Helpsheets ... continued 47 from homepage

In these difficult economic times, tenants may struggle to pay their rent, leaving landlords out of pocket. In the absence of insurance that makes good the cost of unpaid rent, the way in which the landlord is able to secure relief for the bad debt depends on whether the landlord uses the cash basis or the accruals basis to prepare their accounts.

Cash basis

The cash basis is a simple way of preparing accounts that is based on money in and money out. It is the default basis of accounts preparation for most unincorporated landlords with annual rental income of £150,000 or less.

Under the cash basis, income is only taken into account when it is received, and relief is only given for expenses when they are paid. This methodology provides automatic relief for bad debts as if the rent is not received, it is not taken into account in calculating the rental profit.

If the rent is received at a later date or the landlord is able to recover some or all of the unpaid rent through an insurance policy, it is simply brought into account as a receipt of the property rental business on the date that it is received.

Accruals basis

Landlords may use the accruals basis if they are not eligible for the cash basis, as may be the case if their annual rental income exceeds £150,000 or they operate their property business through a limited company. A landlord who is eligible to use the cash basis may elect to use the accruals basis instead.

Under the accruals basis, income and expenditure are matched to the period to which they relate, regardless of whether it has received or paid out. This is done by taking account of debtors, creditors, prepayments and accruals.

Where the accruals basis is used and the rent is unpaid, the rent for the period would be taken into account in calculating the profit for that period, and the balance sheet would show a debtor for the unpaid rent.

However, the tax legislation provides relief for bad and doubtful debts. Relief is given as a deduction when it becomes clear that the debt is bad or doubtful. Where a tenant is slow to pay but eventually pays, no relief is available – the rent is still taken into account for the period to which it relates regardless of when it is actually received.

Many employers have a social event for employees around the Christmas period. This may take the form of a Christmas party or dinner or another social event, such as wreath-making and cocktails. When planning the event, it is important to consider the tax and National Insurance implications up front. Although there is a specific tax exemption for annual parties and other functions, there are conditions that must be met for the exemption to apply. Ensuring that your Christmas event meets these conditions at the planning stage will prevent employees being hit with a tax charge on the associated benefit.

Conditions

To qualify for the exemption, the party or function must be:

• an annual party or function; and
• available to the employer’s employees generally or to those at a particular location.

Where there is a single annual party or function in the tax year, the cost per head must not exceed £150. Where there is more than one annual party or function in the tax year, the combined cost must not exceed £150 for all events to fall within the scope of the exemption. The cost per head is found by dividing the total cost of the party or function plus the cost of any transport incidentally provided by the total number of attendees (employees plus guests).

Watchpoints

Only annual events qualify for the exemption. As the name suggests, these are events that are held every year, such as an annual staff Christmas party. If the event is a one-off event, the exemption will not apply. This is the case regardless of whether the event is open to all employees and the cost per head is not more than £150.

To fall within the exemption, the event must also be open to all employees or all those at a particular location. HMRC have confirmed that departmental events qualify. However, an event for senior staff only would not fall within the scope of the exemption.

When calculating the cost per head, VAT is included even if this is subsequently recovered. It is also important to include guests as well as employees when performing the calculation. However, if the cost per head is more than £150, the full amount is taxable, not just the excess over £150. Where an employee brings a guest and the cost per head exceeds £150, the employee will be taxed on their attendance and that of their guest.

If there is more than one annual function in the tax year, the functions will be exempt as long as the combined cost per head is not more than £150. Where this limit is exceeded, the employer can choose how best to use the exemption. When allocating the exemption, remember to consider the impact of guests – it is better to leave an event costing £100 per head attended only by employees in charge than one costing £80 per head which is attended by employees and their partners as here the taxable amount will be £160 (2 x £80).

Consider a PSA

If a tax charge does arise in respect of a Christmas event, as will be the case, for example, if the event is not an annual event, the employee will suffer a benefit in kind tax charge. The taxable amount will be the cost per head for the employee and any associated guests. The employer will also suffer a Class 1A National Insurance charge.

