Expenses that landlords can deduct
Landlords must pay tax on any profit from their property rental business (although income from property of less than £1,000 a year can be ignored). In working out the profits, expenses are deducted from rental income. To ensure that the landlord does not pay more tax than is necessary, it is important to deduct all allowable expenses. Remember, the profit calculation is undertaken for the property income business as a whole, not on a property by property basis. Consequently, it does not matter whether the expenses incurred in relation to an individual property exceed the rental income from that property – it is the overall result that matters.
Cash basis - From 6 April 2017, the cash basis is the default basis for eligible landlords.
Allowable expenses - An expense is an allowable expense if it is incurred wholly and exclusively for the purposes of renting out the property.
Common examples of expenses which may be allowable include:
Interest and other finance costs - Relief is available for interest on a loan up to the value of the property when it was first let. However, the way in which relief is given for interest is changing from relief as a deduction from income to relief as a deduction at the basic rate from the tax that is due.
For 2017/18, relief for 75% of the interest costs is available as a deduction and relief for the remaining 25% as a basic rate tax reduction, for 2018/19, relief for 50% of the interest costs is available as a deduction, with relief for the remaining 50% as a basic rate tax reduction. For 2019/20, only 25% of the interest costs are deductible, with relief for the remaining 75% being given as a basic rate tax reduction. From 2020/21 relief for interest is given as a basic rate tax reduction.
Vehicles - A deduction for vehicle costs can, from 6 April 2017 onwards, be claimed using the approved mileage rates. This is generally easier than working out the deduction based on actual costs (although this method can be used if preferred). The rates are as follows:
Vehicle Rate - Cars and vans 45p per mile for first 10,000 business miles in the tax year
25p per mile for subsequent miles
Capital expenditure under the cash basis - Under the cash basis, expenditure for capital items is deductible unless specifically disallowed. Capital items for which a deduction is not allowed include land and cars.
Domestic items - Where the property is let furnished, a deduction is allowed for replacement domestic items, as long as they are of an equivalent standard to the item being replaced. A deduction is not allowed for enhancement expenditure.
Property allowance - A property allowance of £1,000 is available. Property income of less than £1,000 does not need to be reported to HMRC. Where income exceeds £1,000, the £1,000 allowance can be deducted instead of deducting actual expenses. This will be beneficial where actual expenses are less than £1,000.
Director’s loan accounts: recording personal expenses
HMRC commonly find errors in relation to directors’ loan accounts when making routine reviews of company tax returns. This article looks at the importance of maintaining proper records of cash and non-cash transactions between the company and the directors.
Directors’ personal expenses
A statutory rule states that a company may not deduct expenditure in computing its taxable profits unless it is incurred ‘wholly and exclusively’ for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur ‘personal’ expenses. However, many companies, particularly 'close' companies (broadly, one that is controlled by five or fewer shareholders (participators)), pay the personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense and may not therefore be deductible for corporation tax purposes. In such circumstances it may be appropriate for these items to be set against the director's loan account. However, establishing whether a payment forms part of a director's remuneration package can be complex.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director's loan account.
Cash transactions between the company and directors may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.
Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or mis posted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors' loan account balances may be incorrect resulting in s 455 tax being underpaid, or corporation tax relief not claimed by the company at the appropriate time.
Employer childcare vouchers v Government scheme
Employees who joined their employer’s childcare voucher or employer-supported childcare scheme before 4 October 2018 can remain in that scheme and benefit from the associated tax relief for as long as the employer continues to offer it. However, this may not always be the best option for the employee – depending on their circumstances they may be better signing up to the Government’s top-up scheme instead.
Tax relief for employer-provided vouchers
Employees who joined an employer childcare voucher scheme or directly contracted childcare scheme prior to 4 October 2018 can continue to receive the associated tax relief. Vouchers or directly-contracted childcare are tax and National Insurance free up to the exempt amount. This depends on when the employee joined the scheme and, where the employee joined the scheme on or after 6 April 2011, the rate at which they pay tax.
The exempt amount is set at £55 per week where the employee joined prior to 6 April 2011; for employees joining after that date, the exempt amounts are £55 for basic rate taxpayers, £28 per week for higher rate taxpayers and £25 per week for additional rate taxpayers (ensuring the relief is worth £11 per week to all taxpayers).
Each employee is only entitled to one exempt amount to cover childcare vouchers and directly-contracted care, and regardless of how many children they have. However, each parent can benefit from their own exempt amount.
Childcare vouchers and directly-contracted care can be provided via a salary sacrifice or other optional remuneration arrangement without triggering the alternative valuation rules. This means that the tax exemption is preserved where provision is made in this way.
Under the Government scheme, parents can open an online account and receive a tax-free top up of 20p for every 80p that they deposit into the account. The maximum top up is £2,000 per child per tax-year. The Government scheme cannot be used in conjunction with universal credit or tax credits.
Which scheme is best?
Parents cannot benefit from both the employer scheme and the Government scheme, so must choose which is best for them.
Where the employee joined the employer scheme on or after 6 April 2011, the tax relief from employer scheme is worth £11 per week (£583 per year (based on 53 weeks) if one parent receives the vouchers and £1166 if two parents do.
Under the Government scheme, the parents would need to contribute £2332 to receive a top-up of £583 and £4664 to receive a top up of £1166. To benefit from the maximum £2,000 top-up, the parents would need to contribute £8,000.
There is no substitute for crunching the numbers – parents should consider both options and decide what is best for them.
What can be done with business losses?
Providing a business is being undertaken on a commercial basis with a view to making a profit, it is generally possible to claim relief for trading losses.
Relief for trading losses may be obtained in a variety of ways, including:
• set-off against other income in the same or preceding tax year, for example against employment or pension income;
• carry-forward against subsequent profits of the same trade;
• carry-back in the early years of a trade;
• set-off against capital gains of the same or preceding tax year; or
• carry-back of a terminal loss.
It is worth noting here that anti-avoidance rules mean that loss relief will be restricted for individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.
Cap on relief - Trade loss relief against general income, and early trade losses relief are two areas where claimable relief is capped. The cap is set at £50,000 or 25% of income (as defined in the legislation), whichever is greater.
The cap applies to the year of the claim and any earlier or later year in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.
Early years of trade - Where a loss is incurred in any of the first four tax years, the loss can be carried back against total income of the three previous tax years, starting with the earliest year.
This relief often helps new businesses in the first few years of trading. If tax has been paid in any of the previous three years, for example from a previous employment, the taxpayer should be entitled to a repayment of tax.
Set against total income - Relief for the trading loss of a tax year can be claimed against the taxpayer’s total income of that tax year and/or the preceding tax year, in any order. This gives a certain amount of scope to maximise loss relief in the most beneficial way.
Where a claim is made to relieve profits in one basis period by losses of both the same basis period and a subsequent period, the claim for the loss in the same period takes precedence.
Where basis periods overlap, and a loss would otherwise fall to be included in the computations for two successive tax years (opening years), it is taken into account only in the first of those years.
Relief is not normally available for farming and market gardening losses, where losses were also incurred in the previous five years (calculated before capital allowances).
Carry forward of losses - Where a trader makes a loss in a year, but does not have any other income against which the loss can be set, he or she can carry it forward indefinitely and use it to reduce the first available profits of the same business in subsequent years.
Setting losses against capital gains - A taxpayer can also set any losses arising from a business against any chargeable capital gains. The relief can be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.
Incorporation - Where incorporation is being considered, it is usually permissible to carry forward any unused losses of the pre-incorporation business and set them off against the first available income derived from the new company.
