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VAT-registered businesses can generally reclaim VAT on goods and services purchased for business purposes. However, for a claim to succeed HMRC requires valid evidence to support those claims. In most cases, this means retaining a valid VAT invoice, but what is the situation should a full VAT invoice not be issued?

An invalid VAT invoice

A VAT invoice must contain specific information, including the supplier’s details, a unique sequential number, the VAT registration number, invoice date, the customer’s name and address, description of goods or services supplied, the VAT rate charged, the net of VAT amount payable and total gross amount payable. A recent tax case, Athena Luxe Ltd v HMRC [2025], serves as a reminder of these requirements. However, where a fully compliant invoice cannot be obtained, all is not necessarily lost. The tax case confirmed that HMRC cannot automatically reject a VAT claim simply because a supplier has failed or refused to issue a compliant invoice if there is other convincing evidence showing that the business genuinely incurred the VAT.

Common examples of invalid invoices include those that:

• omit the supplier’s VAT registration number;
• fail to show the VAT amount separately;
• lack sufficient detail about the goods or services supplied; or
• have inaccuracies regarding dates, values or parties involved.

Crucially, where a business seeks to recover VAT, the invoice should normally be addressed to that business. Problems can arise when invoices are issued in the name of a company director, an employee or another party rather than the VAT-registered business, as the tax case showed.

Athena Luxe Ltd v HMRC [2025] UKFTT 1507 (TC)

Athena Luxe Ltd bought luxury goods from UK traders and exported them overseas. As these sales were mainly zero-rated exports, it regularly reclaimed VAT on its purchases. HMRC reviewed its VAT returns and disallowed input VAT because it said some invoices were invalid. Some invoices lacked sufficient description of the goods purchased whilst others were issued in employees’ names rather than the company’s. When asked, the issuing company refused to issue in the correct (company) name.

The Tribunal found in favour of Athena Luxe and allowed the VAT recovery. It confirmed that HMRC must consider all evidence before making its decision. Where an invoice was incomplete, a matching till receipt showed that the item had been purchased. For invoices in employees’ names, the Tribunal accepted that the company had genuinely bought the goods for its business, paid for them through the company and had done all it could to obtain valid invoices. HMRC's refusal to exercise its discretion to accept alternative evidence was found to be unreasonable.

Note that this tax case was a First-tier Tribunal decision, so it is persuasive but not binding on all future cases.

E-invoicing

E-invoicing is likely to make the problems seen in Athena Luxe Ltd v HMRC less common. Under a typical e-invoicing system, invoice data is generated in a structured digital format rather than as a PDF or paper receipt, containing the same information as paper invoices.

From April 2029, all UK VAT registered businesses will be required to create, send, receive and process invoices to other businesses in a compliant electronic format. This will allow data to be read automatically by systems without manual intervention.

Although the use of e-invoicing should produce fewer defective invoices, HMRC may become less tolerant of basic invoice errors because they become easier to avoid. Disputes may focus more on the substance of the transaction.

Practical point

Where invoices contain errors, businesses should seek corrected documentation from suppliers as soon as possible. Relying on HMRC’s discretion is rarely desirable. Additional records (e.g. bank statements, expense claim records, purchase orders, contracts, email correspondence, delivery notes and receipts) can help demonstrate that a genuine business transaction took place and that VAT was properly incurred.

Landlords running an unincorporated property business obtain relief for interest and finance costs incurred in relation to residential lets (including holiday lets) as a tax reduction.

The tax reduction is 20% of the lower of the:

• interest and finance costs;
• the profits of the property business for the tax year (after any brought forward losses); and
• adjusted total income (income after losses and reliefs that exceeds the personal allowance).

The deduction cannot create a tax refund.

If the interest and finance costs are higher than the business profits and/or the landlord’s adjusted total income, the interest and finance costs will not be relieved in full in the year in which they were incurred. Where this is the case, the unrelieved interest and finance costs are carried forward.

Example

Ali has a house which he lets out. He has a mortgage on the property on which he pays interest of £10,000 a year.

In 2025/26, the profits from his property rental business were £8,000. His adjusted net income was £25,430.

Ali is able to claim a tax reduction in respect of his interest costs equal to 20% of the lower of:

£10,000 (interest and finance costs);

£8,000 (profits of the property business); and

£25,430 (adjusted net income).

His tax reduction is £1,600 (20% of £8,000).

As his business profits are less than his interest costs, he is not able to relieve the interest in full. The unused amount (£2,000) is carried forward.

In 2026/27, Ali’s interest remains at £10,000. However, this year the profits of his property rental business are £13,000 and his adjusted net income is £36,000. He is able to claim a tax reduction of 20% of the lower of:

£12,000 (interest costs, being £2,000 brought forward from 2025/26 and £10,000 for 2026/27);

£13,000 (profits of the property rental business); and

£36,000 (adjusted net income).

His tax reduction is £2,400 (20% of the interest costs of £12,000). In 2026/27, he is able to secure relief both for the interest incurred in that year of £10,000 and the unrelieved interest of £2,000 brought forward from 2025/26.

Convention has it that in times of high interest rates, borrowing from your company is invariably more tax efficient than borrowing from other sources such as a bank. However, this may not always be the case. If the loan cannot be repaid within nine months and one day after the company's accounting year end, the company will be liable for a tax charge equal to the dividend upper rate (35.75%). Without this charge, the director could borrow money from the company indefinitely without ever paying income tax or NIC on the amount withdrawn. In addition, where a beneficial loan exists, the director may face an income tax charge on the benefit, while the company pays Class 1A NIC. This applies regardless of whether the loan is repaid.

Company charge

The tax charge is technically temporary as, should the company be liable, the payment will be refunded when the loan is repaid (or written off.) The refund is usually offset against the corporation tax bill due, nine months and one day after the accounting year end in which the loan is repaid, with no interest received. If no corporation tax is due and a cash refund required, HMRC will not refund until after the same nine-month period has passed. This delay could create serious cash flow problems for the company.

Director’s charge

A separate set of rules applies entirely independently of the company’s charge, designed to catch the benefit to the director of having an interest-free (or below-market-rate) loan. If the loan balance exceeds £10,000 at any point during the tax year (even for one day), the director is treated as receiving a taxable benefit in kind equal to the notional interest on the loan, calculated using HMRC's official rate (currently 3.75%). Income tax is levied at the director’s marginal tax rate on the difference between any interest charged and the 'official rate', such loans termed 'beneficial loans'. The company must also pay Class 1A NIC at 15% on the same amount.

The benefit in kind and employer's NIC can be avoided by levying interest on the loan at the official rate (or above), even if rolled up in the loan, rather than immediately paid. If the 'official rate' is charged, borrowing from the company is cheaper than a bank loan or credit card.

Planning to clear the loan

Not repaying the loan on time can produce significant tax charges on both the company and the individual. Therefore, unless repayment is made on the sale or winding-up of the company, settlement will have to come from personal savings, by taking taxable income from the company (e.g. dividend) or by further external borrowing. In practice, paying a bonus or dividend to clear the loan is the cleanest route, but this triggers income tax (on a bonus) or dividend tax, so the ‘free loan’ turns out not to have been free at all.

For a basic taxpayer, it would be cheaper to convert the loan into a dividend taxed at 10.75% rather than have the company pay the 35.75% charge. Conversely, where the director is an additional rate taxpayer, it may be cheaper for the company to suffer the charge, as this is ultimately repayable when the loan is repaid or written off. For a higher rate taxpayer there would be no difference. However, even when tax does have to be paid, the shareholder can still end up with more initial funds through a loan than through additional salary or dividends, having benefited from interest-free or low-interest borrowing in the meantime.

Some directors repay using borrowed money by taking out a personal loan or 0% credit card, repaying over time. This can work, but needs careful planning, as personal loans carry interest costs and 0% credit card deals have time limits.

Practical point

Borrowing from the company only makes sense for basic rate taxpayers who require short-term loans e.g. where a dividend will be declared shortly after year end and the loan cleared promptly. Treated as a long-term financing tool, it is almost never tax efficient. However, the s455 charge is only temporary and any benefit in kind may be less than the cost of external borrowing.

HMRC use a range of communication methods, as do fraudsters. Consequently, it can be difficult to be certain that a call, email, letter or text which seems to come from HMRC actually does. How then do you tell if the communication is genuine?

Phone calls

Scammers may pretend that they are from HMRC and try to extract a person’s bank details by telling them that they are entitled to a tax refund. This should set warning bells ringing – HMRC will never phone someone to tell them that they are entitled to a tax rebate or that they are to be charged a penalty, or to ask for personal information.

Not all calls purporting to be from HMRC will be a scam. However, to help callers identify whether a call is genuine, HMRC publish details of their current phone contacts. The list is available on the Gov.uk website at www.gov.uk/guidance/check-if-a-phone-call-youve-received-from-hmrc-is-genuine.

However, a missed call or voicemail from 0300 200 3884 is from HMRC.

Emails

Scammers also send emails purporting to be from HMRC. However, as with phone calls, HMRC publish a list of recent email topics, which can be found of the Gov.uk website at www.gov.uk/guidance/check-if-an-email-youve-received-from-hmrc-is-genuine.

It is advisable not to open a link in an email.

Letters

HMRC may write to taxpayers. However, it is prudent to check that a letter which seems to be from HMRC actually is. HMRC publish a list of recent letters that they are sending out, details of which can be found on the Gov.uk website at www.gov.uk/guidance/check-if-a-letter-youve-received-from-hmrc-is-genuine. Examples of genuine letters include Letter IDMS99P which tells someone that they have an overdue payment on a Simple Assessment and Letter IDMS99 which tells someone that they have a payment which is overdue. HMRC may also reply to correspondence by letter.

