipment) must be provided with one by their employer. The provision of such a test does not constitute a taxable benefit. Similarly, if the test shows that the employee needs glasses or other corrective appliances, these too can be made available by the employer free of tax if they are provided solely for use for display screen work. However, the exemption only applies if the tests and corrective appliances are made available to all the employees who need them.

Where eye tests or glasses are provided or paid for by the employer in other circumstances, a tax liability will arise.

Recommended medical treatment

An employer is able to provide recommended medical treatment to an employee or reimburse the cost of such treatment up to the value of £500 without a tax liability arising. Recommended medical treatment is that recommended by a health professional for the purpose of assisting an employee to return to work after a period of absence due to injury or ill health. The treatment must be provided after an employee has been absent from work for at least 28 consecutive days.

Overseas medical treatment

While an employee is working abroad, the employer can meet the cost of any medical treatment that arises, and also the cost of medical insurance to cover the cost of overseas medical treatment, without triggering a tax charge under the benefits in kind legislation. However, the provision of medical treatment in the UK and private medical insurance are taxable benefits.

Welfare counselling

The provision of certain types of welfare counselling to employees is exempt from tax. Although the exemption is tightly drawn, it covers counselling for problems such as stress, work problems, debt problems, alcohol and drug dependency, career concerns, bereavement, equal opportunities, ill health, sexual abuse, harassment and bullying, conduct and discipline and personal relationship difficulties. However, advice on finance (other than debt problems), tax, leisure or recreation and legal advice are specifically excluded from the scope of the exemption.

The property allowance enables individuals to enjoy property income of up to £1,000 each tax year free of tax and without the need to report it to HMRC. This provides opportunities for individuals to earn some tax-free income by letting out their drive where there is an event nearby or letting out their house while on holiday. However, the allowance cannot be used to shelter rent received from a personal or family company for the use of an office in the director’s house.

If total rental income received in the tax year is less than £1,000, there is no tax to pay and the income does not need to be reported to HMRC. The property allowance is available in addition to other allowances such as the personal allowance, the trading allowance, the personal savings allowance and the dividend allowance.

It is also possible to benefit from the property allowance if rental income in the tax year is more than £1,000. The landlord has the option of deducting the £1,000 property allowance rather than their actual expenses when calculating their taxable rental profit. This will be beneficial if actual expenses are less than £1,000.

Where rental income in the tax year is more than £1,000 it has to be reported to HMRC. Currently, the rental income and any associated expenses must be reported on the Self Assessment tax return. However, HMRC have announced that they plan to increase the threshold for reporting property income on the Self Assessment tax return to £3,000 before the end of the current Parliament. While rental income in excess of £1,000 will still need to be reported to HMRC, taxpayers will instead be able to use a new digital service to do so rather than filing a Self Assessment tax return. Where the landlord needs to file a Self Assessment tax return to report other income, they will still be able to report property income in the return – use of the new digital service will be optional.

Where rental income is more than £1,000, the associated rental profit is taxable. If rental income is less than £1,000 but the landlord makes a loss, they may prefer to report their income to HMRC to preserve the loss rather than take advantage of the property allowance.

A look at a tax planning strategy recently upheld in an Upper Tribunal case.

In March 2016 George Osborne announced that the dividend tax credit system was being abolished from 6 April 2016. This change was also going to put up effective dividend tax rates by about 7.5 percentage points; for an additional rate taxpayer, it was rising from 30.56% to 38.1%.

This is the backdrop to a recent Upper Tribunal (UT) case, in which two brothers managed to save a large amount of tax by careful planning of when they received dividend payments. With only one class of share in issue (which they owned equally), there was no opportunity to pay different levels of dividend to each shareholder.

Their strategy relied on the fact that an interim dividend is ‘paid’ for income tax purposes when it is received by the shareholder; in contrast, a final dividend is ‘paid’ when the motion proposing the dividend is passed by the shareholders (unless the motion specifies a later payment date).

HMRC v Gould [2024] UKUT 285

In March 2016, Regis Group (Holdings) Limited (‘Regis’) resolved to pay an interim dividend of £40m, split equally between Peter Gould (‘PG’) and his brother.

It suited the brothers to be taxed on the dividends in different tax years. PG wanted his in 2016/17 (i.e., when he would be non-resident and thus not subject to tax on the dividend), whereas his brother wanted the dividend in 2015/16 when his effective tax rate was 30.56%, not 38.1%.

His brother’s £20m dividend was paid on 5 April 2016; PG’s dividend was not paid until December 2016. HMRC sought to tax PG’s dividend on the earlier date, arguing that:

 • the two dividends must be treated as being due and payable on the same date; and

 • that date was the day on which the earlier dividend was paid to his brother.

The First-tier Tribunal (FTT) allowed PG’s appeal, finding that no debt was created for him by the payment of the dividend to his brother. HMRC appealed.

The UT decision

The FTT had erred in law in determining that PG did not have an enforceable debt when Regis paid the dividend to his brother in 2015/16.

However, this was not a material error in law, as there was an informal agreement between the shareholders for Peter Gould to receive his dividend later. This meant that the principle set out in re Duomatic Limited [1969] 2 Ch 365 applied, as all the shareholders had (informally) agreed to vary the Articles of Association, such that the directors were permitted to pay dividends at different times without creating an enforceable debt.

HMRC’s appeal was dismissed.

Re Duomatic Ltd

This case (which may well be new to many readers) laid down the principle that, where there has been unanimous consent, shareholders can be deemed to approve decisions of the company as if there had been a general meeting. It concerned whether certain payments made to directors of a company were valid, even though:

 • none of the directors had contracts of service with the company; and

 • no resolution had ever been passed authorising them to receive the payments.

The company went into liquidation and the liquidator made an application for repayment of the money. The High Court held that the payments were to be regarded as properly authorised because they had been made with the full knowledge and consent of all the shareholders.

Practical tip

Subject to any appeal, the Gould decision confirms that family-owned companies can vary the timing of interim dividends to minimise the tax liabilities of shareholders.