Tax-free savings income of £18,500
Where income is mainly derived from savings, it is possible to enjoy tax-free savings income of up to £18,500 tax-free in 2019/20 in addition to that held in tax-free wrappers, such as individual savings accounts (ISAs).
The ability to enjoy savings income tax-free is made up of three components:
• the personal allowance;
• the zero-starting rate for savings; and
• the personal savings allowance.
The personal allowance
The personal allowance is available to set against all income. It is set at £12,500 for 2019/20, but is reduced by £1 for every £2 by which income exceeds £100,000.
Where the personal allowance is not set against other income, such as that from employment or self-employment or income from property, it can be used against savings income. So, for example, if a person has a pension of £8,000, the remaining £4,500 of the personal allowance could potentially be utilised against savings income.
Savings starting rate
The savings starting rate is set at 0% for 2019/20 and applies to up to the first £5,000 of taxable savings income but its availability depends on the individual’s other income. The savings starting rate is only available where taxable non-savings income is less than £5,000. Where the individual has no taxable non-savings income, the zero starting rate applies to £5,000 of savings income; where the individual’s taxable non-savings income is between £0 and £5,000, the savings starting rate band is reduced by the amount of the taxable non-savings income.
This would mean for example, if a person had a salary of £14,000, of which £12,500 is set against the personal allowance, the starting savings rate band would be reduced by their taxable income of £1,500 to £3,500.
Personal savings allowance
The personal savings allowance is available to basic rate and higher rate taxpayers only – additional rate taxpayers do not benefit from a personal savings allowance. For 2019/20, the personal savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. It is available in addition to the personal allowance and, where available, the savings starting rate.
Case study: £18,500 in tax free savings income
Albert is a pensioner. In 2019/20 his only income is savings income of £20,000.
The first £12,500 of his savings income is covered by the personal allowance.
As Albert has no taxable non-savings income, the starting savings rate of zero is available for the next £5,000 of his savings income.
Albert is also able to benefit from the personal savings allowance of £1,000, sheltering a further £1,000 of savings income.
As result of the above, Albert is able to enjoy the first £18,500 of his savings income tax-free (£12,500 + £5,000 + £1,000).
The remaining £1,500 (£20,000 - £18,500) is taxed at the basic rate of 20% - a tax bill of £300 on savings income of £20,000.
Minimising upheaval of an HMRC enquiry
Where a business receives an enquiry notification from HMRC, it does not always mean that something is wrong. Sometimes HMRC simply need some further information to ensure that a return is correct, for example, if the business recently received a lot of money, it would be reasonable for HMRC to ask where the funds came from. Returns are also selected at random for enquiry to make sure that the system is operating fairly.
Whatever the reason for the enquiry, being co-operative and open can make all the difference to the final outcome. In calculating the amount of any subsequent penalty, HMRC take taxpayer behaviour into account, including the extent to which information was freely and fully volunteered.
Good record-keeping is often a business’s only real defence in disputing HMRC claims. All businesses should, therefore, ensure that paperwork is kept in good order from the outset.
It is a good idea to set up a file to hold all correspondence between the business and HMRC relating to the enquiry, including copies of any documents sent. Records of telephone conversations, giving names, dates and contents covered, is also advisable.
In many cases the enquiry will be straight-forward. If an enquiry drags on excessively, the taxpayer can apply to the tribunal for a direction that HMRC give either a closure notice, or a partial closure notice, within a specified period. Whilst this course of action should be a ‘last resort option’, in some circumstances, reminding HMRC of its existence may be enough to help move things along.
ADR service - HMRC offer an alternative dispute resolution (ADR) service, which aims to provide an alternative way of resolving tax disputes by using an independent facilitator, who mediates discussions between the business and the HMRC caseworker in an attempt to resolve the dispute.
ADR can be used before and after HMRC has issued a decision that can be appealed against, and at any stage of an enquiry, including:
• during a compliance check when the business has been unable to reach an agreement with HMRC, or where progress in the enquiry has stalled;
• at the end of a compliance check, when a decision has been made that can be appealed against.
ADR does not affect the taxpayer’s right to appeal, or to ask for a statutory review.
The ADR service may be particularly useful where the facts of a case need to be firmly established, but where communications have broken down between the business and HMRC.
Once an application has been submitted, HMRC will advise within 30 days whether the case can be included in the ADR process. HMRC will then contact the taxpayer, or their representatives, and introduce them to their facilitator who will explain their role in more detail. Customers and their representatives will also be asked to complete an ADR Process Agreement to confirm participation and commitment to ADR.
The facilitator will be an HMRC member of staff who has undergone training in facilitation and has had no prior involvement with the dispute.
ADR does not suit every taxpayer. However, given the possibility of resolving matters for a fraction of the cost and time of taking a case to tribunal, for some, it may be worth trying. According to HMRC’s Annual Report and Accounts 2017-18, some 82% of cases accepted for ADR were fully or partially resolved, and some 94% of taxpayers and their representatives were satisfied/very satisfied with the ADR process.
Putting property in joint name – beware a potential SDLT charge
There are a number of scenarios in which a couple may decide to put a property which was previously in sole name into joint names. This may happen when the couple start to live together, get married or enter a civil partnership. Alternatively, it may occur if the couple take advantage of the capital gains tax no gain/no loss rule for spouses and civil partners to transfer ownership of an investment property into joint name prior to sale to reduce the capital gains tax bill.
While most people are aware that stamp duty land tax is payable when they purchase a property, they may be unaware of the potential charge that may arise if they put a property in joint names – it all depends on the value of the consideration, if any.
It should be noted that Land and Buildings Transaction Tax (LBTT) applies to properties in Scotland Land Transaction Tax to properties in Wales.
What counts as consideration?
The problem is that the definition of ‘consideration’ extends to more than just money – it also includes taking over a debt, the release of a debt and the provision of goods, works and services. So, while there may be no transfer of money when a couple put a property in joint names, if they also put the mortgage in joint names, depending on the amount of the mortgage taken on, they may trigger an SDLT charge.
Case study 1
Following their marriage, Lily moves into Karl’s house. They decide to put the property in joint names as well as the mortgage of £200,000. There is no transfer of money, but Lily assumes responsibility for half the mortgage. Lily is a first-time buyer having previously rented.
The valuable consideration is the share of the mortgage taken on by Lily, i.e. £100,000. As this is less than the first-time buyer threshold of £300,000, there is no SDLT to pay.
Case study 2
Anna has several investment properties in her sole name. She is planning on selling a property and expects to realise a chargeable gain of £30,000. As her wife Petra has not used her annual exempt amount, she transfers 50% of the property into Petra’s name to make use of this. There is a £50,000 mortgage on the property, which remains in Anna’s sole name.
There is no valuable consideration and no SDLT to pay.
Case study 3
Following their marriage, Helen moves into her new husband Michael’s home. The property is worth £700,000 and has a mortgage of £400,000. Helen gives Michael £100,000 from the sale of her previous home, which he uses to reduce the mortgage. They then transfer the remaining mortgage of £300,000 into joint name,
Helen had assumed that there would be no SDLT to pay as the £100,000 she had given Michael is less than the SDLT threshold of £125,000. However, the consideration also includes the share of the mortgage taken on of £150,000, so the total consideration is £250,000. As a result, SDLT of £2,500 (on the slice from £125,000 to £250,000 at 2%) is payable.
The whole picture
It is important to look at the whole picture when putting property in joint names – sharing the mortgage may trigger an unexpected SDLT bill.