To maintain the goodwill element of the event, the employer may wish to include the benefit within a PAYE Settlement Agreement and meet the associated tax liability on the employee’s behalf.

Partner note: ITEPA 2003, s. 264.

The normal filing deadline for the 2024/25 Self Assessment tax return is 31 January 2026. However, if you have some tax to pay under Self Assessment and you also pay tax under PAYE, if you file your return by 30 December 2025, you may be able to pay what you owe through an adjustment to your tax code rather than through the Self Assessment system. This may be the case if, for example, you are employed or receive a pension and also have some income from self-employment or property or you have taxable investment income.

Conditions

Tax due under Self Assessment can only be collected through your tax code if the following conditions are met:

• the total amount that you owe through Self Assessment is £3,000 or less;
• you already pay tax through PAYE (for example, because you are employed or receive a company pension); and
• you filed a paper return by 31 October 2025 or an online return by 30 December 2025.

It should be noted that if the amount you owe is more than £3,000, you cannot make a part payment to reduce the outstanding amount to £3,000 or less and pay the balance through your tax code.

However, even if these conditions are met, you will not be able to pay your Self Assessment tax bill through your tax code if any of the following apply:

you do not have sufficient PAYE income to collect the amount that is due;

you would end up paying more than 50% of your income in tax; or

you would end up paying over twice as much tax as you normally do.

How it works

If you have filed your return by the deadline and you are eligible to pay your tax bill through your tax code, HMRC will automatically adjust your tax code to collect the amount of tax that you owe, unless you indicate that you do not wish to pay your tax in this way. The adjustment will take the form of a deduction from your allowances. The amount of the deduction will depend on how much you owe and your marginal rate of tax. For example, if you pay tax at 40% and owe tax under Self Assessment of £1,000, your allowances will be reduced by £2,500 (40% of £2,500 = £1,000).

The adjustment will be made to your 2026/27 tax code. As a result of the adjustment, you will pay what you owe for 2024/25 in equal instalments throughout 2026/27 each time that you are paid. If you are paid monthly, you will effectively pay your bill in 12 monthly instalments.

Advantages and disadvantages

Paying tax through your tax code allows you to pay it later – instead of having to settle the bill by 31 January 2026, you pay it in equal instalments over the 2026/27 tax year. This provides a cashflow benefit and removes the need to find the funds to pay the bill in one hit.

Paying your bill through your tax code also provides an automatic interest-free instalment plan. Unlike a Time to Pay arrangement, you do not need to set it up, and there is no interest to pay either.

However, having your tax deducted from your pay will reduce your take-home pay, so it may not be for everyone.

In her tax-raising Budget on 26 November 2025, the Chancellor announced that the dividend ordinary rate and the dividend upper rate are to rise by two percentage points from 6 April 2026. This will affect director/shareholders in personal and family companies who extract profits in the form of dividends.

How dividends are taxed

Dividends have their own tax rates, which are lower than the standard income tax rates. Dividend income which is not sheltered by the personal allowance or the dividend allowance is treated as the top slice of income. It is taxed at the dividend ordinary rate where it falls in the basic rate band, at the dividend upper rate where it falls in the higher rate band and at the dividend additional rate where it falls in the additional rate band.

For 2025/26, the dividend ordinary rate is 8.75%, the dividend upper rate is 33.75% and the dividend additional rate is 39.35%.

From 6 April 2026, the dividend ordinary rate rises to 10.75% and the dividend upper rate rises to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

All individuals are entitled to a dividend allowance, which is £500 for 2025/26 and remains at this level for 2026/27. The dividend allowance acts as a nil rate band; dividends sheltered by the allowance are tax-free. However, it uses up part of the band in which it falls.