Texts

HMRC do communicate by text, for example, to follow up a call to a helpline or to advise someone that their Self-Assessment refund is being processed. Some texts may have HMRC branding which will show HMRC as the sender, include the HMRC logo and contain the verified sender information.

As with other forms of communication, HMRC publish details of recent text contact on the Gov.uk website (see www.gov.uk/guidance/check-if-a-text-message-youve-received-from-hmrc-is-genuine).

HMRC will never ask for personal information in a text.

While a text from HMRC may include a link to the Gov.uk website or to a webchat, recipients should not open any links or reply to a text that claims to be from HMRC and offers a tax refund in exchange for personal information.

QR code

Leaflets and letters from HMRC may contain a QR code which can be scanned to access further information or help. Details of genuine letters from HMRC containing a QR code can be found on the Gov.uk website at www.gov.uk/guidance/check-if-a-qr-code-on-a-letter-youve-received-from-hmrc-is-genuine.

More than one method of communication

HMRC may use more than one method to communicate with a taxpayer, for example, a letter followed by a phone call. Details of current contacts using more than one method of communication can be found on the Gov.uk website at www.gov.uk/guidance/check-genuine-hmrc-contact-that-uses-more-than-one-communication-method.

Reporting suspicious communication

Scam text and email messages and scam social media accounts claiming to be from HMRC should be reported. Scam emails should be forwarded to phishing@hmrc.gov.uk, scam texts can be forwarded to 60599 and scam calls can be reported online.

Stay alert

It is important to stay alert and check whether communications from HMRC are genuine.

A taxpayer may need to contact HMRC if they have a query about their tax affairs. There are various ways in which this can be done.

HMRC’s digital assistant

Taxpayers can ask HMRC’s digital assistant for help by visiting the Gov.uk website at www.tax.service.gov.uk/ask-hmrc/chat/self-assessment. If the digital assistant is unable to answer the question, the taxpayer can ask to be transferred to a webchat with an HMRC advisor if they are available.

X

HMRC will answer queries via X. However, this route cannot be used to discuss specific cases, so taxpayers should not include personal details. The post should start with @HMRCcustomers. The service is available between 8am and 8pm Monday to Friday and between 8am and 4pm on Saturday.

Phone

Taxpayers can also contact HMRC by phone. For Self-Assessment queries, taxpayers should call 0300 200 3310. Taxpayers with income tax queries should call 0300 200 3300. The lines are open from 8am to 6pm Monday to Friday.

Contact details for other helplines can be found on the Gov.uk website.

Post

HMRC can also be contacted by post. The correct address will depend on the nature of the query.

For Self-Assessment queries, taxpayers should write to:

Self-Assessment

HM Revenue and Customs

BX9 1AS

For PAYE and income tax queries, taxpayers should write to:

Pay As You Earn and Self-Assessment

HM Revenue and Customs

BX9 1AS

Taxpayers who have already contacted HMRC can use the online service to check when they can expect a reply. Taxpayers are advised not to contact HMRC again until this date has passed. The service is available on the Gov.uk website at www.gov.uk/guidance/check-when-you-can-expect-a-reply-from-hmrc.

A chargeable gain may arise on the disposal of a residential property which has not been the owner’s only or main residence throughout. This may be the case where the property is a second home or an investment property which has been let out.

Unlike other capital gains, residential property gains are not reported in the capital gains tax pages of the Self-Assessment return which must be submitted no later than 31 January after the end of the tax year. Instead, separate rules apply which govern how and when the gain is reported and the associated capital gains tax is paid.

Reporting the gain

A capital gains tax liability arising on the disposal of a UK residential property must be reported to HMRC within 60 days of the completion date. Where the property is jointly owned, each co-owner must report their own gain.

There is a dedicated online service for reporting residential property gains, and the seller will need to set up an account to report the gain and pay the tax. This can be done online at www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020.

The following information is required:

• address and postcode of the property;
• date of acquisition;
• date of exchange of contracts on the sale;
• date of completion of the sale;
• purchase price (or market value where relevant);
• sale price (or market value where relevant);
• costs of purchase and sale;
• cost of any improvements; and
• details of any available tax reliefs or exemptions.

In the event that the seller is unable to use the online service to report the gain, they can instead contact HMRC and request a paper form.

Paying the tax

The capital gains tax due on the residential property gain must also be paid within 60 days of completion. This is the best estimate of the capital gains tax due at the time, taking account of any available annual exemption or capital losses. Capital gains on residential property gains are taxed at 18% to the extent that the seller’s income and gains do not exceed the basic rate band (£37,700 for 2026/27) and at 24% thereafter. The rates are now the same as for other gains.

Payment can be made online through the online account using a debit or corporate credit card or by approving a payment through an online bank account. Payments can also be made by bank transfer or by cheque. The 14-character capital gains tax payment reference should be quoted.

There may be an adjustment once the overall capital gains tax position for the year is known. For example, the realisation of losses later in the tax year may give rise to a repayment. The position will be finalised in the Self-Assessment tax return.

Interest and penalties

Interest and penalties will be charged where a taxpayer fails to report and pay capital gains tax on a residential property gain within the required 60-day window.

In the last few months, some taxpayers who possibly have had no dealings with HMRC previously have been receiving letters headed ‘Simple Assessment’. The letters are being sent to those taxpayers whose outstanding tax liabilities cannot be collected automatically through the Pay As You Earn (PAYE) system or who do not complete a self-assessment tax return.

A simple assessment is issued when HMRC already holds sufficient information to calculate a taxpayer’s liability, but cannot collect it automatically. Rather than requiring the individual to complete a tax return, HMRC calculates the liability and issues an assessment showing the amount due.

Therefore, such assessments are commonly issued to taxpayers that HMRC believes have:

• underpaid tax from employment or pension income;
• state pension income that has not been fully taxed;
• multiple sources of income where PAYE deductions were insufficient;
• tax liabilities of £3,000 or more that cannot be recovered through tax code adjustments; or
• tax due after employment or PAYE income has ceased.

HMRC bases simple assessments on information provided by the Department for Work and Pensions, employers, pension providers and other organisations (such as banks).

How does self-assessment differ?

The main distinction between simple assessment and self-assessment is who provides the information and performs the calculation. Unlike simple assessment, where HMRC performs the calculation, self-assessment places responsibility on the taxpayer to declare all relevant income, expenses, reliefs and allowances accurately. HMRC then calculates the final liability based on the information submitted, although taxpayers can calculate themselves.

Note that taxpayers cannot choose to enter the simple assessment system – HMRC decides.

When are simple assessments issued?

HMRC generally starts issuing simple assessment calculations in the summer months following the end of the tax year. By that time, HMRC will have automatically received data from the Department for Work and Pensions and financial institutions such as banks. As information is received at different times, HMRC may issue multiple assessments for the same taxpayer.

Query and appeal

Unlike for self-assessment, there is a slightly different process for querying a simple assessment. A ‘query’ is raised where the taxpayer contacts HMRC by phone, or in writing, to explain why they disagree with the assessment. The taxpayer has 60 days from the issue of the assessment to raise a query.

If the taxpayer remains dissatisfied after HMRC has responded, they may submit a written appeal within 30 days of HMRC’s final response.

A revised simple assessment is automatically issued when a query has closed which will be when one of the following takes place:

• when HMRC closes the query manually; or
• six months after the query was raised.

An appeal does not have an automatic closure date.

Payment dates - Payment dates mirror self-assessment deadlines. If the assessment for the 2025/26 tax year is issued before 31 October 2026, payment must be made by 31 January 2027; if received after 31 October 2026, payment is within three months of the date on the assessment letter.

Why are (more) simple assessments being issued? - Simple assessments are not new. Although simple assessment was introduced in September 2017, its use has expanded significantly. HMRC issued a record 1.32 million simple assessments in 2023/24 tax year.

However, rising state pension payments under the ‘triple lock’ and higher savings interest are pushing more people over the frozen personal allowance, resulting in more assessments being issued.

State pension only - The so-called ‘triple lock’ guarantees that the state pension increases annually by the highest of September's consumer price index figure (which stood at 3.8% for 2025), average earnings growth between May and July, or 2.5%. As personal allowances are frozen at £12,570 until April 2031, from April 2027 someone whose only income is the full new state pension will receive more than the personal allowance, so tax would be due.

However, the Chancellor has confirmed that those people will not have to pay tax before 2030.

Practical point - As HMRC continues to expand its use of digital records and real-time reporting, more taxpayers will receive simple assessments instead of being asked to complete a full tax return.

The Community Infrastructure Levy (CIL) is a charge which can be levied by local authorities on new development in their area.

The levy will only apply in an area where the local authority has consulted on and approved a charging schedule which sets out its levy rates and has published the schedule of rates on its website.

Scope

Most developments which create net additional floor space of 100 square metres or more or which create a new dwelling are potentially with the scope of the charge. However, exemptions do apply.

Exemptions

There are a number of exemptions from the CIL, which may be available under the following circumstances:

• minor development exemption;
• exemption for residential annexes or extensions;
• mandatory charitable relief;
• discretionary charitable relief;
• mandatory social housing relief;
• discretionary social housing relief;
• self-build exemption (whole house); and
• exceptional circumstances relief.

Details of the nature of each exemption can be found on the Gov.uk website at www.gov.uk/guidance/community-infrastructure-levy#relief-and-exemptions.

Exemptions must be claimed.

Providing information

When applying for planning permission, applicants should submit the Additional CIL Information form (Form 1). Where the levy applies, in most cases it is found by multiplying the additional gross internal area by the rate for the type of development in question.

Ignorance is not bliss

Developers who were unaware of the CIL or who thought erroneously that it did not apply to them may face hefty bills. It is important that the levy is considered at the outset and, where an exemption applies, this is claimed. It is advisable to check your local authority website in advance for details of charges applying in your area. Professional advice should also be sought.