No Minimum Period of Occupation Needed for Main Residence
Main residence relief (private residence relief) protects homeowners from any gains arising on their only or main home. However, there are conditions to be met for the relief to be available. One of the major ones is that the property is at some time during the period of ownership occupied as the owner’s only or main home. Where this is the case, the period of occupation as a main home is sheltered from capital gains tax, as is the final 18 months of ownership, regardless of whether the property is occupied as a main home for that final period.
Living in a property for a period of time is worthwhile to secure main residence relief, not least because doing so has the added benefit of sheltering any gain that arises in the last 18 months of ownership.
But, how long does the property have to be occupied as a main residence to trigger the protective effects of the relief?
Quality not quantity
A recent decision by the First-tier tax tribunal confirmed that there is no minimum period of residence that is needed to secure main residence relief – what matters is that there has been a period of residence as the only or main home.
The case in question concerned a taxpayer who ran a property development company and who purchased a property in which he intended to live in as a main home. The property was initially purchased through the company, but the taxpayer intended to obtain a mortgage to buy it from the company. He lived in the property for a period of two and a half months whilst trying to sort out his finances. As a result of the financial crash, he was only able to secure a buy-to-let mortgage, the terms of which precluded him living in the property. The property was let to a friend, but the taxpayer moved in briefly following the friend’s death and undertook some decorating with a view to moving back in with his family. Due to health problems, this did not happen and the property was sold, realising a gain.
The Tribunal found that the taxpayer had lived in the property as a main home, albeit for a short period. It was the quality of occupation, not the quantity, that was important. Consequently, main residence relief was available.
Where a person owns a second home, living in it as a main residence, even if only for a short period, can be beneficial. This will protect not only the gain relating to the period of occupation from capital gains tax but also the last 18 months.
Partner note: TCGA 1992, s. 222; Stephen Bailey v HMRC TC06085.
PAYE settlement agreements
A PAYE Settlement Agreement (PSA) enables the employer to pay the tax and National Insurance instead of the employee on those benefits and expenses included within the PSA. This can be useful to preserve the beneficial nature of the benefit, for example in respect of a Christmas or other function falling outside the associated exemption, or where the effort involved in reporting the benefit on individual employees’ P11Ds is disproportionate to the amount involved.
What can a PSA be used for?
A PSA cannot be used for all benefits – only for those which fall into one of the following three categories:
• minor benefits and expenses – such as telephone bills, incentive awards outside the scope of the exemption and similar
• irregular items – such a relocation expenses or the occasional use of a company flat
• impracticable expenses and benefits in respect of which it is difficult to place a value on or to divide up between individual employees – such as staff entertainment or shared cars
A PSA cannot be used for cash payments or for high-value items such as company cars.
Items falling within the scope of the trivial benefits exemption can simply be ignored for tax and National Insurance purposes – they should not need to be included in a PSA.
Setting up and checking a PSA
To set up a new PSA, the employer should write to HMRC setting out the benefits and expenses to be included within the PSA. Once HMRC have agreed the PSA, they will send two draft copies of form P626. Both copies should be signed and returned to HMRC. HMRC will authorise the PSA and send a form back – this will form the PSA.
A new PSA must be agreed by 6 July following the end of the tax year for which it is to have effect.
A PSA is an enduring agreement. Once it has been set up it remains in place until revoked by either the employer or HMRC. Employers should check that an existing PSAs remain valid.
Impact of a PSA
Where a PSA is in place, the employee does not pay tax on any benefits included within the PSA – instead the employer meets the liability on the employee’s behalf. Also, there is no need to report benefits included in the PSA on the employee’s P11D, or to payroll them.
Instead the employer pays tax on the items included within the PSA grossed up at the employees’ marginal rates of tax. For Scottish taxpayers, the relevant Scottish rate of income tax should be used in the calculation.
As far as National Insurance is concerned, Class 1B contributions, which are employer-only contributions are payable at a rate of 13.8% in place of the Class 1 or Class 1A liability that would otherwise arise. Class 1B contributions are also due on the tax paid under the PSA (as the tax paid on behalf of employees is also a taxable benefit).
Settling the PSA
Form PSA1 should be used to calculate the amount of tax and Class 1B National Insurance due under the PSA. This should be sent to HMRC after the end of the tax year. The tax and Class 1B National Insurance must be paid by 22 October after the end of the tax year where payment is made electronically or by the earlier date of 19 October where payment is made by cheque.
Reporting expenses and benefits for 2018/19
Where employees were provided with taxable benefits and expenses in 2018/19, these must be notified to HMRC.
The reporting requirements depend on whether the benefits were payrolled or not.
Benefits not payrolled - Taxable benefits that were not payrolled in 2018/19 must be reported to HMRC on form P11D. There is no need to include benefits covered by an exemption (although take care where provision is made via an optional remuneration arrangement (OpRA)) or those included within a PAYE Settlement Agreement. Paid and reimbursed expenses can be ignored to the extent that they would be deductible if the employee met cost, as these fall within the statutory exemption for paid and reimbursed expenses.
The value that must be reported on the P11D depends on whether the benefit is provided via an OpRA, such as a salary sacrifice scheme. Where the benefit is provided other than via an OpRA, the taxable amount is the cash equivalent value. Where specific rules apply to determine the cash equivalent value for a particular benefit, such as those applying to company cars, employment-related loans, living accommodation, etc., those rules should be used. Where there is no specific rule, the general rule – cost to the employer less any amount made good by the employee – applies.
Where provision is made via an OpRA, and the benefit is not one to which the alternative valuation rules do not apply, namely:
• payments into pension schemes
• employer provided pension advice
• childcare vouchers, workplace nurseries and directly contracted employer-provided childcare
• bicycles and cycling safety equipment, including cycle to work schemes
• low emission cars (Co2 emissions 75g/km or less)
the taxable amount is the relevant amount. This is the higher of the cash equivalent under the usual rules and the salary foregone or cash alternative offered. The taxable amount is the cash equivalent value where the benefit falls outside the alternative valuation rules.
Payrolled benefits - Payrolled benefits should not be included on the P11D but must be taken into account in calculating the Class 1A National Insurance liability on form P11D(b).
P11D(b) - Form P11D(b) must be filed regardless of whether benefits are payrolled or notified to HMRC on form P11D. The P11D(b) is the Class 1A return, as well as the employer’s declaration that all required P11Ds have been submitted.
Paper or online - There are various ways in which forms P11D and P11D(b) can be filed. The simplest is to use HMRC’s online end of year expenses and benefits service or HMRC’s PAYE Online for employers service. Forms can also be filed using commercial software packages.
There is no requirement to file P11Ds and P11D(b)s online – paper forms can be filed if preferred.
Deadline - Regardless of the submission methods, forms P11D and P11D(b) for 2018/19 must reach HMRC by 6 July 2019. Employees must be given a copy of their P11D (or details of the information contained therein) by the same date. Details of payrolled benefits must be notified to employees by the earlier date of 31 May 2019.
Class 1A National Insurance must be paid by 22 July where paid electronically, or by 19 July where payment is made by cheque.
Main residence relief – beware when buying off-plan
Private residence relief exempts any gain arising on the sale of the only or main residence from capital gains tax. Where the property has been occupied as the main residence throughout the period of ownership, the whole gain is exempt; if the property has only been occupied as a main residence for part of the period of occupation, the gain eligible for relief is reduced accordingly.
A recent tribunal case highlighted the loss of relief that may potentially arise when a property is purchased off-plan.