Impact of the rise

Where profits are extracted as dividends and the shareholder is a basic or higher rate taxpayer, they will pay an additional £20 in tax on every £1,000 of dividends paid in 2026/27 as compared to 2025/26. A shareholder taking £50,000 of dividends a year will pay an additional £1,000 in tax.

Additional rate taxpayers are unaffected by the change.

Beating the rise

Where a personal or family company has retained profits, consideration should be given to paying dividends before 6 April 2026 if the tax hit will be lower than if the dividend is paid on or after that date. However, if dividends have already been paid to use up the basic rate band, there is no point paying a dividend if it would be taxed at the dividend upper rate if paid before 6 April 2026 and at the dividend ordinary rate if paid on or after that date; 10.75% is lower than 33.75%.

In a family company scenario with an alphabet share structure, to minimise the total tax paid on profits extracted as dividends, make sure shareholders’ dividend allowances and basic rate bands are used up before paying dividends taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as employer pension contributions or tax-free benefits in kind.

Unincorporated landlords pay income tax on the profits of their property rental business. This is currently at the normal income tax rates. However, this is set to change from 6 April 2027 when property income will have its own tax rates. The bad news is that the new property tax rates will be two percentage points higher than the current income tax rates.

Current rates and new rates

For 2025/26 and 2026/27, unincorporated landlords pay income tax on their rental profits at 20% where it falls in the basic rate band, at 40% where it falls in the higher rate band and at 45% where it falls in the additional rate band.

For 2027/28onwards, rental profits will be taxed at the new property tax rates which are, respectively 22%, 42% and 47%.

The new property tax rates only apply to landlords running an unincorporated property business; corporate landlords will continue to pay corporation tax on their profits.

Interest and finance costs

Where unincorporated landlords incur interest and finance costs, for example, mortgage interest, relief is given as a basic rate tax reduction.

When the new property tax rates come into effect from 6 April 2027, the rate used to calculate the tax reduction will be the property basic rate of 22%.

Allocation of personal allowance

The rules which determine the order in which income is taxed are also changing from 6 April 2027. Currently, allowances and reliefs are allocated so as to give the best result for the tax year.

For 2027/28 onwards, this will no longer be the case. The personal allowance will first be set against employment income, trading income and pension income (taxable at 20%, 40% and 45%) rather than property or savings income (taxable at 22%, 42% and 47%).

Mitigating the effects

Provisions contained in the Renters’ Rights Act 2025 will limit a landlord’s ability to increase rent to compensate for the tax rise. Where the landlord is increasing rents before these provisions bite, they may wish to factor in the forthcoming tax rises.

The cash basis is the default basis of accounts preparation for unincorporated landlords with rental income of less than £150,000. Under the cash basis, income is taxed when received and expenses relieved when paid.

Where possible, landlords should advance income, so it is received before 6 April 2027 to save 2% in tax. In contrast, they could consider delaying expenses until on or after 6 April 2027 so that relief is given at the new (higher) property rates.

All things being equal, receiving a pay rise which takes your income over £100,000 would be seen as a cause for celebration. However, all things are not equal, and as press reports attest, some people would rather turn down a promotion or cut their hours than take their earnings over £100,000.

We explain why this is.

Reason 1 – loss of the personal allowance

Individuals have a personal allowance of £12,570, allowing them to earn £12,570 before they pay tax. However, once their income exceeds the personal allowance income limit, their personal allowance starts to reduce. The personal allowance income limit is £100,000, unchanged since its introduction.

Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. A person with adjusted net income of £110,000 will only receive a personal allowance of £7,570 (£12,570 – ((£110,000 – £100,000)/2)).

Once a person’s adjusted net income reaches £125,140, their personal allowance is lost entirely so that they pay tax from the first pound that they earn.