HMRC publish details of CIL appeals, which are available on the Gov.uk website at www.gov.uk/government/collections/community-infrastructure-levy-appeal-decisions. These provide an insight into building work within the scope of the levy and when exemptions apply.

Getting around a city by bus, car or taxi can be frustrating, with traffic congestion often making journeys slow and unpredictable. Travelling by bicycle can be quicker, cheaper and better for the environment. If you run your own limited company, buying a bicycle through the company can also be a tax-efficient way of providing transport for commuting and business travel. However, there are tax rules to consider.

Option 1: The company buys the bike

The simplest approach is for the company to buy the bicycle and retain ownership. If the company is VAT-registered and the bike is used for the business, it can normally reclaim the input VAT. The cost (excluding recoverable VAT) will usually qualify for capital allowances, often giving 100% tax relief through the annual investment allowance. VAT on accessories such as helmets, lights, locks and protective clothing may also be recoverable, with the net cost deductible for corporation tax.

From the employee's perspective, this arrangement can be surprisingly attractive. In order for there not to be a benefit in kind charge on the employee, HMRC sets three conditions:

• there must be no transfer of ownership of the cycle to the employee;
• the employee must use it mainly for qualifying journeys; and
• cycles must be available generally to employees.

‘Qualifying journeys’ include commuting between home and work, as well as business travel between workplaces. Electrically assisted pedal cycles are also covered by the exemption.

The key requirement is that more than 50% of the bicycle's use is for qualifying journeys. Leisure cycling is permitted, provided it does not become the bike's main use. HMRC does not normally expect detailed mileage records to be kept and accepts the 'main use' test unless there is clear evidence that qualifying journeys account for less than half of the use.

There is no need for HMRC approval or a formal scheme. The company simply purchases the bicycle and makes it available to a director or employee. However, be aware that HMRC requires bicycles to be available generally to employees. For companies with only one director and no other staff, this condition is usually straightforward.

Option 2: Using the cycle to work salary sacrifice scheme

The cycle to work scheme is the option most people have heard about in relation to using a company-provided bike. Instead of buying the bike personally, an employee agrees to give up (‘sacrifice’) part of their gross salary in exchange for the use of a bicycle provided by their employer. This method of purchase can prove beneficial for both employee and employer as the employee’s salary is reduced before tax and NIC are calculated.

For employees generally, salary sacrifice cannot reduce gross pay below the National Minimum Wage. However, the position is often different for company directors who are paid using the low salary/dividend method of recompense. In these circumstances, reducing an already modest salary through salary sacrifice may produce little additional tax or NIC saving.

The salary sacrifice route also involves more administration. There must be a formal hire agreement, salary reductions need to be recorded correctly and there may be additional paperwork depending on how the scheme is operated.

Another consideration comes at the end of the hire period. If the employee wishes to own the bike personally, they will usually need to pay its fair market value to prevent a taxable benefit in kind being levied. HMRC publishes guidance and an optional simplified valuation table, setting percentages of original price based on the bike's age. When calculating the original price, safety equipment fixed to the cycle such as lights and bells is included, but equipment worn such as helmets or reflective clothing is not. Failing to follow these rules could create a taxable benefit.

Practical point

For many owner-managed companies, having the company purchase and retain ownership of the bicycle is often the simplest and most tax-efficient solution. The cycle to work salary sacrifice scheme can still be attractive where there are several employees on normal PAYE salaries, as they benefit from income tax and NIC savings on the salary sacrificed, while the employer also saves employer's NIC.

Some homeowners who are fortunate enough to have a larger drive than is required for parking their own motor vehicles advertise on websites or apps such as JustPark or YourParkingSpace for motorists to rent a parking space on their drive, for a period of hours or possibly days.

For example, a safe place to park can be a valuable commodity for football supporters travelling to away matches, or for someone attending a music concert in another town or city. If you live close to a public venue like a sporting ground, concert hall or even an airport, renting out one or more spaces on the drive of your house could generate a handy source of additional income.

What's the tax position?

A form of tax relief is available to individuals (ITTOIA 2005, ss 783B-783BQ) on certain income of a 'relevant property business' for the tax year, up to a 'property allowance' of £1,000 (NB there is a separate regime for trading income with its own relief of up to £1,000, which is not considered in this article; nor does it address any legal or commercial implications). This is 'full relief'. If the property is jointly owned (e.g., by spouses or civil partners), they are each entitled to their own property allowance of £1,000. However, the allowance is not available if the 'rent-a-room' scheme is used.

If the individual's gross property income (from all their property businesses) is £1,000 or less, it is not generally necessary to notify HM Revenue and Customs (HMRC) or include actual income and expenses on a tax return (although in some circumstances a tax return may still be required or preferred). Alternatively, the individual may deduct actual allowable expenses instead; this may be beneficial if (for example) actual expenses exceed rental income. Individuals who do not wish to use the property allowance may elect on a tax return for full relief not to apply. Profits would then be calculated and reported on a tax return in the normal way.

If annual gross property income amounts to more than £1,000, the tax-free allowance can be used instead of deducting any actual property expenses incurred, with rental income above that threshold being taxable (i.e., 'partial relief'). An election is required for partial relief to apply. In the absence of an election for partial relief, the individual instead deducts actual allowable expenses incurred for the tax year. This latter treatment should be attractive if actual allowable expenses exceed the tax-free allowance of £1,000. Elections for full relief not to apply, or for partial relief to apply, should generally be made on or before the first anniversary of 31 January following the tax year for which the election is being made.

Keep records

It will be necessary to keep records. For example, details about rental income will be necessary to substantiate whether the £1,000 tax-free limit has been exceeded. If actual expenditure is being claimed instead of the £1,000 allowance, copies of expense invoices, payment information (e.g., bank statements) and any other supporting information should be kept on a contemporaneous basis. HMRC may impose penalties for record keeping failures, particularly if little or no effort has been made to keep adequate records.

Practical tip

HMRC guidance on the tax-free allowance for property and rental income is available on the Gov.uk website (www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income), with more detailed guidance in HMRC's Property Income Manual (at PIM4410-PIM4480).

Employer’s Class 1 National Insurance is a significant cost for employers, being charged at 15% on earnings over the relevant threshold. However, there are some steps that employers can take to reduce their bill.

Claim the Employment Allowance

The Employment Allowance is a valuable allowance which reduces an employer’s secondary Class 1 bill by up to £10,500 a year. The allowance is capped at the employer’s secondary Class 1 liability for the year where this is less than £10,500.

The allowance is not given automatically and for eligible employers to be able to benefit from it, they need to claim it. This can be done through their payroll software.

The allowance is not available to companies where the sole employee paid above the secondary threshold is also a director, rendering many personal companies ineligible. However, consideration could be given to perhaps changing the director to a spouse or civil partner or taking on a second employee and paying them above the secondary threshold (set at £96 per week).

Employ part-time workers

Employers pay secondary Class 1 National Insurance on employees’ earnings above the secondary threshold. By employing more part-time workers and less full-time workers, the employer is able to benefit from additional secondary thresholds, reducing their overall bill.

Example

An employer employs a full-time worker who is paid £4,000 a month. None of the higher secondary thresholds apply. The employer pays secondary Class 1 National Insurance of £537.45 a month (15% (£4,000 – £417)).

If instead the employer employed two part-time workers, paying them each £2,000 a month, the employer would pay secondary Class 1 National insurance of £237.45 a month for each employee (15% (£2,000 – £417)) – a total monthly bill of £474.90. By employing two part-time workers rather than one full-time worker, the employer saves £62.55 a month (15% of the monthly secondary threshold of £417). This is an annual saving of £750.60.

Employ workers under the age of 21

A higher secondary threshold – the upper secondary threshold for under 21s – applies where the worker is under 21. For 2026/27, it is set at £967 per week, £4,189 per month and £50,270 per year. Employer contributions (at 15%) are only payable on earnings in excess of the threshold. Employing a worker under 21 rather than one over 21 can reduce the employer’s secondary Class 1 bill by up to £6,790.50 a year.

Employ apprentices

A higher secondary threshold also applies in respect of the earnings of apprentices under the age of 25. The apprentice upper secondary threshold (AUST) is set at £967 per week, £4,189 per month and £50,270 a year for 2026/27. Taking on apprentices can be beneficial for the business and reduce the employer’s National Insurance bill. However, the apprentice must meet the statutory definition in the National Insurance legislation for the AUST to be available.

Employ armed service veterans

Taking on an armed forces veteran can also pay. A higher secondary threshold, the veterans upper secondary threshold, applies to the earnings of an armed forces veteran in the first 12 months of employment since leaving the armed forces. It is available for 2026/27 and is set at £967 per week, £4,189 per month and £50,270 a year.

Relocate to a Freeport or an Investment Zone

Employers whose businesses are located in a Freeport or an Investment Zone benefit from a range of tax incentives. These include a higher secondary threshold for new employees in their first three years of employment in a Special Tax Site. The threshold is set at £481 per week, £2,083 per month and £25,000 a year.

It should also be noted that employers can deduct secondary Class 1 contributions in calculating their taxable profits.

While the rules regarding VAT compliance may appear straightforward at first glance, there are several common pitfalls that can lead to problems which, if not rectified, can lead to penalties. Some of the more frequent VAT traps that small businesses face are detailed below:

Late registration

One of the more common ‘traps’ is failing to register for VAT on time. Registration is required once taxable turnover exceeds the VAT threshold (£90,000) within a rolling 12-month period, not just at the end of the financial year. Many small business owners misunderstand this rule and only review their turnover annually, which can result in late registration.

The consequences of late registration can be significant. To rectify the error, a business may be required to pay VAT on sales made after the date they should have registered, even if they did not charge customers VAT at the time. This effectively means absorbing the VAT cost themselves, which can severely impact profit margins and cash flow.