The taxpayer, Mr Higgins paid a deposit to reserve an apartment in what was previously St Pancras station. Contracts were exchanged on 1 October 2006, but the purchase did not complete until 5 January 2010 as a result of delays in the construction of the apartment. Mr Higgins signed a contract to sell the flat on 15 December 2011; the sale completing on 5 January 2012. He lived in the property for two years, from 5 January 2010 until 5 January 2012. He claimed main residence relief in respect of the gain arising on sale.
HMRC sought to deny part of the relief relating to the period from which contracts were exchange – 1 October 2006 – to the date on which Mr Higgins occupied the property – 5 January 2010. For capital gains tax purposes, the period of ownership runs from the date of exchange of contracts, rather than from completion. However, main residence relief can only start from the date the property was first occupied. It did not matter that it was not physically possible to occupy the property in October 2006 as it did not exist at that point; and indeed Mr Higgins had no right to occupy the property until the sale had completed.
The Tribunal agreed with HMRC and accordingly the proportion of the gain relating to the 39 months from 1 October 2006 to 5 January 2010 was liable to capital gains tax as during that period the apartment was not occupied as a main residence.
Although extra-statutory concession D49 can provide relief where there is a delay of up to two years in taking up residence, the tribunal found the concession not to be relevant in this case.
Delay between exchange of contracts and completion
This decision is not only relevant where a property is purchased off plan. The start date for ownership for main residence relief purposes is the date contracts are exchanged, not the completion date (regardless of the fact the purchaser has no right to occupy the property until completion). Unless exchange of contracts and completion occur on the same day (which is not usually the case) there will be a window where, technically, main residence relief is not in point. In practice, where the delay is only a few weeks, HMRC usually ignore it and grant main residence relief.
The decision is this case is somewhat worrying – and something to be aware of when buying a new home. Extra-statutory concession D49 may help to bridge the gap where the delay in taking up occupation is beyond the taxpayer’s control.
Keeping records of rental income and expenses
Unless rental income is less than £1,000, landlords must declare it to HMRC and pay tax on any profit made by the property rental business.
The profit can be calculated by deducting allowable expenses from rental and other income of the property business. However, where it is beneficial to do so, the landlord can claim the property allowance of £1,000 and deduct this instead of actual expenses. This will work in the landlord’s favour where actual expenses are less than £1,000 (unless there is a loss to preserve).
To calculate profits (or losses) accurately, the landlord must keep records.
For all properties in the property rental business, a record should be kept of:
• the dates on which the property was let;
• rental income received;
• any income from services provided to tenants; and
• any other income.
The landlord should also keep supporting documentation, such as rent books, invoices and bank statements.
The landlord will also need to keep a record of expenses. Expenses can be claimed to the extent that they relate wholly and exclusively to the letting out of the property. Examples of expenses which typically may be incurred by a landlord include:
• agents’ fees
• advertising costs
• wages of staff
• repairs and maintenance
• replacing domestic items
• landlords’ insurance
The landlord should keep a record of all expenses incurred, and also supporting documentation, such as invoices, agents’ statements, bank statements, receipts, etc.
Where the property allowance is claimed instead, the landlord does not need to keep records of actual expenses. However, it is useful to do so in order to check whether claiming the allowance is beneficial, and also from a business perspective.
Method of keeping records - At the moment, the landlord can keep their records in the way that best suits them. They may prefer to use a software package designed for this purpose, a general accounting package or spreadsheets. Alternatively, they may prefer to keep manual records. What matters at this point is that adequate records are kept and will stand up to HMRC scrutiny if need be.
Looking ahead to Making Tax Digital - When Making Tax Digital for income tax purposes is rolled out to landlords, they will need to keep digital records and upload information up to HMRC quarterly via a digital account. The start date has yet to be announced, but at the time of the 2019 Spring Statement the Chancellor confirmed that it would not be introduced from 2020.
Voluntary National Insurance contributions – should you pay?
The payment of National Insurance contributions provides the mechanism by which an individual builds up their entitlement to the state pension and certain contributory benefits. Different classes of contribution provide different benefit entitlements.
Employed earners pay Class 1 contributions where their earnings exceed the lower earnings limit – set at £118 per week (£512 per month, £6,136 per year) for 2019/20. Self-employed earners pay Class 2 and Class 4 contributions, but it is the payment of Class 2 contributions only which provide pension and benefit entitlement. A self-employed earner is liable to pay Class 2 contributions where their earnings from self-employment exceed the small profits threshold, set at £6,365 for 2019/20. Where profits from self-employment are below the small profits threshold, the self-employed earner is not liable to pay Class 2 contributions but is entitled to do so voluntarily. For 2019/20, Class 2 contributions are payable at the rate of £3 per week.
Qualifying year - A year is a qualifying year is contributions have been paid for all 52 weeks of that year. If there are some weeks for which contributions have not been paid, the year is not a qualifying year. However, contributions can be paid voluntarily to make up the shortfall and turn a non-qualifying year into a qualifying year.
How many qualifying years are needed? - An individual needs 35 qualifying years to receive the full single-tier state pension payable to those reaching state pension age on or after 6 April 2016. To receive a reduced single tier state pension, at least 10 qualifying years are needed.
Should voluntary contributions be paid? - Voluntary contributions may be paid to make up the shortfall for a year where Class 1 or Class 2 contributions were not paid for the full 52 weeks or for a year for which there was no liability to either Class 1 or Class 2.
Before paying voluntary contributions, it is necessary to ascertain whether the payment of such contributions would be worthwhile. The starting point is to check your state pension. This can be done online at www.gov.uk/check-state-pension.
If you already have 35 qualifying years (or will do by the time state pension age is reached), there is no benefit in paying voluntary contributions. However, if you have less than 35 years, it may be worthwhile to increase your state pension. Likewise, if by state pension age you will have some qualifying years but less than 10, it may be worthwhile paying sufficient voluntary contributions to secure a minimum pension.
Class 3 contributions - Class 3 contributions are voluntary contributions and can be paid to boost the state pension.
For 2019/20, Class 3 contributions cost £15 per week. Thus, at these rates, to increase the state pension by 1/35th by paying voluntary Class 3 contributions for a year will cost £780. For 2019/20, the single-tier state pension is £168.60 per week, so at 2019/20 rates, each extra qualifying year (up to 35) is worth £4.82 per week.
Class 3 contributions must normally be paid within six years from the end of the tax year to which they relate – although extended time limits in certain cases.
Voluntary Class 2 - Where a person is entitled but not liable to pay Class 2 contributions, paying Class 2 contributions voluntary is a cheaper option, at £3 per week for 2019/20 rather than £15 per week.
Capital allowances – write off small pools
Businesses which are not using the cash basis can claim capital allowances for capital items that are used in the business, such as plant and machinery, tools and equipment, and so on.
Where the annual investment allowance, which gives an immediate 100% deduction against profits is not claimed, either because the allowance has been used up or because a claim is not beneficial, for example to prevent personal allowances from being wasted, relief for qualifying capital expenditure is given by means of a writing down allowance. Allowances are given at the rate of 18% on the main pool. A reduced rate (8% before 1/6 April 2019 and 6% thereafter) applies to assets in a special rate pool, for example high emission cars and integral features.
Small pools allowance
The legislation allows the whole balance of the main pool to be written off in a single year when the value of the pool is less than £1,000. This is known as the small pools allowance. The allowance, equal to the tax written down value of the pool, is claimed instead of the writing down allowance.
The £1,000 limit is adjusted proportionately where the accounting period is more or less than 12 months (so £500 for a six-month period and £1,500 for an 18-month period).
