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helping you keep more of your income
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If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can assist in all aspects of self-employment, from choosing the best time to start the business, the best time for your year-end, support you through the initial business registration and provide advice on all aspects of tax.
We provide a range of compliance services for sole traders:
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Our compliance services include:
We are a member firm of the Association of Chartered Certified Accountants and our rigorous internal procedures mean that clients can be confident that their accounts have been prepared in line with the Association’s standards of and the Companies Act 2006.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use our expertise and the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time. We have considerable experience in dealing with HMRC and are also experienced in representing our clients should they be subject to a tax enquiry or investigation.
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is highly tax efficient.
We are IR35 experts and will advise you on how to structure your next contract to minimise IR35 risk. We will ensure you claim all the tax deductible expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns ahead of deadlines and provide you with clarity over your future tax payments.
Free company incorporation and set up with HMRC if you are a new Contractor and sign up with us.
Included in this service:
VAT • Value added tax is one of the most complex and onerous tax regimes imposed on business. We provide an efficient cost effective VAT service which includes assistance with VAT registration and help with completing your VAT return.
Payroll • Administering your payroll can be time consuming and the task is made all the more difficult by the growing complexity of taxation and employment legislation. We provide a comprehensive payroll service.
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Management Accounting • Provision of management accounts
If you wish to know more about these services please contact us on 01332 202660.
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Adrian Mooy & Co is a registered auditor with the Association of Chartered Certified Accountants.
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
We can work with you to:
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax returns, accounts preparation and tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively to minimise your tax liabilities.
Services we offer include:
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a free meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Confirm your expectations
Our aim is to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.
Build a relationship
Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.
We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.
Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time. Eddie Morris
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Residence Nil Rate Band
From April 2017, a new nil rate band – the residence nil rate band (RNRB) – is available for inheritance tax purposes. It increases the amount that can be left free of inheritance tax when the estate includes a residence (or a share in a residence) that is left to a direct descendant.
When is it available
The RNRB is available to an estate where:
How much is it worth
The RNRB is set at £100,000 in 2017/18, increasing to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21.
It is available in addition to the normal inheritance tax nil rate band of £325,000. This means that by 2020/21 a couple can leave £1 million free of inheritance tax where the estate includes a residence worth at least £350,000, which is left to direct descendants.
As with the normal nil rate, any portion of the RNRB unused on the death of the first spouse or civil partner can be used on the death of the second spouse or civil partner. This is the case even if the first spouse or civil partner dies before 6 April 2017, as long as the second death occurs on or after this date.
To qualify, the residence (or share in a residence) must be left to a direct descendant. This is a lineal descendant (children, grandchildren, great grandchildren, etc.) or the spouse or civil partner of a lineal descendant. Also qualifying, are step-children, adopted children and foster children of the deceased, and a child for whom the deceased was appointed a guardian or special guardian while they are under 18.
To qualify for the RNRB, the residence must be included in the deceased’s estate and must have been lived in by the residence at some point. However, it does not have to be the main home.
An estate can also benefit from the RNRB where the deceased downsized after 7 July 2015.
Estates worth more than £2 million
Where the estate is worth more than £2 million, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million. For £2017/18 it is lost completely where the estate exceeds £2.2 million.
Interest Relief for Lettings - Making The Most of The Old Rules
The mechanism by which landlords receive tax relief for interest and other finance costs is changing from April 2017 … and not for the better. The current rules are more generous than the new rules in that they enable the landlord to receive tax relief at his or her marginal rate of tax. By contrast, the new rules - which are being phased in - will, when fully implemented, provide relief only at the basic rate. Further, relief will be given as an income tax reduction rather than as a deduction from rental income when computing taxable profits.
Current rules - Under the existing rules, interest and other finance costs, such as fees for arranging a mortgage or loan, are deducted as an expense when working out taxable profits.