Penalties (which automatically expire after two years, provided the filer has not yet reached their threshold), will be calculated as a percentage of VAT that should have been paid (with the percentage depending on whether the failure was prompted or unprompted, and whether behaviour was non-deliberate, deliberate or deliberate and concealed). Interest charges will be levied on unpaid VAT from the date it should have been remitted, and there may be the potential loss of input tax recovery on purchases made before registration, all of which could add up to a considerable amount of money. Note that businesses can generally reclaim input tax on goods and services purchased before registration (subject to time limits: four years for goods still on hand; six months for services).

Exceeding the limit temporarily

In some cases, a business that temporarily exceeds the VAT registration threshold can apply for an exception from registration. To qualify, it must demonstrate that its taxable turnover will not exceed the £88,000 deregistration threshold within the following 12 months. However, HMRC is increasingly refusing exceptions, particularly where businesses have not adequately monitored turnover on an ongoing basis.

To avoid late registration, businesses should regularly monitor their turnover (ideally on a monthly basis) and keep accurate records.

Incorrect zero-rating or partial exemption claims

Another frequent ‘trap’ involves misunderstanding as to which goods or services qualify for zero-rating or fall under the partial exemption rules. Zero-rated supplies are taxable at 0%, but they still count as taxable turnover and must be reported correctly and included in the 12-month registration calculation.

Businesses making both taxable and exempt supplies (partial exemption) must be careful in calculating how much input VAT they can reclaim. Undercharging VAT by applying reduced or zero rates to supplies that should be standard rated creates liability for the underpaid VAT plus potential penalties if HMRC determines the error resulted from carelessness or deliberate attempt to underpay. To manage this risk, business owners should ensure they fully understand the VAT treatment of their products and services and consider seeking professional advice when dealing with mixed supplies.

Reverse charge obligations

The reverse charge mechanism is another area where small businesses often make mistakes. This rule shifts the responsibility for accounting for VAT from the supplier to the customer in certain transactions, particularly in sectors such as construction or when dealing with overseas suppliers.

Under the domestic reverse charge, suppliers do not charge VAT; rather, the customer accounts for the VAT on their own return. Similarly, when purchasing services from overseas, businesses may need to account for VAT, even if no VAT is charged on the invoice. Failing to apply the reverse charge correctly can lead to incorrect invoicing and reporting errors.

Late submissions

Submitting VAT returns late or with inaccuracies is another common compliance problem. VAT returns are typically filed quarterly (although annual submissions are possible), and deadlines are strictly adhered to. Late submission penalties work on a points-based system where a penalty point is applied for each return submitted late. The penalty point threshold differs by filing frequency: annual filers reach the threshold at two points, quarterly filers at four points and monthly filers at five points. Once the applicable penalty point has been reached, a penalty of £200 is levied. A further £200 penalty is levied for each subsequent late submission.

Practical point

By being aware of these common VAT traps, businesses can take proactive steps to stay compliant. These include keeping accurate and up-to-date records, reconciling accounts regularly and reviewing VAT returns carefully before submission. Bank streaming used in conjunction with accounting software can be useful, and seeking professional support can also help ensure compliance.

Pension contributions benefit from tax relief. However, the amount of the relief is capped at the lower of 100% of earnings (or £3,600 where this is higher) and the available annual allowance.

Annual allowance

The annual allowance is set at £60,000 for 2026/27. However, it is reduced where both adjusted net income exceeds £260,000 and threshold income (broadly income excluding pension contributions) exceeds £200,000, by £1 for every £2 by which adjusted net income exceeds £260,000 until the minimum allowance for the year is reached. This is set at £10,000 for 2026/27.

Once the current year’s allowance has been used up, unused allowances from the previous three years can be used, with an earlier year’s available allowance used before a later year.

Employer contributions

Employer contributions count towards the annual allowance but are not subject to the 100% of earnings cap.

Methods of tax relief

Individuals benefit from tax relief at their marginal rate of tax on pension contributions that they make up to the permitted limits.

There are two methods by which relief may be given – under a net pay arrangement or under a relief at source arrangement.

Relief at source

Under a relief at source arrangement, an employer takes an employee’s pension contribution from their net pay. The amount paid to the pension provider is net of basic rate tax. The pension provider reclaims the basic rate of tax from HMRC. If the employee pays tax at the higher or additional rates, they will need to claim relief for the difference between the rate at which they pay tax and the basic rate in their Self-Assessment tax return.

Example

David is a higher rate taxpayer. He pays into a personal pension and his employer deducts pension contributions of £300 a month from his net pay (£3,600 a year).

This is paid net of basic rate tax and equivalent to a gross contribution of £4,500. The pension provider claims an amount equal to the basic rate (£900) from HMRC.

As a higher rate taxpayer, David is entitled to relief at 40%. This is worth £1,800. He has received relief of £900 from HMRC. He can claim relief for the remaining £900 in his Self-Assessment tax return.

The contribution of £4,500 costs him £2,700 (the £3,600 deducted from his pay, less the further relief of £900 claimed in his tax return).

Net pay

Under a net pay arrangement, a pension contribution is deducted from a person’s gross pay (before applying PAYE). In this way, relief is given at their marginal rate of tax, and there is no need to claim relief through Self-Assessment. This method is usually used by workplace pensions.

When a business incurs input tax on its purchases, it's entitled to reclaim it from HMRC, provided the business has the correct evidence to make the claim.

But sometimes, through an oversight, it isn't claimed on time; so, what are the rules for claiming back input tax late?

Normally, the input tax on a purchase should be claimed in the VAT period in which it is incurred. So, if a business's VAT return period ends in July and it receives an invoice dated 15 June, it should be claimed in the period ending 31 July. If a business is on cash accounting and pays the invoice on 20 August, it can claim the VAT back on the return ending 31 October.

Late claims for input tax

If a business does not claim back the VAT on a purchase invoice in the correct period, HMRC considers that it needs to treat it as an 'error correction'.

If the total of all 'errors' results in a net adjustment of VAT of less than £10,000, it can be adjusted on the VAT return, but it will need to be recorded separately in an 'error correction account' rather than in the normal purchases records.

If the net total of all errors in the period results in an adjustment of more than £10,000, it will need to be notified to HMRC separately using a form VAT 652 and a separate repayment will be made by HMRC directly to the business about six weeks later.

Time limits for making a claim

A business has four years to claim back any unclaimed input tax. However, the four years run from the due date of the return on which it should have claimed back the VAT, not from the date of the invoice, so this gives a business some leeway.

Example: Still time to claim

For normal accounting, a business receives an invoice dated 15 April 2022 and fails to reclaim it on time in the period ending 31 May 2022.

The due date for the return is 30 June 2022, so the claim can be made on a return or VAT 652 up to 30 June 2026.

If the business was on cash accounting and the invoice was paid on 10 June 2022, it should have been claimed in the period ending 31 August 2022. The due date would be 30 September 2022 and so the claim could be made up until 30 September 2026.

Late invoices

If an invoice is received late because of a delay by the supplier, or it gets lost in the post and it is received in a later VAT period, it would not count as an error correction because the business did not have the correct evidence to make the claim at the time.

In these circumstances, the invoice can be claimed in the period in which it is received, or paid if on cash accounting, in the normal way and no error correction is required.

Pre-registration input tax

If a business incurs input tax on goods that it still has on hand at the time of registration, it can go back up to four years from the date of the invoice, and for services for a period of six months.

The claim should be made on the first VAT return, but if it is not, the business can still claim it back up to four years after the due date for the first VAT return. This means that in exceptional circumstances, a claim can be made for the VAT on goods purchased up to eight years previously.

Practical tip

If a business fails to claim back input tax on time, it has up to four years to make the claim. If the total errors are more than £10,000, it will need to make a separate error correction.

On 21 May 2026, the Chancellor announced a temporary reduction in the rate of VAT applied to children’s meals and admission to certain attractions. It does not apply to sporting activities. The measure is intended to help families over the summer holiday period.

Children’s meals and tickets to attractions currently are liable for VAT at the standard rate of 20%. However, from 25 June 2026 to 1 September 2026 inclusive, a temporary reduced rate of 5% will apply to qualifying children’s meals and tickets to attractions. The rate will revert to 20% from 2 September 2026.

Qualifying supplies

The temporary reduced rate will apply to children’s meals, children’s cinema, theatre, show and concert tickets and admission to certain attractions.

Children’s meals

For a meal to be a ‘children’s meal’ both of the following must apply:

the meal is held out for sale only as a meal for children; and

the meal is supplied as part of catering by a restaurant, café or similar establishment for consumption on the premises.

It is important to note that the marketing, presentation and price determine whether a meal is a children’s meal rather than who consumes it. Consequently, the reduced rate will not apply to an adult meal consumed by a child but will apply if an adult purchases a children’s meal. It should also be noted that the temporary reduced rate will not apply to meals marketed as smaller portions, lower-calorie options, discounted versions of adult meals and shared meals intended for both adults and children. Where the same meal appears on both the adult menu and the children’s menu, the children’s version should be smaller and cheaper. However, portion size alone will not determine whether a meal is a children’s meal.

If the children’s meal is supplied as a package and includes more than one course and a (non-alcoholic) drink, the reduced rate applies to the whole package. However, separate add-ons, such as sides, retain their usual VAT treatment. Meals that include an alcoholic drink are not regarded as children’s meals.

The reduced rate does not apply to takeaway meals.

Meals that are currently exempt, such as those provided alongside a supply of education, remain exempt.

The measure will reduce the cost of a children’s meal which normally costs £12 to £10.50.

Theatre and cinema tickets

The temporary reduction in VAT will apply to children’s cinema and theatre tickets. These are tickets which are marketed and sold only as a right of admission for a child. A family ticket which provides admission for one or more children will also benefit from the reduced rate. However, group tickets which are not family tickets do not qualify. Adult tickets remain standard rated.

The measure will reduce the cost of a £30 children’s theatre ticket to £26.25.