Ben is a self-employed website designer. He prepares accounts to 31 March each year. He purchased a computer and printer in April 2017 for a total cost of £1,400. To preserve his personal allowance, he claims a writing down allowance instead of the annual investment allowance. The cost of the computer and printer is allocated to the main pool.
In 2017/18 he claims a writing down allowance of £252 (£1,400 @ 18%). The tax written down value of the pool on 1 April 2018 is £1,148.
For 2018/19 he claims a writing down allowance of £207 (£1,148@ 18%). The tax written down value is £941.
For 2019/20, Ben claims the small pools allowance and is able to deduct the remaining pool balance of £941 from his profits instead of a writing down allowance of £169. This reduces his profits for the year by £772.
Assuming Ben is a basic rate taxpayer, claiming the small pools allowance will save him tax of £154 in 2019/20.
Employees: tax-free benefits to keep them healthy
More than 25 million working days are lost annually due to work-related ill health matters, including the two leading causes of workplace absence, namely back injuries and stress, depression or anxiety. There are however, several areas where employers can use tax breaks and exemptions to help promote health and fitness at work.
Gym facilities and memberships
In-house gym facilities may be offered to employees at a convenient location to fit in around work and there will be no tax or NIC liability arising if the following conditions are satisfied:
For employers who cannot practically provide in-house gym facilities, it may be possible to negotiate favourable membership rates with a local gym or leisure centre. Whilst this may lead to a tax liability for employees, the preferential rate can often be up to 20% - 30% cheaper than the normal price, so this is still an attractive offer for employees. Depending on how the cost of the gym membership is funded, the fees will either be taxed as earnings or as a taxable benefit-in-kind. So, for example, if an employer gives the employee additional salary to pay for their gym membership, the money is taxed as earnings through PAYE. If the employer pays the gym membership direct, a taxable benefit-in-kind arises on the employee and should be reported to HMRC on form P11D, or through the payroll.
Where an employer pays for a gym membership and the employee contributes towards the cost from their net pay (after tax and NICs), this is referred to as ‘making good’. The amount of the benefit (cost of gym membership) is reduced by the amount of the contribution.
Health-screening, check-ups and recommended treatments
A tax and NIC-free exemption allows employers to fund one health-screening assessment and/or one medical check-up per year per employee.
Subject to an annual cap of £500 per employee, employer expenditure on medical treatments recommended by employer-arranged occupational health services may be exempt for tax and NICs. ‘Medical treatment’ means all procedures for diagnosing or treating any physical or mental illness, infirmity or defect. Broadly, in order for the exemption to apply, the employee must have either:
Employer-funded eye, eyesight test, and ‘special corrective appliances’ (i.e. glasses or contact lenses) may also be exempt for ta and NICs, providing certain conditions are satisfied.
Many employees struggle to fit physical activity into their busy working days but research shows that being active for just one hour can offset the potential harm of being inactive. As fitness and health issues become increasingly popular, anything an employer can do to help is likely to be most welcomed by employees.
There may be occasions on which an employer provides an employee with a taxi either to or from work. As a general rule, where an employer pays for a taxi for an employee’s journey between home and work, there is a taxable benefit as journeys between home and work are regarded as private, rather than business, journeys.
However it might be possible to provide a taxi without triggering a tax liability.
Late night taxis - There is a specific tax exemption for the provision of late-night taxis home. However, as with all exemptions, it is only available if the associated conditions are met
There are four late working conditions, all of which must be met:
• the employee is required to work later than usual and until at least 9pm;
• this occurs irregularly;
• by the time that the employee ceases work, either public transport has ceased or it would not be reasonable to expect the employee to use public transport; and
• the transport home is provided by taxi or similar road transport.
Further, the provision of a tax-free taxi for late working and the failure of car sharing arrangements is capped at 60 occasions in the tax year.
Example - Polly works in a patisserie. To ensure that they are able to complete a large order for a wedding, Polly works until 10pm. Her normal working hours are 9am to 5pm.
Working late to finish orders happens occasionally. As the bus that Polly normally takes to work does not run after 8.30pm, her employer pays for a taxi home. She has provided a taxi on three previous occasions in the tax year when Polly has worked late.
The conditions for the exemption are met and no tax liability arises.
Failure of car sharing arrangements - The tax exemption also applies if the employer provides an employee with a taxi home from work where the employee’s normal car sharing arrangements fail. The exemption is available where the employee regularly travels to work in a shared car with one or more employees employed by the same employer and, due to unforeseen circumstances, the car sharing arrangement is unavailable. This may happen, for example, if the driver is taken ill and has to leave work early.
The cap of 60 tax-free journeys in the year applies to taxis provided either because the employee works late or the car sharing arrangements fail.
A trivial benefit? - Depending on the circumstances, it may be possible to provide a tax home tax-free by taking advantage of the trivial benefits exemption where the exemption for late night taxis or failed car sharing arrangements is not available.
However, it should not be assumed that this exemption will apply automatically if the cost of the taxi fare is less than £50.
One of the conditions that must be met for the trivial benefits exemption to apply is that the benefit must not be provided in recognition of services provided by the employee. This condition will fail, for example, if an employer provides a taxi home because the employee has worked later than usual. So if an employee works until 8pm and the employer provides a taxi home, the late-night taxis exemption will not apply as the employee has not worked until 9pm and the trivial benefits exemption will not apply as the taxi is provided in return for working late. The benefit will be taxable.
However, if the employer provides a taxi home after, say, a department meal out, the trivial benefits exemption may be in point.
Reducing your payments on account
Under the self-assessment system, a taxpayer is required to make payments on account – advance payments towards the eventual tax and National Insurance liability – where the previous year’s self-assessment bill was £1,000 or more, unless more than 80% of the tax liability is deducted at source, for example, under PAYE.
The self-assessment return for the 2017/18 tax year was due by 31 January 2019. It is the tax liability for 2017/18 which determines whether payments on account are due for 2018/19, and where they are, the amount of those payments.
Each payment on account is 50% of the previous year’s self-assessment tax and, for the self-employed, Class 4 National Insurance liability. Class 2 National Insurance, while payable under the self-assessment system, is not taken into account in working out the payments on account.
Where they are due, payments on account must be made by 31 January in the tax year and 31 July after the end of the tax year. Any final adjustment is made by 31 January after the tax year once the self-assessment return has been made, with any balance for the year being due by that date. Where the eventual liability is less than the payments made on account, the excess is refunded or set against the following year’s payments on account. However, HMRC may hold back the repayment where tax liabilities will fall due within the next 45 days until those liabilities have been paid.
Reduce your payments on account
If you know that your tax liability for the current year is going to be less than the previous year, you can apply to reduce your payments on account. This may be the case if you have suffered a downturn in trade or lost a major customer. If this is known at the time you file your self-assessment return, you can do this at the outset before you make the first payment on account. Alternatively, it can be done later in the year, for example once the accounting period has come to an end and the profit figure is known.
An application to reduce payments on account can be made online via the personal tax account.
Holly had a self-assessment tax and Class 4 National Insurance liability of £1,800 for 2017/18. Based on this, she is liable to make payments on account of £900 for 2018/19 by 31 January 2019 and 31 July 2019.
Holly prepares accounts to 31 March each year. She prepares her accounts to 31 March 2019 in April 2019, calculating that her tax and Class 4 National Insurance liability for 2018/19 is £1,400. As a result, she applies to reduce each payment on account to £700.
As she has already paid the first payment on account of £900, she claims a refund of £200. She makes the second (reduced) payment on account of £700 by 31 July 2019.