The combined effect of the loss of the personal allowance and paying tax at the higher rate of 40% means that the marginal rate of tax between £100,000 and £125,140 is 60%. Add to that National Insurance of 2% and possibly student loan deductions of 9% or 15% and maybe pension contributions, the taxpayer does not actually keep much of the money that they earn between £100,000 and £125,140. Easy to see why some may deem the extra hours or workload as not being worthwhile.

Once income reaches £125,140, the marginal tax rate drops to 45% (the additional rate).

Reason 2 – loss of free childcare and tax-free top-up

Working parents may be able to receive free childcare for children from the age of nine months to four years for 30 hours a week for 38 weeks of the year. This is valuable. However, it is only available as long as neither partner has adjusted net income of more than t£100,000. Thus, once income reaches £100,000, free childcare is lost.

Working parents may also be able to benefit from the Government’s tax-free childcare scheme which provides up to £2,000 a year towards childcare costs (and up to £4,000 a year if the child is disabled). Under the scheme, the Government provides a £2 tax-free top-up for every £8 that the parents deposit in a dedicated account, up to the £2,000/£4,000 maximum top-up. However, as with free childcare, tax-free childcare is not available where either partner earns £100,000 or more.

For parents with young children, earning £100,000 or more will significantly increase their childcare costs.

Beating the system

There is a way to have the benefit of earning more than £100,000 a year and keeping your personal allowance, free childcare and the tax-free top-up. This is by making personal pension contributions to reduce your adjusted net income to below £100,000. You will still get the benefit of the money eventually, while retaining the personal allowance and childcare benefits.

The more altruistic can make charitable donations to reduce adjusted net income to below £100,000, which works in the same way.

Corporate landlords will not be hit by the property tax rises that will apply to unincorporated landlords from 6 April 2027; they will continue to pay corporation tax on their rental profits, the rates of which are unchanged. However, this does not mean that their shareholders are immune from the Budget tax rises. Where profits are extracted from a property company in the form of dividends, the recipient shareholders will be affected by the increases in the dividend tax rates applying from 6 April 2026.

Profit extraction

Although the profits of a property company are liable to corporation tax, the rates of which are lower than the income tax rates and the new property tax rates applying from 6 April 2027, if the shareholders want to use those profits personally, they will need to extract them. There are various ways in which this can be done, but a popular strategy where the personal allowance is available is to pay a salary equal to the personal allowance and to extract further profits as dividends.

All taxpayers have a dividend allowance, which is to remain at its current level of £500 for 2026/27. Dividends sheltered by the dividend allowance are taxed at 0%, although it should be remembered that the allowance uses up part of the tax band in which it falls.

Thereafter, dividends, which are treated as the top slice of income, are taxed at the dividend ordinary rate where they fall within the basic rate band, at the dividend upper rate where they fall within the higher rate band and at the dividend additional rate where they fall in the additional rate band.

Currently, the ordinary rate is 8.75%, the upper rate is 33.75% and the additional rate is 39.35%. From 6 April 2026, the ordinary rate rises to 10.75% and the upper rate to 35.75%. There is no change in the dividend additional rate which remains at 39.35%l

The rise will mean that basic and higher rate taxpayers will pay an extra £20 in tax on each £1,000 of dividends that they receive. A shareholder taking £50,000 in dividends will pay an additional £1,000 in tax.

Beating the rise

Where a property company has retained profits, consideration could be given to paying a dividend before 6 April 2026 where this will mean that the tax payable on that dividend will be at a lower rate than if the dividend is paid on or after 6 April 2026.

Going forward, where the company has several shareholders and an alphabet share structure is in place, the overall tax hit on profits extracted as dividends will be minimised by ensuring that all shareholders’ dividend allowances and basic rate bands are used before declaring dividends that will be taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as tax-free benefits and employer pension contributions.

It used to be possible to report errors in a VAT return to HMRC on form VAT652. This is no longer the case; form VAT652 was withdrawn from 5 September 2025. This means that now, where an error has been made in a VAT return, the error must be corrected in one of the following ways:

• updating the next VAT return;
• making the correction online; or
• writing to HMRC to notify them of the correction.