Attractions

The temporary reduced rate will also apply to admission tickets to qualifying attractions that are suitable for families. Unlike cinema and theatre tickets, here the reduced rate applies to all admissions, regardless of the customer’s age. Qualifying attractions are amusement parks and fairs (including water and theme parks but not pay-per-ride attractions), circuses, adventure parks, museums and other cultural facilities (such as nature reserves, planetariums, heritage sites and botanical gardens), zoos, aquariums, wildlife parks and farm visitor attractions, soft play centres, indoor bounce parks and indoor play facilities and observation attractions, including viewing platforms, towers and observation wheels.

The reduced rate applies only to admissions and only during the period from 25 June 2026 to 1 September 2026.

Where an employee works at home, they may incur additional household expenses as a result, such as additional heating and lighting costs, the cost of business phone calls on a home phone, additional insurance costs and additional cleaning costs.

Reimbursed by the employer

The tax legislation contains a dedicated exemption which allows the employer to reimburse these costs without the employee being taxed on the amount reimbursed.

For the exemption to apply, the employee must be working at home under homeworking arrangements with the employer, rather than out of choice. Further, the costs must be reasonable and must be incurred in carrying out the duties of the employment; the exemption does not apply if the employer meets costs which would be the same regardless of whether the employee worked at home or not, such as mortgage interest or rent.

To make life easier, rather than reimbursing actual costs, which can be tricky and time-consuming to work out, the employer can make a tax-free payment of £6 per week (£26 per month) to cover the additional costs of working from home. The amount is the same whether the employee works at home one day a week or five days a week.

Costs met by the employee

Prior to 6 April 2026, the employee was able to claim a fixed deduction of £6 per week (£26 per month) to cover the additional costs of working at home under a homeworking arrangement. Employees could also claim a deduction based on the actual additional costs of working from home.

However, from 6 April 2026, this all changed. From that date, a deduction for additional household expenses is expressly prohibited regardless of whether they are wholly, exclusively and necessarily incurred in the performance of the duties.

Where a taxpayer has been made bankrupt, their Unique Taxpayer Reference (UTR) expires at the end of the tax year in which they were made bankrupt. They cannot use that UTR to file Self-Assessment tax returns for later tax years. Instead, they must re-register for Self-Assessment and  obtain a new UTR if they continue to trade after the tax year in which they were made bankrupt or if they need to complete a Self-Assessment tax return for any reason after that tax year. The old UTR must be used for all Self-Assessment tax returns filed for the tax year in which the person became bankrupt.

Having different UTRs for pre- and post-bankruptcy enables HMRC to keep the person’s tax affairs for each period separate and ensures that future tax returns are processed correctly.

If the old UTR is used post-bankruptcy, this will lead to delays in processing as HMRC will need to correct the UTR.

When a company pays a dividend, all shareholders holding the same class of shares must receive dividends in proportion to their shareholdings. To pay dividends at different rates, a company must either issue different classes of shares with distinct dividend rights or vary the proportions held by shareholders. Alphabet shares are commonly used to provide such flexibility.

What are alphabet shares?

Alphabet shares are different classes of shares identified by letters, such as ‘A’ ordinary shares and ‘B’ ordinary shares. They allow dividends to be paid to one class of shareholder without requiring equal dividends to all shareholders. This can be particularly useful where shareholders are taxed at different rates, e.g., where one shareholder is a higher-rate taxpayer and another is a basic-rate taxpayer or non-taxpayer.

In addition to differing dividend rights, alphabet shares may allow different voting rights or other restrictions, such as redeemable or non-redeemable rights. However, where shares are intended to qualify for the spouse exemption under the settlements legislation, care should be taken to ensure the shares carry full ordinary share rights and are not substantially restricted. Otherwise, HMRC may argue that the recipient has not acquired true ownership but only a right to receive income and tax dividends on the original shareholder instead. Therefore, shareholders should retain genuine beneficial ownership of their shares, including rights to capital, voting and future growth, rather than holding shares solely to receive dividends.

‘Settlements’ legislation

The settlements legislation is designed to prevent income being diverted from one person to another for tax advantages while the original owner retains effective control or benefit. Dividends paid on certain classes of shares must represent a genuine return on investment rather than effectively being remuneration for services taxed as employment income under PAYE and NIC.

HMRC’s stance

HMRC can now more easily identify who owns shares in which companies through enhanced digital reporting, data matching and Companies House transparency reforms.

In addition, as from 6 April 2025, any person who was a director of a close company during the relevant tax year must include the name and registered number of the close company, the dividend amount received by the taxpayer and the percentage of the share capital owned in their personal self-assessment tax return. The intention of this additional declaration is to enable HMRC to identify cases where a director’s dividend income appears inconsistent with their shareholding as declared to Companies House or where income-shifting arrangements may exist and merit further review.

Family investment companies (FIC)

Alternative structures such as a FIC may be worth considering. A FIC is a private company set up to hold, invest and distribute family wealth.

The typical structure involves parents as both directors and shareholders, retaining voting control through a single share class. Children or grandchildren are allocated different share classes with limited or no voting rights but entitlement to dividends and capital growth. Care must be taken where parents provide funds for the children’s share subscriptions or where the dividend policy is structured to benefit the children at the expense of the parents.

Suggested action

Directors should be wary of creating alphabet shares immediately before declaring a dividend or after substantial reserves have accumulated, as HMRC may view this as evidence of income shifting.

Generally, dividends should be paid into an account beneficially owned by the shareholder concerned. Genuine joint accounts are usually acceptable.

If a future sale of the company is anticipated, shareholders should consider the qualifying conditions for Business Asset Disposal Relief. Any restrictions attached to alphabet shares may affect eligibility.

Practical point

Failure to maintain proper documentation can increase the likelihood of an HMRC challenge. Directors should ensure the articles of association permit the creation of alphabet shares, board minutes and shareholder agreements are in place, and all dividend declarations are properly documented and implemented in accordance with the company’s articles.

Taxpayers within Self-Assessment must make payments on account towards their next tax and Class 4 National Insurance bill if the tax that they owed for the previous tax year was £1,000 or more, unless they paid more than 80% of the tax that they owed for that year outside Self-Assessment, for example, under PAYE. Each payment on account is 50% of the tax and Class 4 National Insurance liability for the previous tax year. The payments must be made by 31 January in the tax year and 31 July after the tax year. If more tax and Class 4 National Insurance is due for the year, the balance must be paid by 31 January after the end of the tax year.

Example

Tom is a self-employed gardener. In 2024/25 he had profits from self-employment of £45,000. He paid tax of £6,486 and Class 4 National Insurance of £1,945.80 – a total bill of £8,431.80.

As his total tax and Class 4 National Insurance bill is more than £1,000, he must make payments on account towards his 2025/26 bill. Each payment on account is £4,215.90 (50% of £8,431.80).

31 July 2026 deadline

The second payment on account for 2025/26 is due by 31 July 2026.

If payment is not made on time or the full amount is not paid by this date, interest will be charged from the due date of 31 July 2026 to the date that the payment is made in full.

Review the payments

As the July payment on account is made after the end of the tax year to which it relates, the profit for that tax year may be known. Where this is the case, the payment on account should be compared to the actual payments which will be due for the year. If taxable income has fallen, for example, because profits are less in 2025/26 than in 2024/25, the payments on account can be reduced.

Example

The facts are as in the example above. In June 2026, Tom does his accounts for 2025/26. During that year, he took some time off to care for his elderly mother. As a result, his profits have fallen and for 2025/26 are £36,000. His tax bill for 2025/26 is £4,686 and his Class 4 National Insurance bill is £1,405.80 – a total of £6,091.80.

If Tom makes two payments on account of £4,215.90, he will overpay by £2,240 Consequently, he reduces his payments on account.

Reducing payments on account

Where a taxpayer knows that their bill will be lower this year than last year, they can ask HMRC to reduce their payments on account. The taxpayer can do this online by signing into their personal tax account, selecting the option to view their Self-Assessment return and selecting the ‘reduce payments on account’ option. An application to reduce payments on account can also be made by post on form SA303.

Example

The facts are as in the above example. Tom opts to reduce each payment on account to £3,045.90 (50% of his 2025/26 liability). He paid £4,215.90 on 31 January 2026. He must therefore pay £1,875.90 by 31 July 2026. The payments on account will match his 2025/26 liability so there will be no balancing payment to make by 31 January 2027 (although the first payment on account for 2026/27 of £3,045.90 will be due by that date).

It is important to note that if the payments on account are reduced by too much, interest will be charged on the shortfall.

Where an employee is provided with a company van that is available for private use, a tax charge may arise under the benefit in kind legislation. However, this will not always be the case. Unlike company cars, where a van benefit charge does arise, it does not depend on CO2 emissions. Instead, it is a set amount.

If fuel is provided for private use in the van, a fuel benefit charge may also arise.

Electric vans

The van benefit for a zero-emission van is nil, regardless of the level of private use. Consequently, allowing an employee to use an electric van for private use is a valuable tax-free benefit.

Restricted private use

Where an employee is provided with a van other than one with zero emissions, it is still possible to avoid a benefit in kind charge if private use is restricted. The restricted private use condition comprises two tests, both of which must be met:

• the commuter use requirement; and
• the business travel requirement.

Both must be satisfied throughout the tax year (or part of the tax year for which the van is provided).

The commuter use requirement is met if:

• the terms on which the van is made available to the employee prohibit private use other than for the purposes of home to work travel (known as ‘ordinary commuting’) or travel between two places which for practical purposes is substantially home to work travel; and
• neither the employee nor a member of their family or household makes private use of the van other than for these purposes.

However, as long as any other private use is insignificant, the commuter use requirement is treated as met. HMRC cite the following as examples of insignificant private use:

• taking an old mattress or other rubbish to the tip once or twice a year;
• making a slight detour on the way to work to drop a child at school or to stop at a newsagent; or
• calling at the dentist on the way home from work.