Example - John has two properties which he lets out. In 2016/17, he pays mortgage interest of £10,000 on mortgages taken out to buy the properties. He receives rental income of £18,000 in the year and incurs other allowable expenses of £2,000.
The properties are investment properties. John is employed as an IT consultant and in 2016/17 he receives a salary of £70,000. He is a higher rate taxpayer.
For 2016/17 he can deduct the mortgage interest, along with the other expenses, to arrive at a taxable profit of £6,000. Thus, he obtains relief for the mortgage interest at his marginal rate of tax of 40% - thereby reducing his tax bill by £4,000.
Looking ahead - Relief for finance costs is to be gradually restricted from 2017/18 onwards, although the restriction only applies in relation to residential properties. It does not affect commercial lets.
The restriction is to be phased in from April 2017 and will be fully in place from the 2020/21 tax year.
In the transitional period, some relief will be given as for the current rules as a deduction in computing profits and relief for the remainder will be given as a basic rate tax deduction.
Based on the facts in the above example, once the restriction is fully implemented, John will receive relief for his mortgage interest costs as a reduction in his tax bill of £2,000 (assuming a basic rate tax of 20%). The change in the rules will ultimately cost him £2,000 a year compared to the current position.
The current rules are more generous than the new rules, and where costs can be brought forward to 2016/17 rather than 2017/18, this can be potentially advantageous to higher and additional rate taxpayers.
Partner note: ITTOIA 2005, s. 272A, 272B, 274A (as inserted by F(No. 2)A 2015, s. 24).
Dividends have lost some of their appeal thanks to the changes announced in the 2015 Summer Budget, and implemented from 6 April 2016. Basically, the effective income tax rate on dividends has increased by 7.5% across the bands, significantly narrowing the efficiency margin. However, where the alternative is a bonus subject to employees' and employers' National Insurance contributions (NICs), they are still relatively tax-efficient, and are likely to remain the preferred method of extracting profits (broadly above the personal allowance) for many family-owned companies.
Beware of insufficient company reserves - The company may pay out as dividends only what it can afford to, when measured against its distributable profits - basically all the after-tax profits it has ever made since incorporation, after all previous dividends it has paid out. It does not necessarily matter if a company is making losses, or has just made losses in the latest accounting period; what matters is whether there remains an overall distributable surplus.
Get the balance right - Taxpayers often assume that they can vote dividends in the amounts they see fit, for various family shareholders. By default, dividends must be voted in proportion to shareholdings. This is arguably subject to the company’s Articles of Association, but it would be most unusual for the Articles to deviate from this standard.
Dividend waivers - One of the ways to get around this is to 'waive' one’s entitlement to a proposed dividend by means of a dividend waiver, in respect of some or all of one’s shares. The waiver can be in respect of a future dividend, or several future dividends, or apply for a given period.
Pitfalls with waivers - A waiver is a formal document: it is a legal deed of waiver so must be drawn up correctly, and must be signed and witnessed accordingly. Waivers cannot be implemented retrospectively; they must be in place before entitlement to the dividend arises. They should not last for more than twelve months.
Alphabet shares instead? - If waivers are likely to be a regular feature, then it may be better to issue a separate class of shares to the affected shareholder, that may well rank on an equal footing with the original class of shares, but effectively circumventing the presumption that all shares of a particular designation are equally entitled to a dividend. It is generally recommended that such shares rank on an equal footing so that they are demonstrably and significantly more than just a right to income.
Pitfalls in relation to timing of dividends - A common pitfall with otherwise valid dividends is that the dividend paperwork must also be in order - and timeous.
ln particular, interim dividends may be varied at any time up until they are actually paid, and if payment is effected by journal entry rather than with a money transfer (cheque, bank credit, etc.) HMRC’s position is that it is not effected until it is written up in the company’s books and accounting records. ln HMRC’s company taxation manual (at CTM15205), HMRC is quite clear that if the journals are written up later on, the dividend will be treated as paid on that later date - even if in a later income tax year.