Updating the next VAT return

An error can be corrected by making an adjustment in the next VAT return if the value of the error is £10,000 or less or if the error is between £10,000 and £50,000 and does not exceed 1% of the box 6 figure (net outputs) in the VAT return for the period in which the error was discovered.

A correction can only be made by updating the next VAT return if the error was made carelessly.

The net value of the error is the difference between the additional amount owed to HMRC as a result of the error and the additional refund due from HMRC as a result of the error.

Correcting the error online

If the value of the error is more than £50,000, is between £10,000 and £50,000 and more than 1% of the box 6 figure in the VAT return  for the period in which the error was discovered or was made deliberately, it must be notified to HMRC rather than being corrected in the next VAT return. The default route for doing this is to make the correction online. The trader will need to sign into their Government Gateway account.

When reporting the error online, the following information must be provided:

• how each error arose;
• the VAT accounting period in which it occurred;
• whether it was an input tax error or an output tax error;
• the VAT underdeclared or overdeclared in each VAT period;
• how the VAT over or under declaration was calculated;
• whether any of the errors resulted in the payment of an amount to HMRC that was not due; and
• the total amount to be adjusted.

Refund claims can only be accepted where all the above information is provided.

Notifying in writing

If the trader is unable to use the online service, they will need to notify HMRC in writing of the errors if they are of a type that cannot be corrected in the next VAT return. The letter must include the trader’s VAT registration number and the information listed above. It should be sent by post to:

BT VAT

HMRC

BX9 1WR

Time limit

Errors should be corrected as soon as possible, but time limits do apply.

The time limit for correcting errors in a VAT return is four years from the end of the prescribed period in which the error occurred where the error related to output tax or over-claimed input tax, and four years from the due date of the return for the prescribed accounting period where the error related to under-claimed input tax.

The four-year time limit does not apply to deliberate errors.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is mandatory from 6 April 2026 for self-employed traders and landlords whose combined gross trading and business income in 2024/25 is £50,000 or more. Those within MTD for ITSA must maintain digital records and submit quarterly updates and a final declaration to HMRC electronically using software compatible with MTD for ITSA.

As the name suggests, MTD for ITSA relies on digital record-keeping and communication. HMRC recognise that not everyone is able to operate in a digital world and those who they accept as being ‘digitally excluded’ can apply for an exemption from MTD for ITSA.

Meaning of ‘digitally excluded’ - HMRC acknowledge that there are various reasons why a person may consider themselves digitally excluded. For example, a person may be digitally excluded because:

• their age, a health condition or a disability prevents them from using a tablet, computer or smartphone to keep digital records and to submit returns to HMRC;
• they are a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records and they do not use a computer, tablet or smartphone for business or personal use; or
• they cannot get internet access at their home or business because of their location, and they are unable to get access at a suitable alternative location.

However, HMRC will not accept an application for exemption from MTD for ITSA if the only reason for the application is one of the following:

• the person previously filed a paper tax return;
• the person is unfamiliar with accounting software;
• the person only has a small number of records to create each year; or
• the person will spend extra time or incur additional costs as a result of complying with MTD for ITSA.

Where a person has an existing exemption from MTD for VAT because they are digitally excluded, providing that the person’s circumstances have not changed, HMRC will accept that they are also exempt from MTD for ITSA.

Applying for an exemption - To apply for an exemption from MTD for ITSA on the grounds of digital exclusion, a person will need to write to HMRC ahead of their MTD for ITSA start date. They must provide the following information:

• their National Insurance number;
• their name and address;
• details of how they currently submit their returns (including the use of an agent or other person to submit them on their behalf);
• the reason that they think that they are digitally excluded, including information in support of their claim;
• whether they have an accountant or agent and what they do for them; and
• any additional needs that they have.

An application can be made by an agent on behalf of someone who is digitally excluded.