By contrast, the use of the van to do a weekly supermarket shop, on a holiday or outside work for social activities is not regarded as insignificant and if the van is used in this way, the restricted private use exemption will not apply.

The second limb of the restricted private use condition is the business travel requirement, which is that the main reason that the van is made available to the employee is because they need to undertake business travel in the van as part of their job.

Where the restricted private use condition is met, the benefit in kind charge is nil.

Unrestricted private use

If the employee is able to use the van other than for ordinary commuting and the van is not an electric van, a tax charge arises under the benefit in kind legislation. For 2026/27, the taxable amount is £4,170 (up from £4,020 for 2025/26). Unrestricted private use of a company van (other than an electric van) will cost a basic rate taxpayer £834 in tax and a higher rate taxpayer £1,668 in tax in 2026/27.

Pooled vans

No tax charge arises on a pooled van. This is a van that is available and actually used by more than one employee, no one employee uses the van to the exclusion of the others and any private use of the van is merely incidental. In addition, the van must not normally be kept overnight at or near an employee’s home.

Additional fuel charge

Where fuel is provided for unrestricted private travel in a van which is not an electric van, a separate fuel benefit charge arises. This is set at £798 for 2026/27 (up from £769 in 2025/26). A basic rate taxpayer will pay £159.60 in tax in 2026/27, and a higher rate taxpayer will pay £319.20 – this is likely to be less than cost of the fuel used for private use and can be a worthwhile benefit.

HMRC publish mileage rates for petrol, LPG and diesel and electric cars. The rates are known as the advisory fuel rates and are updated quarterly with effect from 1 March, 1 June, 1 September and 1 December. The rates are fuel-only rates, which can be used either to reimburse employees for fuel used for business travel in a company car or where an employee needs to repay the cost of fuel used for private journeys in a company car. For petrol, LPG and diesel cars, the rate depends on the engine size, whereas for electric cars the rate depends on whether the car was charged at a home charger or a public charger.

The rates applying from 1 June 2026 are as follows:

Engine size.        Petrol (rate per mile).  LPG (rate per mile)

1,400cc or less.    14 pence.                11 pence

1,401 cc to 2,000cc 17 pence.                13 pence

Over 2,000cc.       26 pence                 21 pence

Engine size                   Diesel (rate per mile)

1,600cc or less               15 pence

1,601cc to 2,000cc            17 pence

Over 2,000cc                  23 pence

Charging location             Electric (rate per mile)

Home charger                  7 pence

Public charger                15 pence

Reimbursing business travel

The rates can be used to reimburse an employee for business travel in a company car without a tax charge arising on the reimbursement. There will be no Class 1A National Insurance for the employer to pay either.

The employer does not have to use the advisory rates and can set their own rates instead. However, if the amount paid exceeds the advisory rates and the employer cannot show that the actual costs are higher than the advisory rates (and equal to the amount paid), the excess over the amount due at the advisory rates is taxable and must be included in earnings for Class 1 National Insurance purposes.

The rates should not be used to reimburse business travel in an employee’s own car. Instead, Approved Mileage Allowance Payments rates should be used. These are higher as they include an element for the costs of wear and tear, servicing and insurance.

Repaying private travel

If an employee has a company car other than an electric car, a fuel benefit tax charge will arise if the employer meets the cost of private travel. This is an all or nothing charge – the charge will apply if the employer meets the cost of any private mileage in the year. The charge can be significant as the amount charged to tax is found by applying the appropriate percentage used to work out the company car benefit by the multiplier for the year, which for 2026/27 is set at £29,200.

To avoid the charge, the employee must make good the cost of all fuel for private journeys. The amount which the employee will need to reimburse can be calculated using the advisory fuel rates. To eliminate the charge, the cost of private fuel must be repaid no later than 31 May after the end of the tax year if the benefit is payrolled and no later than 6 July after the end of the tax year if it is returned on the P11D.

The advisory rates do not need to be used if it can be shown that the employee has met the full cost of fuel for private travel by reimbursing at a lower rate.

There is no fuel benefit charge if the employer meets the cost of electricity for private journeys in an electric car, so reimbursement is not needed here.

In November 2025, the government announced a joint strategy involving HMRC, the Insolvency Service and Companies House to crack down on what is termed ‘contrived insolvencies’ i.e. company closures engineered to avoid paying tax through the use of so-called ‘phoenix companies’. The measures signal a tougher approach to directors who repeatedly abandon companies with unpaid tax liabilities before starting near-identical businesses.

What is ‘phoenixing’?

Phoenixing is where a company’s owners close that company and then shortly afterwards begin trading through a new company carrying on substantially the same business, often with the same customers, assets and management. The old company's debts, including unpaid tax, remain behind while the business effectively continues in a new corporate vehicle. This practice is known as ‘phoenixism’, because the new company rises from the ashes of the old one.

While this method of incorporating companies is not automatically illegal (an owner is permitted to close a struggling business and start again), problems arise where insolvency is deliberately used to avoid paying creditors, particularly HMRC, or to obtain a tax advantage. HMRC is now looking to treat this as a priority target.

Closing a company can save tax

Company profits are normally extracted as dividends, subject to income tax at the shareholder's marginal dividend tax rate (currently up to 39.35%). However, if the company is formally wound up, the payout is usually treated as proceeds from selling shares, taxed under the capital gains tax (CGT) rules at lower tax rates, the highest being 24%.

Qualifying shareholders may also get business asset disposal relief (BADR), reducing the tax rate even further. Although BADR has become less generous at 18%, this tax rate is much lower than that applicable if the distribution is  treated as income.

The difference in tax rates encourages some owners to close a company, take the proceeds as a capital gain at the lower rates, then start a near-identical company, turning what should be income into a gain.

The targeted anti-avoidance rule (TAAR)

To counter this practice, the TAAR permits HMRC to tax the liquidation proceeds as income instead of a capital gain if the winding up is undertaken mainly to obtain a tax advantage.

The rules apply where all the following conditions are met:

• Condition A: the individual receiving the distribution had at least a 5% interest in the company immediately before the winding up;
• Condition B: the company was a close company at any point in the two years ending with the start of the winding up;
• Condition C: the individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound-up company at any time within two years from the date of the distribution; and
• Condition D: it is reasonable to assume that the main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax.
• HMRC considers both the circumstances at the time of liquidation and subsequently afterwards when deciding whether the rule applies.

Targeting directors

Normally, a limited company is responsible for its own tax debts, not its directors.  However, HMRC can, in certain cases, make directors personally liable by issuing a Joint and Severable Liability Notice where HMRC believes there has been repeated tax avoidance, deliberate tax evasion or a pattern of ‘phoenixing’.

HMRC also intends to make greater use of its existing powers to require security deposits from businesses considered high risk. These deposits may cover future VAT, PAYE, NIC and other tax liabilities. Companies that continue trading after being required to provide security but fail to do so may commit a criminal offence.

Practical point

The latest strategy is aimed at directors who repeatedly leave unpaid tax behind through successive company failures. The three departments will share more information and target suspected abusive phoenix activity more effectively.

The tax code is fundamental to the operation of PAYE. It is made up of letters and numbers which take account of the allowances that you receive and also any deductions from those allowances, for example, to collect underpaid tax. If you have received a tax code for the 2026/27 tax year, it is important that you understand what it means and check that it is correct.

The number in the tax code tells the employer or pension provider how much tax-free pay you are entitled to for the tax year. The number is found by taking the personal allowances that the individual is entitled to for the tax year (if any). Deductions are made to collect unpaid tax, tax on untaxed income, such as interest received gross, tax on company benefits which have not been payrolled and the High Income Child Benefit Charge.

The final digit is removed to arrive at the number in the tax code. Where the code is a suffix code, a letter is added at the end. This may be L, M, T, M1, W1 or X.

L indicates that the person is in receipt of the standard personal allowance. For 2026/27, where a person is entitled to the standard personal allowance of £12,570 and has no deductions in their code, their tax code will be 1257L.

Code M indicates that a person has received the marriage allowance from their spouse or civil partner, while code N indicates that a person has transferred 10% of their personal allowance to their spouse or civil partner.

A T in the tax code indicates that the tax code includes other calculations to work out the personal allowances, for example, where adjusted net income exceeds £100,000 and the personal allowance is abated.

Codes that contain M1 and W1 indicate that the individual is on an emergency code operated on a non-cumulative basis. X also indicates an emergency code. NONCUM also indicates that tax is be calculated on a non-cumulative basis.

Where deductions exceed allowances, the number is preceded by a K (a K code).

There are also a number of special codes:

0T – the personal allowance has been used up elsewhere or a person has started a new job, and the employer does not have the details needed to give the employee a correct tax code;

BR – all income from the job is to be taxed at the basic rate;

D0 – all income from the job is to be taxed at the higher rate; and

D1 – all income from the job is to be taxed at the additional rate.

Where the taxpayer is a Welsh taxpayer, their code is preceded by a C. Scottish taxpayers have an S prefix, so that CD0 would be a Welsh taxpayer where all income from the job is taxed at 0the higher rate. As there are more Scottish rates of tax, there are more codes – SD0), SD1, SD2 and SD3, indicating that all income is taxed, respectively, at the Scottish intermediate rate, the Scottish higher rate, the Scottish advanced rate and the Scottish top rate.

Updating your code

If you think that your tax code is wrong, it may be because HMRC have missing or incorrect information. Taxpayers can update their details using the ‘Check your income tax online’ service on the Gov.uk website. If HMRC need to amend the code, they should do this within 15 days.

Taxpayers can also write to their tax office if they think that their code is wrong.

Different taxes have different rules, and it is important to consider the full picture. Looking at one tax in isolation may lead to an unexpected bill.