Conclusion: Despite the government’s best efforts, dividends remain a very important component of the profit extraction/remuneration strategy of most family companies. There are, however, numerous opportunities to go wrong, and it is important to work with your accountant to develop (and stick to) a compliant regime that works for your business.
Private Residence Relief for Landlords - Part 1
With landlords facing capital gains tax (CGT) rates of 18% and/or 28% on the disposal of residential properties, this article considers the availability of private residence relief on disposals by landlords.
Private residence relief is available to shelter the gain on disposal of a person’s only or main residence. Ownership of a property alone is not sufficient to qualify for the relief; there must also have been occupation of the property as a residence.
If a let property does qualify for relief, this could add up to a valuable sum, as the following amounts potentially qualify:
Ensuring the property is the taxpayer’s residence - to qualify for relief, the property must be the person’s only or main residence, which carries with it an expectation of occupation with permanence.
Private Residence Relief for Landlords - Part 2
Example - Let property: How much relief?
Fred bought a house on 1 July 2002 for £12S,000. He occupied the property until 30 September 2005, when he decided to go travelling. He returned to the property on 1 l\/lay 2006 and occupied it until 31 March 2009, when he bought another house jointly with his girlfriend, which they occupied together. He decided to let out his house, and it was let until he disposed of it for £294,697 on 30 June 2016.
The periods qualifying for relief are as follows:
The property was owned for 14 years in total, with eight years and three months attracting private residence relief. The total gain was £169,697 and £100,000 of the gain (8.25/14 years x £169,697) qualifies for private residence relief.
The gain attributable to letting is for a period of five years and nine months and is £69,697 (5.75/14 years x £169,697). As this exceeds the maximum amount of relief of £40,000, the amount of relief for the letting period is restricted to £40,000.
This leaves Fred with a chargeable gain of £29,697.
Private Residence Relief for Landlords - Part 3
Which property is the only or main residence? Where a person has more than one residence (which is different to owning more than one residential property), determining which property is the main residence can either be decided on the facts, or an election can be made to nominate which is the main residence (TCGA 1992, s 222(5)).
Where an election is made, the property that is nominated does not have to factually be the 'main' residence, but it does have to be a dwelling house in use as the person’s residence (i.e. occupied on a permanent basis) for the election to be valid.
Time limits apply for making an election. An election can be made within two years of whenever there is a new combination of residences. This happens when a person starts occupying a dwelling as a residence, or ceases occupying a property as their residence (which may be different to when the property is acquired or disposed of).
An election can be varied at any time, and backdated for up to two years from the date that it was given. HMRC guidance states:
‘A variation will often be made when a disposal of a residence is in prospect or the disposal has already been made and the individual making the disposal wishes to secure the final period exemption.
For example, where an individual with two residences validly nominates house A, they may vary that nomination to house B at any time. The variation can then be varied back to house A within a short space of time. This will enable the individual to obtain the benefit of the final period exemption on house B with a loss of only a small proportion of relief of on house A.’
Ownership by husband and wife - for the purposes of private residence relief, a husband and wife may only have one residence. However, when it comes to letting relief, in the case of joint ownership by husband and wife each may have relief of up to £40,000.
Avoiding VAT Registration when the Threshold is Exceeded
Failing to register for VAT at the right time can be one of the most expensive mistakes a business can make. Compulsory registration is required where:
The problem is that businesses don’t always keep an accurate cumulative record of taxable supplies. If a taxable person goes over the VAT threshold, and doesn’t register on time, HMRC will register them from the date they ought to have been registered, collecting VAT on taxable income accordingly.
In many cases, the business will be unable to recover the VAT on sales. As a result, gross income is taken to be VAT inclusive, with 16.6% (or 20/120ths) of it being payable to HMRC.