It should be noted that if a person is unable to use digital returns themselves, for example because of age or disability, but they have an agent or someone else who can keep digital records and file digital returns on their behalf, an exemption will not be forthcoming.

The application should be sent to: Self Assessment, HMRC, BX9 1AS

Where a person is already exempt from MTD for VAT because they are digitally excluded, they will also need to write to HMRC to apply for an exemption from MTD for ITSA, providing their National Insurance number, their VAT registration number and the reason that they are digitally excluded from submitting their VAT returns using software that is compatible with MTD for VAT. An agent can apply for an exemption on a client’s behalf.

Other exemptions

The following are automatically exempt from MTD for ITSA and are unable to sign up voluntarily:

those completing a tax return as a trustee, including a trustee of a charitable trust or a non-registered pension scheme;

a person who does not have a National Insurance number on 31 January before the start of the tax year;

a person completing a tax return as the personal representative of someone who has died;

a Lloyd’s underwriters in respect of their underwriting activity; and

a non-resident company.

Anyone in the above groups does not need to apply for an exemption as it is automatic.

HMRC publish fuel-only rates which are only of relevance where an employee has a company car. The rates, which are updated quarterly, can only be used in two situations:

• to make tax-free reimbursements to employees who meet the cost of business travel in their company car; and
• to repay the cost of fuel provided or paid for by their employer and used for private journeys in a company car.

The rate depends on the fuel type and, where relevant, the engine size. From 1 September 2025 onwards, the rate for electric cars also depends on whether the car was charged at the employee’s home or using a public charger, with a higher rate applying to miles on a public charge.

The rates, which are updated quarterly on 1 March, 1 June, 1 September and 1 December, are available on the Gov.uk website at www.gov.uk/guidance/advisory-fuel-rates.

Reimbursing the cost of business journeys

Where an employee meets the cost of fuel for a business journey in a company car, they will usually be able to reclaim this from their employer. The reimbursement is generally made in the form of a mileage allowance.

Where the employer reimburses the employee using the advisory fuel rates, the reimbursement can be made free of tax and National Insurance. HMRC will allow higher amounts to be paid tax-free where the actual cost exceeds the advisory rate, and the employer can substantiate this. In the absence of such evidence, if the amount paid exceeds the amount payable at the advisory rate, the excess is earnings for both tax and National Insurance.

From 1 September 2025 onwards, where the car is an electric car, the tax-free amount depends on whether the car was charged at home or using a public charger. Where a business journey involves both types of charge, an apportionment is necessary as shown in the example below.

Example

Laura has an electric company car. She visits a customer on 27 November 2025 undertaking a business journey of 154 miles. She charged her car at home the previous Sunday. En route to the customer, she stops at a service station 65 miles from home and charges her car. She completes the journey to the customer and home without needing a further charge.

Her employer uses the advisory fuel rates to reimburse Laura, paying her 8 pence per mile for the 65 miles on the home charger and 14 pence per mile for the remaining 89 miles on the public charger, a total reimbursement of £17.66.

Repaying fuel for private mileage

A fuel benefit charge applies if the employer meets the cost of fuel for private journeys in a company car unless the car in question is an electric car. The charge can be significant. However, the tax charge can be avoided if the employee makes good the cost of all fuel used for private journeys. The repayment can be made using the advisory fuel rates. To be effective at cancelling the charge, the employee must ‘make good’ before 1 June following the end of the tax year if car and fuel benefits are payrolled and by 6 July following the end of the tax year if the employer would report the benefit via the P11D process. It should be noted that the charge is only eradicated if the employee makes good the cost of all fuel for private journeys; there is no reduction in the charge for a partial reimbursement.

As far as benefits in kind are concerned, there were both winners and losers in the Budget.

Winner – easement for plug-in hybrid electric vehicles

Under the company car tax rules, the taxable amount depends predominantly on the list price of a car and its CO2 emissions.