By 31 January 2020, she must pay her Class 2 National Insurance liability for 2018/19, together with the first payment on account of £700 for 2019/20 (being 50% of her 2018/19 liability).
Beware of reducing the payments on account too much as interest will be charged on any shortfall between the payments made and 50% of the actual liability.
Interest relief for renovation or development costs
Often, when a property is purchased there is work to be done before it can be let out or sold. Where this work is financed by a mortgage or other loan, the way in which and the extent to which relief is available for the interest costs depends whether it falls with the property income or trading income tax rules.
The following case studies illustrate the different approaches.
Case study 1: Buy-to-let investment
Simon buys a property as an investment, with the intention to let it out long term. The property has been neglected and needs doing up before he can put it on the rental market. The property costs £250,000 and Simon has budgeted £40,000 to renovate it. The purchase and refurbishment work are financed with savings of £70,000 and a mortgage of £220,000. Interest on the mortgage is £800 per month.
The purchase completes on 1 May 2018. The renovation work takes six months and the property is let from 1 November 2018. At the time the property is let, it is valued at £280,000.
Under the property income rules interest is allowed as a deduction or tax reduction (as appropriate) to the value of the property when first let. In this case the value of the property when first let (£280,000) is more than the mortgage of £220,000, so relief for the full amount of the interest is allowed in computing the rental profit. For 2018/19, 50% of the interest costs are deductible from the rental income, with relief for the remaining 50% being given as a basic rate tax reduction. For 2019/20, 25% of the interest costs are eligible as a deduction, with relief for the remaining 75% being given as a basic rate tax reduction.
Relief for the interest incurred in the renovation period before the property was first let is available under the pre-commencement provisions. These allow relief to the extent that it would be available had the interest been incurred while the property was let. The interest in the pre-letting period (i.e. that relating to the period from 1 May 2018 to 31 October 2018 of £4,800) is treated as incurred on the day that the property rental business commences, i.e. 1 November 2018.
Case study 2
David also buys a property to do up. However, his intentions are different to Simon in that he wishes to do the property up as quickly as possible and sell at a profit, buying a further property to do up with the proceeds. David is a property developer rather than a landlord and any interest costs incurred in funding the development are deductible under the trading provisions in computing his trading profit. This would be the case regardless of whether David operates as a sole trader or other unincorporated business or forms a company through which to carry out his property development business. Availability of the interest deduction depends on the ‘wholly and exclusively’ rule being satisfied.
Is tax payable on tips?
The question of whether tips and gratuities are taxable and subject to National Insurance Contributions (NICs) often results in a lively debate. Broadly, their treatment will depend on how they are paid to the recipient.
Cash tips handed to an employee, or say, left on the table at a restaurant and retained by the employee, are not subject to tax and NICs under PAYE, but the employee is obliged to declare the income to HMRC.
Where HMRC believe that employees in a particular employment are likely to have received tips which have not been declared, they will generally make an estimate of the tips earned on the basis of facts available to them. HMRC often make an adjustment to an employee’s PAYE tax code number to reflect the amount likely to be received during a tax year and the tax and Class 1 NICs due will be collected via the payroll.
By contrast, if an employer passes tips to employees that are either handed to them (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made. Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.
The obligation to operate PAYE remains with the employer where the employer:
• delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant; or
• passes tips/service charges to a tronc (see below) but the tronc is not a tronc for PAYE purposes.
Examples - Marcia, a restaurant owner, passes on all tips paid by credit/debit card to her employees. She has made a payment to her staff and must operate PAYE on these payments as part of the normal payroll.
Franco, also a restaurant owner, allows all cash tips left on tables to be retained in full by his staff. However, to ensure the kitchen staff receive a share, he collects all the cash tips and shares them out to the staff at the end of each day. Franco is involved in the sharing out of the tips and he must therefore include the amounts received as part of the payroll and operate PAYE on them.
Troncs - Where tipping is a usual feature of a business, there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. Such an arrangement is commonly referred to as a ‘tronc’. The person who distributes money from a tronc is known as a ‘troncmaster’. Where a person accepts and understands the role of troncmaster, he or she may have to operate PAYE on payments made. Broadly, under such arrangements the employer must notify HMRC of the existence of a tronc created and provide HMRC with the troncmaster’s name.
There are no hard and fast rules regarding how a tronc should operate and HMRC will apply the PAYE and NIC rules to the particular circumstances of each tronc. Where payments made from a tronc attract NICs liability, responsibility for calculating the NICs due and making payment to HMRC rests with the employer. If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his or her PAYE obligations, HMRC can direct the employer to operate PAYE on monies passed to the tronc from a specified date.
NICs - Legislation provides that any amount paid to an employee which is a payment 'of a gratuity' or is 'in respect of a gratuity' will be exempt from NICs if it meets either of the following two conditions:
• it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example by customers; or
• it is not allocated, directly or indirectly, to the employee by the employer.
Review business records - It is worthwhile checking that businesses treat tips and gratuities correctly. From time to time HMRC carry out reviews of employers’ records to make sure things are in order for PAYE, NICs and separately for the National Minimum Wage (NMW). Any errors in tax and NICs treatment could prove costly.
Practicalities of forming a partnership
Although a partnership can be a simple and flexible way for two or more people to own and run a business, unlike limited company status, partners do not have any protection if the partnership fails. If one of the partners resigns, dies, or goes bankrupt, the partnership has to be dissolved, even though the business itself may not need to cease.
Although there are no legal formalities involved in establishing a partnership, and a partnership may come into existence under an oral agreement, it is advisable that a formal partnership deed is drawn up. This is a legal document that sets out what each partner is responsible for and what they can expect from the business. Many partnerships ask a solicitor to help with the deed, but it is possible for the partners to drawn one up themselves. Note that although anyone can enter into a partnership, partners under the age of 18 cannot be legally bound by the terms of a partnership agreement.
With regards to tax and National Insurance Contributions (NICs), each partner is self-employed and takes a share of the profits. Usually, the partners share the decision-making and management of the business, but each partner is personally responsible for any (and potentially all) debts that the partnership incurs, and each person pays income tax and NICs on his share of the partnership profits.
As well as an active partner (or partners), a partnership may include a sleeping partner. Broadly, the sleeping partner contributes money to the business but doesn’t get involved in running it. This partner usually receives a smaller annual share of the partnership profits.
A partnership must appoint one of the partners (referred to as the ‘nominated officer’) to complete a partnership tax return each year and submit it to HMRC. This return includes a Partnership Statement, which shows how profits or losses have been divided amongst the partners. The nominated partner is also obliged to provide each partner with a copy of the Partnership Statement to assist them with completing their own personal tax return correctly.
All partners will be responsible for submitting their own individual tax returns. However, the partnership must register with HMRC by 5 October in the business’s second tax year, or a penalty may be incurred. Registration should generally be done online although it can be done manually using form SA400 (for the partnership) and forms SA401(for the partners).
Where a sole trader takes in one or more partners there is a change in business entity for VAT purposes. If the sole trader is VAT registered, the change must be notified to HMRC within 30 days and the existing VAT registration will be cancelled. Alternatively, an application may be made (on form VAT 68) for the VAT registration to be transferred to the partnership. The partnership itself must register if the VAT taxable turnover is more than the VAT registration threshold (currently £85,000).