Example. Joe runs a hairdressers. He brings in the 2015/16 records at the end of December 2016. These cover the year to go June 2016. Figures show taxable turnover to 30 June as £82,000; the registration threshold was passed on 31 July 2016, when the rolling cumulative twelve-month turnover came to £85,000. Joe should have registered the business from 1 September 2016. He has exposure to VAT on four months’ turnover - which could mean a cost of approximately £5,000. Joe says that there was an exceptionally busy quarter due to a local one-off event. This is unlikely to happen again.
There is a potential let out in the form of exception from registration. Schedule 1 (3) VATA 1994 says that a person does not become liable to registration if they can satisfy HMRC that the taxable turnover in the following twelve months (after the threshold is exceeded) will not exceed the deregistration threshold - £81,000 in 2016/17.
In order to look at using the exception, an estimate will need to be made of future activity. The estimate should be of future taxable turnover, this includes zero-rated supplies, but not exempt supplies or one-off sales of capital items.
The critical date is when the registration threshold is crossed. Neither the date the business would have been registered, nor the date of an application for exception matters. Only information which would have been available at the date of crossing the registration limit is relevant to the decision.
When considering making an application, only cite information that would have been available at the time the registration threshold was exceeded.
Travelling Expenses for the Self Employed: Recent Cases
The tricky area of the deductibility of travel expenditure by the self-employed.
Basic tests - For an expense to be deductible in computing a self- employed individual's taxable profits the expense must have been 'wholly and exclusively’ incurred for business purposes; must not constitute a 'capital' expense; and must not be 'specifically prohibited' as a deduction by statute.
Splitting travel costs - Although, strictly, an expense needs to be wholly and exclusively incurred for business purposes, in practice it is often feasible to dissect a particular expense into a private and a business element, enabling the latter to rank as tax deductible. Often HMRC will challenge the taxpayer’s split.
In the recent case of Dr AS Jolaoso, a gynaecologist, the travelling expenses in point were motoring costs, and whilst Dr Jolaoso sought to claim 50% of these costs as incurred for business purposes, HMRC allowed only 10%.
Key differentiation: ‘in’ versus ’to’ - The Courts have decided that travelling expenses incurred in the course of the business are deductible whereas such expenses incurred in travelling to the place of business are not. This principle was decided as far back as 1971 (Horton v Young ) and the case was a victory for the taxpayer, a Mr Horton.
In that case, Mr Horton, a sub-contractor, argued that his home was his business base, and thus when he travelled around picking up his bricklayers to then take them to building sites such expenses were tax deductible, i.e. the expenses were incurred in the course of carrying on his business. The court agreed. A similar favourable result also arose for the taxpayers in two cases in 2011 (Reed v R & CC ; Kenyon v R & CC , concerning a scaffolder and a pipe fitter respectively.
On the other hand seven years earlier in 2004 (Powell v Jackman ) Mr Powell, a milkman, was denied a deduction with reference to his travel expenses incurred in travelling from his home to the milk dairy to pick up his milk for delivery to customers. And, six years later in 2010 (Manders v R & CC ), a similar result arose where a market trader was denied a deduction for expenses incurred in travelling from his home to the location of his market stall. And as recently as 2014 (White v R & CC ) a flying instructor, was denied a deduction for his travel expenses incurred in travelling from his home to airports where he provided flying lessons.
Two recent taxpayer failures and very similar cases occurred in 2014 (Dr S Samadian v R & CC ) and 2015 (Dr Sharat Jain v R & CC ). Both cases involved hospital consultants and the expenses related to travel between home and a number of private hospitals, and between the private hospitals and various NHS hospitals.
What becomes very clear when looking at these cases is that they are each heavily fact dependent.
The home: a business office - The cases illustrate that the major problem area is where the taxpayer seeks to deduct travel expenses incurred in travelling from (and to) his/her home where an alleged office subsists. The office must be of some substance; just a desk and filing cabinet, and making the odd business call, will not suffice. In addition, HMRC must not be able to argue that in fact the 'real' office is located elsewhere and it is from that office that the real the business is conducted.