From 1 January 2025, new European Union and United Nations emissions standards were introduced which found the CO2 emissions for plug-in hybrid electric vehicles (PHEVs) to be higher than previously thought. Normally, an increase in the CO2 emissions figure would mean an increase in the taxable amount.

However, an easement will mean that, for a limited period, the amount charged to tax under the benefit in kind rules will be determined by reference to a nominal CO2 emission figure of 1g/km. Where a car’s CO2 emissions are between 1 and 50g/km, the appropriate percentage depends on the car’s electric range.

To be eligible for the easement the following conditions must be met:

• the vehicle was first registered on or after 1 January 2025;
• its CO2 emissions figure is 51g/km or above;
• it was registered under an emissions standard other than Euro 6d-ISC-FCM or Euro 6e; and
• the car’s electric range is at least one mile.

The easement will apply retrospectively from 1 January 2025.

Anyone accessing an eligible PHEV company car before 6 April 2028 will be able to benefit from the easement until the arrangements are varied or renewed or, if earlier, 5 April 2031.

Winner 2 – expansion of workplace benefits relief

Currently, reimbursed expenses are only tax-free if the employee would be entitled to a tax deduction had they met the cost themselves.

However, from 6 April 2026, employers who reimburse the costs of eye tests, flu vaccines and home working equipment will be able to do so tax-free.

Winner 3 – delayed start to ECOS changes

Legislation to bring certain cars made available to employees under an employee car ownership scheme (ECOS) within the tax charge for company cars had been due to come into effect on 6 April 2026. The changes will not be introduced until 6 April 2030.

Losers – removal of relief for homeworking expenses

An administrative easement that allowed employees to claim a flat rate deduction of £6 per week for the additional costs of working from home is being removed from 6 April 2026. This is worth £124.80 to a higher rate taxpayer and £62.40 to a basic rate taxpayer.

Employers will still be able to make a tax-free payment of £6 per week for additional homeworking costs, and employees will still be able to claim a deduction for the actual extra cost (although this will involve more work).

A director’s loan account is simply a means of keeping track of transactions between the director and the company of which they are a director. Where the company is a personal or family company, the director may borrow from the company or lend money to the company. Similarly, the director may meet expenses of the company, or the company may pay the director’s personal bills. These transactions are recorded in the director’s loan account. Dividend or salary payments may also be credited to the account.

If the director’s account is overdrawn at the end of the company’s accounting period or at any point during the tax year, there may be tax implications to address.

Close companies

If the company is close, as personal companies and most family companies are, there will be tax consequences for the company if the director’s account is overdrawn at the company’s year end. Broadly, a close company is one that is under the control of five or fewer participators or any number of participators if those participators are directors. A participator is someone who has an interest in the capital or income of the company.

The action that the company needs to take in respect of an overdrawn director’s loan account depends on whether the account is still overdrawn at the corporation tax due date, which is nine months and one day after the end of the accounting period.

If the loan has been repaid within this time frame, the company must disclose the loan on form CT600A when they prepare their corporation tax return, notifying HMRC of the amount that was outstanding at the end of the accounting period and the date(s) on which the repayments were made.

If the account remains overdrawn at the corporation tax due date, the company must pay section 455 tax on the outstanding loan balance along with their corporation tax. Anti-avoidance provisions exist to prevent the loan being repaid and then reborrowed in a bid to avoid the section 455 charge.

Section 455 tax

The company must pay section 455 tax on the amount by which the director’s account remains overdrawn nine months and one day after the company year end. The rate of section 455 tax is aligned with the upper dividend rate (currently 33.75%). The tax is paid with the corporation tax but crucially is not corporation tax.

Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the accounting period in which the loan is repaid.

Clearing the loan, whether by an injection of cash, declaring a dividend or by paying a bonus, will prevent a section 455 liability from arising. However, this will not always be the best option. If the loan is cleared by a dividend or a bonus, this will trigger tax and (in the case of a bonus) National Insurance liabilities which may be greater than the section 455 tax. It may be cheaper to pay the section 455 tax and to clear the loan at a later date when it can be done more tax efficiently.