Most people are aware of the capital gains tax rule which allows spouses and civil partners to transfer assets or a share in an asset between them at a value which gives rise to neither a gain nor a loss – the transferee simply takes on the transferor’s base cost. This can be handy when putting a house or a flat into joint names.

However, while there may be no capital gains tax to pay on the transfer, it may give rise to a stamp duty land tax (SDLT) liability.

Nature of SDLT

SDLT is payable on the purchase of land and buildings in England and Northern Ireland. It is charged on the ‘chargeable consideration’. This will usually be the amount that is paid for a property. It may also include fees paid to secure the property, for example, where a property is bought at auction, any auction fee payable by the buyer.

However, the definition of chargeable consideration also includes any debt or obligation taken on by the purchaser, even if little or no cash changes hands. This includes taking over a share of a mortgage and it is this which often catches couples out.

If there is no chargeable consideration, there is no SDLT to pay. This would be the case on a gift between individuals of a property where there is no associated transfer of debt.

The debt trap

Spouses and civil partners can be caught out when they put a property into joint names and also put the mortgage into joint names. This can unwittingly trigger an SDLT charge, even though no cash changes hands.

Example

Lucy and Ben live together in a house owned by Lucy. Following their marriage, Lucy transfers a 50% share of the house to Ben. Lucy paid £500,000 for the house on which she has a £400,000 mortgage. They also put the mortgage into joint names. At the date of the transfer, the house is worth £600,000.

There is no capital gains tax to pay as the no gain/no loss rules apply.

However, for SDLT purposes, there is chargeable consideration of £200,000 (the share of the mortgage assumed by Ben). He must pay SDLT of £1,500 ((£125,000 @ 0%) + (£75,000 @ 2%)).

Separation and divorce

Where property is transferred between spouses and civil partners on separation where this is likely to prove permanent or on divorce or the dissolution of a civil partnership, there is no SDLT to pay even where one partner takes over the other’s share of a mortgage.

Avoiding the trap

Aside from the rather drastic step of separating or divorcing, couples can avoid an unwanted SDLT charge where circumstances allow by either clearing the mortgage or reducing the share of the debt taken over to below £125,000 where the couple only have one residential property and to below £40,000 where the property is a second or subsequent property.

Where first year allowances, such as the Annual Investment Allowance or full expensing, are not claimed in respect of capital expenditure on plant and machinery, or not claimed in full, relief is instead given by way of writing down allowances (WDAs). The rate at which the allowance is given depends on whether the expenditure is main rate expenditure of special rate expenditure.

Special rate pool

Expenditure is allocated to the special rate pool where it relates to integral features, items with a long life, solar panels, thermal insulation or cars with CO2 emissions above a certain threshold. For cars purchased on or after 6 April 2021, cars with CO2 emissions of 50g/km or above are added to the special rate pool. Special rate expenditure attracts WDAs at the rate of 6% per annum on a reducing balance basis. As for all capital allowances, there is no requirement to claim them or claim the full amount.

Main rate pool

Expenditure not relieved by first year allowances on plant and machinery that was not allocated to the special rate pool is allocated to the main rate pool. The rate of main rate WDAs fell to 14% from 1 April 2026 for companies and from 6 April 2026 for individuals. Previously, the rate was 18%. The allowance is given on a reducing balance basis.

Where the accounting period spans the date on which the rate changed, a hybrid rate applies for that accounting period which is based on the proportion of the period falling before the rate change and the proportion falling on or after the rate change.

Example

A Ltd prepares accounts to 30 June each year. At the start of the accounting period, the brought forward balance on the main rate pool was £150,000. During the year, the company purchases two new cars with CO2 emissions of 20g/km, costing £35,000 each. The expenditure is added to the main rate pool.

The rate of main rate WDAs is 18% prior to 1 April 2026 and 14% on or after that date. As the year to 30 June 2026 spans the date on which the rate changed, it is necessary to calculate a hybrid rate for that period.

In the year to 30 June 2026, 274 days fell before 1 April 2026 when the rate was 18% and 91 days fell on or after 1 April 2026 when the rate was 14%. The hybrid rate is therefore 17% ((274/365 x 18%) + (91/365 x 14%)).

The company can claim main rate WDAs for the year to 30 June 2026 of £37,400 (17% (£150,000 + £35,000 + £35,000)).

Mandatory payrolling was due to come into effect from 6 April 2027. However, it has now been announced that the introduction will be phased in, with mandatory payrolling only applying to benefits in kind in phase one from 6 April 2027, with all remaining benefits in kind (with the exception of taxable cheap loans and living accommodation benefits) being brought within mandatory payrolling from 6 April 2028. From the same date, employers will be able to opt to payroll taxable cheap loans and living accommodation benefits if they register to do so before the start of the 2027/28 tax year. These benefits are to be brought within mandatory payrolling from a later date.

Nature of payrolling

Under payrolling, the taxable amount of a benefit in kind is treated like extra pay which is paid to the employee with the same frequency as their cash pay. For example, if a monthly paid employee receives medical insurance with a cash equivalent value of £600, the employee’s gross pay for PAYE purposes each month would include £50 in respect of the medical insurance benefit. Tax is worked out on the total gross pay in the pay period and deducted from the employee’s cash pay.

As most benefits in kind are within Class 1A National Insurance, rather than Class 1, the payrolled benefit is not included in gross pay for National Insurance purposes.

Phase one

Mandatory payrolling is phased in from 6 April 2027. From that date it will apply to:

• company cars;
• car fuel;
• company vans;
• van fuel; and
• medical benefits.

Employers must payroll these benefits from that date. For 2027/28, payrolling is optional for other benefits in kind including taxable cheap loans and living accommodation benefits. There is no need to register benefits for which payrolling is mandatory. However, where a benefit is to be payrolled voluntarily in 2027/28, it must be registered for payrolling before the start of that tax year.

Phase two

From 6 April 2028, mandatory payrolling is extended to all other benefits in kind with the exception of taxable cheap loans and living accommodation benefits from 6 April 2028 (however, employers will be able to opt to payroll these voluntarily as long as they are registered for payrolling before the start of the new tax year).

Class 1A National Insurance

For 2026/27 and earlier tax years, Class 1A National Insurance is included in the Class 1A National Insurance calculation on the P11D(b). The liability is paid in a single lump sum after the end of the tax year. Payment must be made by 22 July following the end of the tax year where payment is made electronically or by 19 July if payment is made by cheque.

However, under mandatory payrolling, the associated Class 1A National Insurance will be reported through Real Time Information on the Full Payment Submission each month and paid over to HMRC with the PAYE and Class 1 National Insurance for the month. This will bring forward the payment date and may have cashflow implications for employers.

During the move to in-year collection, employers may pay some Class 1A National Insurance monthly and some after the end of the tax year.

Impact on P11D and P11D(b)

Where a benefit is payrolled, it is not reported on the P11D. The introduction of mandatory payrolling will render the P11D obsolescent. For 2028/29 and later tax years, it will only be used to report taxable cheap loans and living accommodation where the employer has not opted to payroll these.

As noted above, under mandatory payrolling, Class 1A National Insurance contributions are reported and paid in-year. This will mean that benefits in kind within mandatory payrolling will not be included in the Class 1A calculation on the P11D(b). For 2028/29 and later tax years, the P11D(b) will only be used to calculate the Class 1A National Insurance liability on taxable cheap loans and living accommodation benefits where these are not payrolled.

Explaining bank receipts as gambling winnings might prove difficult when it comes to convincing HM Revenue and Customs.

Many people enjoy a 'flutter' on the outcome of sporting events. Most people have the occasional win, but lose money in the long run.

Is it a business?

However, a small number of regular gamblers make money over time (i.e., winnings exceed losses overall). This sometimes attracts the attention of HM Revenue and Customs (HMRC). So, the question arises: can gambling amount to a taxable trade or profession? HMRC's 'basic position' is that betting and gambling do not constitute a trade. However, HMRC's Business Income Manual states (at BIM22015): '…an organised activity to make profits out of the gambling public will normally amount to trading.'

In the case of 'professional' gamblers, HMRC's guidance states: 'The fact that a taxpayer has a system by which they place their bets, or that they are sufficiently successful to earn a living by gambling does not make their activities a trade' (BIM22017). There is long-established case law supporting this proposition (Graham v Green, KB 1925, 9 TC 309).

Bank receipts from gambling

Alternatively, if the individual owns a business (unrelated to gambling) and HMRC enquires into unidentified receipts into the individual's bank account, the individual may end up having to convince the tax tribunal that the receipts represent gambling winnings, as opposed to undeclared business receipts. For example, in *J & F Wilson Plumbing & Heating Ltd & Anor v Revenue and Customs* [2026] UKFTT 403 (TC), an individual (FW) was the sole director of a company. HMRC raised concerns in relation to several of the company's accounting periods. The company's agent replied and provided bank and credit card statements, and an analysis of FW's personal bank receipts. The agent accepted that some company card receipts were paid into FW's personal account. Further information was subsequently provided. The agent asserted that certain sums deposited into FW's personal account came from gambling windfalls.

Following enquiries, HMRC considered that company income had been misrouted to the director's personal account. Furthermore, in the absence of any supporting evidence, HMRC rejected explanations that the large cash deposits (and cash used to fund vehicle purchases) were from non-taxable gambling windfalls. The company and FW appealed. The First-tier Tribunal (FTT) accepted FW's evidence that he saved his gambling winnings and did not live a lavish lifestyle. The FTT was also satisfied that the absence of any documentary evidence (e.g., ticket stubs or betting slips) was down to the fact that FW was hiding his increasing gambling addiction from his former partner. The FTT considered that FW's evidence that he stopped gambling after an ultimatum from his former partner in 2018 was consistent with the lack of any further cash deposits from that point. The FTT concluded that the source of the disputed cash was gambling winnings. FW's (and the company's) appeal was allowed.