Thus, for example, in Manders v R & CC the court took the view that it was his market stall that was Mr Manders’ main place of business and so travel costs from home to the stall were disallowed. Similarly, in White v R & CC, the court held that despite having an office at his home, the flying instructor conducted his business at the airports on a regular and predictable basis, and hence travel costs to and from were disallowed.
Tip - To enhance success, try and identify a decided case (or cases) where another taxpayer succeeded in the courts and where the facts are very similar to your own circumstances.
Are Your Company's Dividends Valid?
Many family or owner-managed businesses will pay dividends several times a year. It is important to get the process correct, lest they be challenged by HMRC later on.
A dividend may be challenged where it is found to have been made otherwise than in accordance with the Companies Act 2006 or the company's own legal constitution.
Who authorises dividends? - It is generally the company's own Articles of Association that determine who may authorise dividends.
For these purposes, there are two types of dividend:
Dividends may only be paid when the company has the funds to do so. The Companies Act 2006 specifies that a dividend may be paid only out of profits available for that purpose.
Relevant accounts - In order to check what profits are available for distribution in the period, the directors/shareholders must refer to the relevant accounts. These are usually the latest annual accounts laid before the company in a general meeting.
Getting the paperwork right - It is essential that the paperwork be drawn up correctly to support the dividend. For final dividends, general meetings are no longer necessary provided a majority of shareholders approve the proposed dividend by ordinary resolution. The documentation should evidence that the relevant accounts have been considered, and the distribution approved.
An interim dividend may be varied at any time before it is actually paid, and as such is deemed to be paid only when the funds are placed unreservedly at the disposal of the shareholder. This is straightforward when dealing with a money transfer, but if effected by journal entry in the company's books of account - typically by way of a credit to a director's loan account or similar - then an interim dividend will be deemed to have been paid only when the relevant entries have been made.
Dividends should be paid in proportion to respective shareholdings. Dividend vouchers are still required, despite there no longer being a 'tax credit' in the new dividend regime.
Summary - Dividends are still a key tool for tax efficient income planning. But getting the procedure and paperwork right is essential, including:
Should Landlords Incorporate? - Part 1
Issues to bear in mind for buy-to-let landlords thinking about incorporating of their property business.
A BTL investor should only incorporate his or her business if there is good reason to do so. Before the new rules restricting tax relief for finance costs on residential property, many landlords would not have been better off by incorporating. Since April 2016 a new, more punitive regime for taxing dividend income means that incorporation is even less beneficial.
Example: Sole proprietor vs company - Joe owns several properties, but has no other sources of income. His net property profits are £40,000. In 2016/17, his personal tax position will be:
If he had instead put his properties into a company, the company would first have to pay corporation tax on its profits:
Should Landlords Incorporate? - Part 2
But this is only half the story; although it is Joe's company, he has so far drawn out only £8,000 salary and the rest of the company’s profits are locked up in the company’s bank account - those funds are not yet his. He therefore pays a dividend out of the company to put the funds at his personal disposal.
The real problem is that, by 2020/21, Joe will be getting only 20% tax relief on his mortgage lnterest if he continues to hold the property personally, while the corporate alternative would not be caught. Suppose that Joe's net rental income of £40,000 is after having paid £32,000 in mortgage interest, and move forwards to 2020/21, where all of his mortgage interest will be subject to the new tax relief restriction:
Should Landlords Incorporate? - Part 3
Joe stands to lose £4,100 by 2020/21 if he continues to run his business personally, even though personal tax-free bands and allowances have risen significantly by then (the government has committed to increase the personal allowance to £12,500 and the higher rate threshold to £50,000).
We already have a rough idea of how Joe would fare with a corporate property portfolio, because companies will not be affected by the new BTL finance restrictions. On the basis that companies remain static, then Joe would still be £1,920 worse off in a company in 2020/21 than with a personal portfolio now in 2016/17, but that would nevertheless be £2,180 better than sticking with personal ownership all the way through to 2020/21.