A limited liability partnership (LLP) structure may be an agreeable compromise in some circumstances – offering both the flexibility of a general partnership and the limited liability protection of a company. LLP partners share costs, risks, and responsibilities of the business. They also take a share of the profits and pay income tax and NICs on their share of the partnership profits. However, under an LLP agreement, debt will be limited to the amount of money each partner invested in the business and to any personal guarantees given to raise business finance. Since liability is generally restricted to the level of investment, members of LLPs will benefit from a certain level of protection if the business runs into difficulties.
Is the summer party tax-free?
An exemption exists, which allows employers to meet the cost of certain social events for staff without triggering tax or NICs, providing certain conditions are met.
The legislation refers to ‘an annual party or similar annual function’.
Conditions - A staff event will qualify as a tax-free benefit if the following conditions are satisfied:
• the total cost must not exceed £150 per head, per year
• the event must be primarily for entertaining staff
• the event must be open to employees generally, or to those at a particular location, if the employer has numerous branches or departments
The ‘cost per head’ of an event is the total cost (including VAT) of providing:
a) the event, and
b) any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer's employees), divided by the number of those persons.
Provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year, for example, there could be three parties held at various times, each costing £50 per head.
If the limit is exceeded by just £1, the whole amount must be reported to HMRC.
If there are two parties, for example, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.
Example - ABC Ltd pays for an annual Christmas party costing £150 per head and a summer barbecue costing £75 per head. The Christmas party would be covered by the exemption, but employees would be taxed on summer barbecue costs, as a benefit-in-kind.
Tax treatment for employers - The cost of staff events is tax deductible for the business. The legislation provides a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses will be shown separately in the business accounts – usually as ‘staff welfare’ costs or similar.
There is no monetary limit on the amount that an employer can spend on an annual function. If a staff party costs more than £150 per head, the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.
The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using a HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE, or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.
It should also be noted that whilst the £150 exemption is mirrored for Class 1 NIC purposes, (so that if the limit is not exceeded, no liability arises for the employees), Class 1B NICs at the current rate of 13.8%, will be payable by the employer on benefits-in-kind which are subject to a PSA.
The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.
Abatement of the personal allowance
Not all taxpayers are able to benefit from the personal allowance – once income exceeds £100,000 the allowance is gradually reduced until it is eliminated in full. However, there are steps which can be taken to reduce income and preserve entitlement to the personal allowance.
The personal allowance is set at £11,850 for 2018/19, rising to £12,500 for 2019/20.
When is it abated? - Once an individual’s ‘adjusted net income’ exceeds £100,000, their personal allowance is reduced by £1 for every £2 by which ‘adjusted net income’ exceeds £100,000.
The measure of income for these purposes is ‘adjusted net income’. This is an individual’s total taxable income before personal allowances and after deducting certain reliefs, such as:
• relief for trading losses;
• donations to charity through the Gift Aid scheme; and
• pension contributions (deduct the gross amount).
Polly has taxable income for 18/19 of £120,000. She makes pension contributions of £5,000.
Polly’s adjusted net income for £2018/19 is £115,000 (£1250,000 - £5,000).
As her income is more than £100,000, her personal allowance is reduced. The personal allowance for the year of £11,850 is reduced by £1 for every £2 by which her income exceeds £100,000.
The reduction in her personal allowance is therefore £7,500 (1/2(£115,000 - £100,000).
Her personal allowance for 2019/20 is therefore £4,350. Assuming her income remains the same for 2019/20 and she continues to make gross pension contributions of £5,000, she will receive a personal allowance of £5,000 for 2019/20.
When is the personal allowance lost? - With a personal allowance of £11,850 for 2018/19, individuals with income in excess of £123,700 do not receive a personal allowance for that year. For 2019/20, the personal allowance is £12,500, and is lost once income exceeds £125,000.
Beware 60% tax in the abatement zone - Where adjusted net income falls within the zone in which the personal allowance is reducing – from £100,000 to £100,000 plus twice the personal allowance – the marginal rate of tax is 60%. This is the combined effect of the application of the higher rate of tax and the reduction in the personal allowance.
Reduce the 60% band and preserve the allowance - To reduce the income falling in the abatement zone (taxed at a marginal rate of 60%) and to preserve as much as the personal allowance as possible, it is necessary to reduce adjusted net income.
There are various ways in which this can be achieved - The first point to consider is the timing of income – can income be deferred to the next tax year, or, if income for the current tax year is less than £100,000 but is expected to be above £100,000 in the following year, can income be brought forward to the current tax year. In a family company scenario, it may be possible to achieve this by adjusting the timing of dividends and bonuses.
Consideration could also be given to putting income earning assets into the name of a spouse or civil partner to reduce income and preserve the allowance.
Adjusted net income is income after pension contributions. Making pension contributions is tax effective, both in terms of benefitting from the relief available and reducing net income to preserve personal allowances.
Alternatively, a person can make charitable donations under gift aid to reduce their adjusted net income. Although they will lose the benefit of their income, the cost will be offset slightly by the preserved personal allowance.
Are you paying the minimum wage?
The National Living Wage (NLW) and National Minimum Wage (NMW) increased from 1 April 2019. From that date, the NLW, payable to workers aged 25 and over, is set at £8.21 per hour. Workers under the age of 25 and over school leaving age must be paid the NMW appropriate for their age. From 1 April 2019, this is £7.70 per hour for workers aged 21 to 24, £6.15 per hour for workers aged 18 to 20 and £4.35 for workers above school leaving age and under 18. A separate rate of £3.90 per hour applies to apprentices under 19 and to apprentices over 19 and in the first year of their apprenticeship.
Who is entitled to the minimum wage? - Workers over the school leaving age are entitled to the minimum wage. This is the last Friday in June of the school year in which they turn 16. Once a worker reaches the age of 25, they are entitled to the NLW.
Payment of the minimum wage is not limited to full-time employees. Workers also include:
• part-time workers, casual labourers, agency workers
• workers and homeworkers paid by the number of items that they make
• apprentices & trainees
• workers on probation, disabled workers
• agricultural workers, foreign workers, seafarers, offshore workers
However, company directors without a contract of service fall outside the minimum wage legislation, as do the self-employed, volunteers and voluntary workers, workers on a government employment programme or pre-apprenticeship scheme or certain EU programmes, members of the armed services, family members living in the employer’s home, non-family members living in the employer’s home who are not charged for meals or accommodation and treated as a family member (for example, an au pair), higher and further education students on placements of up to one year, people on a Jobcentre Plus Work trial for six weeks, share fishermen and those working and living in a religious community.
It is important to identify which workers fall within the scope of the minimum wage legislation.
What is included in the minimum wage? - Certain items are not taken into account in determining whether a worker has been paid at or above the relevant minimum wage for his or her age. These include payments for the employer’s own use or benefit, items that the worker has bought for the job and which have not been reimbursed, such as tools, a uniform and suchlike, tips and service charges and any extra pay for working unsocial hours on a shift.
However, income tax and National Insurance are taken into account in the minimum wage calculation as are advances of wages or loans, repayment of overpaid wages, items provided for the employee which are not needed for the job, such as meal and penalty charges for a worker’s misconduct.
Accommodation - Accommodation provided by the employer is taken into account when calculating the minimum wage. The legislation provides for an accommodation offset, set at £52.85 per week/£7.55 per day from 1 April 2019.
If the employer charges more than this for accommodation, the excess is taken off the worker’s pay which counts for minimum wage purposes. Where there is no charge for the accommodation, the offset rate is added to the worker’s pay.
Failure to pay minimum wage - It is a criminal offence not to pay the National Minimum Wage or National Living Wage to which a worker is entitled. Employers who pay below the minimum wage should pay arrears immediately. Penalties may also be charged.