Practical tip

Keep records to substantiate gambling winnings. The individual in the above case was perhaps fortunate that the FTT was prepared to accept his explanations in the absence of adequate supporting records. HMRC guidance in its Enquiry Manual warns that it is highly improbable for an individual punter to beat the professionals regularly and consistently at their own game, and that such a claim should not be accepted without compelling evidence, with the matter put to the tribunal where necessary.

Some of the potential traps in using trusts to pay school fees.

Given the increase in school fees over the last 20-30 years, and more particularly since January 2025 with the application of VAT to such fees, there has never been more incentive to pay those fees in a more tax-efficient manner.

Trusting in trusts - By using a trust, whose beneficiaries are the children attending the school, those children are essentially the taxpayers of the trust income being used to pay the fees; with children also having an income tax personal allowance and usually a full basic-rate band, the income in their hands (via the school's bursar) is subject to a lower tax rate than that of their parents.

An income-producing source is placed into trust – usually family private companies – with alphabet shares to ensure that income going to the trustees is tailored to meet the school (and associated) fees.

By having trading company shares, the trustees can usually benefit from business property relief (BPR) for inheritance tax purposes – from April 2026, each trust (or each settlor) has the same £2.5m BPR allowance for 100% relief as well as nil-rate bands; this will help mitigate tax due every ten years and if shares are distributed to the beneficiaries when they are older.

Which trust? - Usually, a discretionary trust is used so income distributions can be made to the minor beneficiaries (or often the school directly on their behalf) as and when they are necessary. Whilst the trustees' income is taxed at additional rates, the income distributions come with a refundable 45% tax credit – the children will be taxed on the gross distribution but with the tax credit, the children will usually end up getting back most of that tax, which can also help with school costs (trips, clubs, etc.).

The tax on the income is shouldered by the child, who also receives the excess tax paid by the trustees; however, the trustees have to pay this additional rate tax, so there can be a strain on the cash flow.

An alternative is to use an interest-in-possession (IIP) trust, whereby the income arising within the trust belongs to the beneficiary, with no discretion from the trustees (their discretion is confined to the capital). IIP trustees pay income tax at the basic rate on the beneficiaries' behalf, who then only pay higher or additional-rate tax depending on their marginal rate. That income from the trust can still be used to pay school fees in the same way as with discretionary trusts.

What is the issue? - The beneficiaries (as school children) are under 18, so if the income arises from a gift by their parents, those parents are taxable on the income. The 'settlements' legislation applies when a gift (or any form of 'settlement') is made and the person who makes it (the 'settlor') or their spouse or minor unmarried child can benefit from the settlement – such as a parent putting shares into trust for the benefit of their own children; if this is the case, the settlor of the trust will be taxable.

The easiest way around this is for someone other than the children's parents to place the shares into trust – the grandparents being the most common example.

However, the grandparent must be a genuine settlor, and this is where the risks can present themselves. If the parent can be shown as the true settlor, then HMRC can impose the settlements legislation; the definition of a settlor is very wide and indirect or even reciprocal arrangements can be caught. If the grandparents were given the shares by the parents or able to obtain them in any non-commercial way, then that would likely be caught.

Practical tip - Trusts can be used to pay school fees on behalf of minor children in a tax-efficient way, but the genuine settlor of the trust must be anyone other than their parents.

Not all taxpayers owe money – sometimes they are due a repayment. This may be for a number of reasons and the method by which that repayment is obtained varies depending on which type of tax the repayment relates to. The rules also differ depending on whether the repayment arises from an amended return, a claim or another form of tax adjustment. Different taxes have different deadlines by which a refund can be claimed. However, missing that deadline need not mean the refund is lost forever.

PAYE repayment

Many taxpayers, particularly those whose income is fully or partly taxed under PAYE may not be aware that an overpayment has arisen until they receive a tax calculation from HMRC. For PAYE taxpayers, HMRC can reconcile the information it receives from employers, pension providers and benefits offices and calculate the tax position from that information. To reclaim, the taxpayer can claim online or via the HMRC app, through their personal tax account or by contacting HMRC direct. The refund will then be made via a cheque or the online bank transfer service. Note that HMRC only issues a simple assessment when the taxpayer owes tax.

Self-assessment

Should the taxpayer be subject to self-assessment and a refund is due once their tax return has been prepared, a claim should be made on that return. HMRC instructions state that if any tax is due within 45 days of the return being submitted, the refund will be deducted from any tax owed. However, some taxpayers find that the completion of the refund section of the return is not always actioned and the refund sits in the taxpayer’s account. The taxpayer then has the choice of either leaving the refund where it is or completing a claim online. Depending on the taxpayer’s circumstances, many decide to leave the refund where it is which will then be deducted from the next payment on account should the taxpayer be liable.

Where a taxpayer has overpaid but has not yet made a self-assessment return, they can recover the overpayment during the tax year, by making a claim to amend their payments on account.

Missing a deadline

Although the deadline for submitting a return is 31 January after the tax year end, should any amendment be required, including a claim for loss relief against general income (whether producing a repayment or not), an amendment can be made within 12 months of the normal filing date. However, HMRC strictly adheres to this deadline and another method of claiming must be used if more than 12 months have passed since the self assessment filing date.

Not every tax relief is obtained simply by claiming on a tax return. Some reliefs require a separate claim, with the general rule being four years from the end of the relevant tax year. However, some claims have shorter or otherwise specific periods, e.g. the deadline for a claim to carry back losses against the previous year’s profits is first anniversary of the normal 31 January self-assessment filing date for the loss-making year. Where a loss is stated in a company tax return and the return can no longer be amended, the loss becomes final.

Overpayment relief – A possible alternative

Where tax has been overpaid and the ‘general’ amendment or claim route is no longer available, overpayment relief may provide a possible alternative. The claim can be made to recover income tax, CGT, Class 4 NIC or corporation tax. However, as ever with tax, there are restrictions, notably that the claim must be made within four years after the end of the ‘relevant tax year or accounting period’ (tax year for non corporate repayments and accounting period for corporation tax overpayments).

Should the claim be as a result of a mistake made on the return, the ‘relevant tax year or accounting period’ is the one covered by that return. For any other tax overpayment, the ‘relevant tax year or accounting period’ is the one in which the tax was actually paid.

VAT

The four years ‘general’ deadline also applies to overpayments of output VAT. Depending on the amount (over or under £10,000), the taxpayer can either adjust the return for the period in which the over declaration was discovered or claim a refund by making an error correction notification.

Practical point

‘Overpayment relief’ should not be relied upon if a deadline is missed. It is not a concession; therefore, a claim must be carefully prepared.

A consideration of when business entertainment is allowable and circumstances in which it is not.

HMRC has stated that expenditure on business entertainment cannot be claimed as a deduction against profits (and is therefore also non-VAT-recoverable), even if a genuine business expense. However, that is not entirely correct – there are exceptions.

What is 'entertaining'? - The rules are designed to prevent tax relief from being used to subsidise personal or social costs, but interestingly, there is no legal definition of 'entertaining'. Therefore, HMRC has taken a broad interpretation, treating any hospitality provided free of charge as entertaining. In practice, HMRC accepts the cost of light refreshments (e.g., tea, soft drinks, biscuits, etc.) provided and does not normally challenge such claims, provided the provision does not amount to hospitality in its own right. The position becomes more complicated where meetings are accompanied by more substantial catering.

HMRC's guidance in its Business Income Manual at BIM45034 provides a useful test of whether the expenditure would have been incurred had the guest not been present. If not, the cost is likely to constitute business entertainment. HMRC cites a common example in which a director or employee takes a customer to lunch. Here, the full cost is generally disallowed, as the expenditure would not have arisen but for the customer's presence. The employee's meal is treated as incidental to the entertainment provided to the customer and is similarly disallowed. HMRC's view is that entertainment provided to customers and other external business contacts is blocked for both tax and VAT purposes. Relief is possible only where entertainment is provided exclusively to non-customers (i.e., employees).

Entertaining employees - Where entertainment is provided exclusively for employees, tax relief can usually be claimed. Difficulties arise where attendees include non-employees, such as spouses, family members or other guests. In such cases, only the proportion relating to employees is recoverable. HMRC also accepts VAT recovery where directors attend staff functions alongside employees, provided the event is genuinely for staff generally. Input VAT recovery will normally be denied should the event be exclusively for directors and partners. The benefit-in-kind exemption for annual functions remains available where the statutory conditions are met. The £150 limit is an exemption rather than an allowance and can apply even where the only employees are directors. Note that this exemption is commonly termed the 'Christmas party' exemption; however, it applies to any annual event.

Contractual obligation - Despite the disallowance rules, tax relief and VAT reclaim are possible should the business entertainment be supplied under a contractual obligation (i.e., an obligation that requires the other party to provide something of value in return). A deduction will be allowed so long as the obligation is genuine and the business can demonstrate a full and real value of return for the entertainment. The key issue is whether there is a genuine quid pro quo. Typical examples include hospitality supplied as part of a package of services for which consideration is received, or where attendance at an event forms part of a contractual sponsorship arrangement. A comment by HMRC at BIM45014 should be noted. The section states that for entertainment to be allowable, something of equivalent value must be given in return: HMRC notes that a merely token gesture, such as filling out a questionnaire, would not represent adequate value for the hospitality provided.

Stick to the rules - It is important for businesses to track and document their business entertainment expenses to ensure compliance. Records should clearly identify:

- the individuals entertained;

- their relationship to the business;

- the business purpose; and

- the allocation between employees and non-employees where relevant.

As with other business records, documentation should generally be retained for at least six years.

Practical tip - It should not be assumed that where hospitality is provided in a commercial context, the business entertainment rules apply automatically. Further investigation may be needed to determine whether the expenditure constitutes gratuitous hospitality or forms part of a transaction in which identifiable value is received.