Companies will be more tax-efficient by 2020/21 because the main rate of corporation tax is set to fall to 17%, increasing Joe's saving to more than £3,100.
Many career landlords are dealing with much larger numbers, and the savings will be much more substantial. The key consideration is how much the artificial tax cost of disallowing interest, etc., exceeds the compensating 20% tax relief. If we look instead at an alternative where Joe's mortgage interest is only £12,000, the results are quite different:
In this scenario, the new mortgage interest regime will end up costing Joe only a very small amount annually, even when fully implemented in 2020/21. He would be much better off sticking with direct ownership, rather than incorporating his business.
Other things to consider are the possible effects on student loans, child benefit and the forfeiture of personal allowance for those with larger portfolios.
Replacement of Domestic Items Relief
The wear and tear allowance for fully furnished lettings was repealed with effect from 1 April 2016 for corporation tax and 6 April 2016 for income tax. It was replaced by a new relief for the replacement of domestic items.
Relief is not available for the initial expenditure on furnishings and domestic items. It is only available on their replacement. This is then complicated by the fact that relief is restricted if the replacement items are not 'the same or substantially the same' as the old item.
Guidance for taxpayers - HMRC updated its guidance ‘Income Tax when you rent out a property: working out your rental income' together with 'Income Tax when you rent out a property: case studies' on 28 October 2016. In the main guidance, it says: 'Where the new item is an improvement on the old item, for example replacing a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item. So, if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference. When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or is not, the same or substantially the same as the old item.
If the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge, this is not considered to be an improvement and the full cost of the new item is eligible for relief.'
HMRC's case study:
'David has replaced a single, wooden framed bed in his rental property with a new double divan bed. The new double bed is an improvement on the old bed and David paid £500 for it, which is significantly more than the £150 it would have cost if he had replaced the old bed with a new equivalent wooden framed bed. Therefore, David cannot claim more than £150 of the purchase cost as a deduction.'
The new bed differs from the old bed in both size and style. The example does not elaborate what HMRC considers the improvement is. There is no mention of additional functionality (e.g. a storage divan). Many people would argue that a bed is a bed, regardless of its construction. Some people prefer the look of a wooden bed-frame. Even if a divan was more expensive, they would not consider it an improvement (quite the opposite). This highlights the subjectivity of establishing whether something is the same or improved.
If HMRC adopts a hard line, landlords will have little incentive to provide quality items in their let properties and arguably, it will further encourage a 'throw away’ society.
When it comes to preparing tax returns, whilst landlords may have invoices for items purchased as replacements, they may lack details concerning the item disposed of, particularly where records were not required because the wear and tear allowance was claimed.
Will common sense prevail? HMRC’s Property Income manual states in respect of the former non-statutory renewals basis:
'Sometimes it was impossible to find the current cost of replacing an old asset with something identical. Common sense had to be used to find the cost of a reasonable equivalent modern replacement.’
Personal Allowances and Tax Rates for 2017/18
The 2016 Autumn Statement confirmed that the personal allowance will be increased to £11,500 for 2017/18 (from its current level of £11,000 in 2016/17). It was also announced that the government intends to increase the allowance to £12,500 by the end of Parliament.
The basic rate limit is set to rise to £33,500 for 2017/18 (from £32,000 in 2016/17), which means that the 40% higher rate of tax will not kick in until an individual’s income reaches £45,000. The additional rate threshold, at which the 45% income tax rate is payable, will remain at £150,000 in 2017/18.
Transferring the personal allowance - Since April 2015 it has been possible for an individual, who is not liable to income tax or not liable above the basic rate for a tax year, to transfer part of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate. The transferor's personal allowance will be reduced by the same amount.
For 2017/18, the amount that can be transferred will be £1,150, which means that the spouse or civil partner receiving the transferred allowance will be entitled to a reduced income tax liability of up to £230 for 2017/18.