Benefit in kind charge

If the loan balance exceeds £10,000 at any time in the tax year, a tax charge will arise under the benefit in kind provisions by reference to the difference between interest on the loan at the official rate and that paid by the director (if any). The employer will also pay Class 1A National Insurance on the taxable amount.

An increasing number of people live on cruise ships. They sell or rent out their main residence and spend their days living on the waves. The benefits are various – no meals to get yourself, entertainment every night, different ports to discover, even your washing done. You can even own a ‘villa at sea’, allowing residency aboard a ship for the duration of its life (or a minimum of 15 years). But what are the tax implications, if any? Unfortunately, UK tax liability is primarily determined by tax residence, not lifestyle, therefore a person may live on a ship and still be UK tax resident.

The UK tax system

Once residency is established, UK residents are taxed on their worldwide income/gains whereas non-UK residents are taxed only on UK-sourced income (rents, dividends, bank interest) and UK gains (property disposals); foreign income/gains are untaxed in the UK for non-UK residents.

Statutory residence test (SRT)

Determination of UK tax residence can be complicated and someone ‘living’ on a cruise ship must still assess their residence using the same rules as anyone else. Living on a cruise ship can support a non-UK resident tax position, but only if the steps comprising the SRT are not satisfied.

The first step determines if an individual will be considered automatically resident.

The second step determines if an individual will be considered automatically non-resident. There are three automatic overseas tests under this step and if any one of these tests is met the individual will be deemed non-UK resident for that year.

The third step considers whether the individual meets either the second or third automatic UK tests. If any one of these is met the individual will be deemed UK resident for the year.

The fourth and final step determines if an individual will be considered resident or non-resident under the ‘sufficient ties’ test.

First step

Under this test an individual will be automatically UK tax resident if:

• they spend 183 days or more in the UK in a tax year; or
• there is at least one period of 91 consecutive days (at least 30 of which fall in the relevant tax year) when their only home is in the UK and they spend a sufficient amount of time in that home in any one year.

Second and third steps

If the answer to the above is ‘no’, that is not the end of the process. The next step is to consider the automatic overseas tests which determine UK residence if less than 16 days were spent in the UK, or the individual was UK resident in one or more of any of the previous three tax years, or more than 46 days were spent in the UK (and the individual was non-resident in the previous three tax years) .

Fourth step

If the above tests fail to give a clear answer, the ‘sufficient ties test’ applies, combining days spent in the UK with ties (connections). Ties include the following:

Family tie: spouse, civil partner, cohabiting partner or minor child (under 18) is UK tax resident.

Accommodation tie: UK accommodation (owned, rented or belonging to a friend) available for more than 91 consecutive days and more than one night was spent there. The test is satisfied in the case of a close relative's home if more than 16 nights are spent there during a tax year. Hotels/Airbnb usually qualify if long-term.

Work tie: more than 40 days working more than three hours in the UK during the tax year.

90-day tie: spending more than 90 midnights in the UK in either of the previous two tax years (not combined).

Country tie: UK is the country in which the individual spends most days during the tax year.

Therefore, to be non-UK resident, the individual on the cruise ship must:

• limit UK days according to the SRT day-count; and
• reduce UK ties, such as:

• • a UK home;
  • family in the UK;
  • substantive UK work; and
  • significant UK presence in prior years

Merely selling a house and living on a ship is not sufficient to gain non-UK residency if other UK ties remain.

Practical point

Note that time spent on a cruise ship does not count as time outside the UK if the ship is in UK territorial waters at midnight on any counted day. Therefore, a cruise away from the UK should be the preferred travel option to avoid tax complications (e.g. a cruise of the Southern Hemisphere starting in the USA and ending in the USA).