Employing family members
It is permissible for a business to claim a tax deduction for the cost of a reasonable wage paid to a family member who helps in the business. Their duties could, for example, include answering the phone, going to the bank, bookkeeping and other administrative tasks.
The tax legislation specifies that ‘in calculating the profits of a trade, no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade’, which indicates that as long as the work is undertaken, the payments are realistic and actually made, there should not be a problem with claiming tax relief.
The benefits of spreading income around family members where possible include maximising the use of annual personal tax allowances (£12,500 per individual (children and adults) in 2019/20), and potentially taking advantage of nil and lower rate tax thresholds.
‘Family’ could include anyone who depends on the owners of the family business for their financial well-being (for example, elderly relatives and/or long-standing domestic staff members), but care must be taken not to fall foul of the ‘settlements’ legislation and other anti-avoidance measures in force at the time.
Keeping records - The tax deductibility of wages paid through a business has recently been examined by the Tax Tribunal. The business owner claimed that wages paid to his son had been paid partly through the ‘provision of goods’. He managed to substantiate some cash payments and a monthly direct debit (for insurance costs) by reference to his son’s bank statements. However, the bulk of the claim was based on buying food and drink to help support his son at university. Unfortunately, the tribunal concluded that the payments were made out of ‘natural parental love and affection’. There was a duality of purpose as the ‘wages’ had a major underlying ‘private and personal’ motive, and thus not for the purposes of the trade. The tribunal subsequently dismissed the appeal on the grounds that the business owner was doing nothing more than supporting his son at university.
The outcome of this case could have been very different if the business owner had used an alternative methodology for paying his son’s wages. In particular, the judge noted that had payment been made on a time recorded basis or using some other approach to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied.
In particular, this case highlights the importance of maintaining proper records regarding the basis on which payments are to be made to children. A direct link between the business account and the recipient’s account would clearly be advisable. For example, if the business owner had paid the wages directly into his son’s bank account, leaving the son to purchase his own food and drink from the money he earned from his father, bank statements could subsequently have been used to provide evidence of what had been paid and this could be linked to the record of hours worked. Maintaining the link is the key issue here.
Rate of pay - It is also worth noting that HMRC examine whether a commercial rate is being paid to family members. The concept of ‘equal pay for equal value’ should help prevent a suggestion of dual purpose and thus, in turn, should also help refute allegations of excessive payments to family members as a means of extracting monies from the business.
Finally, wherever payments are made to family member, legal issues such as the national minimum wage should also be borne in mind.
SDLT and first-time buyers
Stamp duty land tax (SDLT) is payable where you buy a property in England or Northern Ireland and the amount paid is more than a certain amount. SDLT does not apply in Scotland, where Land and Buildings Transaction Tax (LBTT) applies instead, nor in Wales, where Land Transaction Tax (LTT) is payable.
As far as residential property is concerned, the rates depend on whether a person is a first-time buyer or not and whether the property is a second or subsequent property. The current residential threshold is £125,000. However, a 3% supplement applies to second and subsequent homes where the purchase price is more than £40,000. Relief is available for first time buyers.
First time buyer rates - Since 22 November 2017, first time buyers buying a residential property do not pay any SDLT if the purchase price is less than £300,000. Where the purchase price is between £300,000 and £500,000, first-time buyers pays SDLT at the rate of 5% on the excess over £300,000. First-time buyers buying a property for more than £500,000 do not get any relief – instead they pay the normal residential rates.
Case study 1 - Kieran buys his first flat for £200,000. As the consideration is less than £300,000 and he is a first-time buyer, no SDLT is payable.
Without the relief he would have paid SDLT of £1,500.
Case study 2 - Orla is a first-time buyer. She buys a two-bedroom cottage costing £420,000. She benefits from first-time buyer relief, paying SDLT at 5% on the excess over £300,000. She must therefore pay SDLT of £6,000 (5% (£420,000 - £300,000)).
Without the relief, she would pay SDLT of £11,000. She saves £5,000 as a result of the relief for first-time buyers.
Case study 3
Connor and Daniel are first time buyers. They buy a flat in London for £700,000.
As the purchase price is more than £500,000, they do not benefit from first-time buyer relief. Consequently, SDLT is calculated at the normal residential rates as follows:
On first £125,000 @ 0% £0
On next £125,000 @ 2% £2,500
On next £450,000 @ 5% £22,500
SDLT payable £25,000
Shared ownership schemes - Changes announced in the 2018 Budget with retrospective effect extended the availability of first-time buyer relief to first-time buyers buying a property through a qualifying shared ownership scheme. Relief is available to the first share purchased as long as the market value of the shared ownership property is less than £500,000. No SDLT is payable where the first-time buyer pays less than £300,000 for their share, with SDLT being payable at the rate of 5% on the excess over £300,000 where their share costs between £300,000 and £500,000.
First-time buyers who purchased a property through a shared ownership scheme between 22 November 2017 and 29 October 2018 who did not benefit from the relief can claim a refund. Where the transaction was completed before 29 October 2018, those affected have until 28 October 2019 to file an amended SDLT return.
Workplace pension contributions rise takes effect
An increase in the minimum contributions employers and their staff must pay into their automatic enrolment workplace pension scheme took effect from 6 April 2019.
From that date, the employer minimum contribution has risen from 2% to 3%, while the staff contribution also increased from 3% to 5%. As part of the ‘phasing’ process, the increases mean that total contributions for employees have gone up from 5% to 8%.
The increases do not apply to employers using defined benefits pension schemes.
The amount that the employer and the employee pay into the pension scheme will vary depending on the type of scheme chosen and its associated rules. The employee contribution may also vary depending on the type of tax relief applied by the scheme. The majority of employers use pension schemes that from April 2019 require a total minimum of 8% contribution to be paid. The calculation for this type of scheme is based on a specific range of earnings. For the 2019/20 tax year this range is between £6,136 and £50,000 a year.
For calculating the minimum contributions payable for this type of scheme the following amounts are included:
• salary, wages, commission, bonuses, overtime
• statutory sick pay (SSP) and statutory maternity pay (SMP)
• ordinary or additional statutory paternity pay and statutory adoption pay
Although most pension schemes use these elements for calculating contributions, it might be a good time to recheck the scheme documents to make sure everything is in order.
All employers must ensure that they implement the changes and ensure that at least the new minimum amounts are being paid into their pension scheme.
The Pensions Regulator provides an online contributions calculator to help employers work out costs for each member of staff. The calculator can be found at https://www.thepensionsregulator.gov.uk/en/employers/work-out-your-automatic-enrolment-costs.
No action is required where an employer does not have any staff in a pension scheme for automatic enrolment, or if amounts above the statutory minimum are already being paid. However, employers still need to assess anyone who works for them each time they are paid, and put them into a pension scheme if they meet the criteria for automatic enrolment. The employer must contribute at least the right minimum amount at the time and any further increases required.
As well as the obligation to continue paying into the pension scheme, manage requests to join or leave the scheme, and keep records, employers are also obliged to carry out a re-enrolment check every three years.
Tax planning points - Remember that people other than the holder can invest in the holder’s pension. For example, an individual could contribute to a spouse or partner’s personal pension, or even to a child’s personal pension to allow them to start building up retirement benefits from an early age.
The number of different pension schemes that a person can belong to is not restricted, although there are limits on the total amounts that can be contributed each year.
It is also worth remembering that non-earners can pay £2,880 a year into a pension and receive an automatic 20% boost to their contribution in tax relief meaning that on a contribution of £240 pm, the amount invested in the pension scheme will be £300.