One point to note here is that married couples or civil partnerships entitled to claim the married couple’s allowance are not entitled to make a transfer.
Married couple’s allowance - The married couple’s allowance may only be claimed if at least one of the parties to the marriage or civil partnership was born before 6 April 1935. The allowance is £8,355 for 2016/17 and will rise to £8,445 for 2017/18.
Blind person’s allowance - An allowance of £2,290 may be claimed in 2016/17 by a blind person, which is given in addition to the personal allowance, and reduces the taxpayer’s total income. The allowance is set to rise to £2,320 for 2017/18.
Note that a married blind person who cannot use all of the relief may transfer the unused part to the other spouse (or civil partner), whether the other spouse is blind or not. A married couple, or civil partners, both of whom qualify for relief, can each claim the allowance.
The allowance can only be claimed by someone who is registered as blind (but not partially sighted). A person may register as blind even if they are not totally without sight. HMRC will, by concession, allow the relief in the previous year if evidence of blindness had already been obtained by the end of it.
Savings income - The band of savings income that is subject to the 0% starting rate will remain at its current level of £5,000 for 2017/18.
The personal savings allowance (PSA), which took effect from 6 April 2016, allows basic rate taxpayers to receive up to £1,000, and higher rate taxpayers up to £500, of tax free savings savings income each year. The PSA is not available for additional rate taxpayers. The allowance is available in addition to the tax-advantages previously available to investors with individual savings accounts. The government has confirmed that the PSA will remain at its current level for 2017/18.
All individuals should try to fully utilise personal allowances and basic rate bands wherever possible. Unused allowances are not available to be carried forward, so it is important to ensure that they are used each tax year.
Salary Sacrifice: The New Rules
The advantages associated with salary sacrifice schemes are considerably reduced once new rules come into effect from 6 April 2017.
What is a salary sacrifice arrangement? Under a salary sacrifice arrangement, the employee gives up an amount of cash salary in return for a benefit-in-kind. Where the benefit-in-kind is exempt from tax and National Insurance contributions (NICs), under the current rules salary sacrifice arrangements are beneficial for both the employee and the employer. There is no tax or NICs to pay on the benefit-in-kind. The employee saves tax and primary Class 1 NICs on the salary given up in exchange for the benefit, and the employer saves secondary Class 1 NICs.
Salary sacrifice arrangements are often used to take advantage of the tax and NICs exemptions available for childcare vouchers and mobile telephones.
Salary sacrifice arrangements can still be beneficial for the employee if the benefit is not exempt, as taking a benefit-in-kind rather than cash salary will generally move the NIC liability from Class 1 to Class 1A, saving the employee contributions at 12% or 2%.
New rules The new rules apply from 6 April 2017 for arrangements entered into on or after that date. Where an arrangement is already in existence on 5 April 2017, the start date is delayed, either until 6 April 2018 or 6 April 2021, depending on the nature of the benefit.
Under the new rules, the benefit of any associated exemption is lost where a benefit is provided under a salary sacrifice arrangement or flexible benefit arrangement, unless the benefit is one of a limited range of protected benefits. Instead, the employee is taxed by reference to the higher of the cash foregone and the cash equivalent value of the benefit calculated under normal rules. Thus, where a benefit would otherwise be exempt (so the cash equivalent value is nil) under the new rules, if it is provided under a salary sacrifice arrangement, the employee would instead be taxed by reference to the cash given up.
Protected benefits - Certain benefits are protected from the operation of the new rules, and remain able to benefit from the associated tax exemptions when made available under a salary sacrifice or flexible benefits arrangement. The protected benefits are:
Consequently, salary sacrifice arrangements continue to be potentially beneficial where the benefit taken in exchange is on the above list.
Existing arrangements - Where an arrangement is in place on 5 April 2017, there is a period of grace before the new rules bite.
For existing contracts, the start date is the earlier of the date on which the contract ends, is modified or renewed, and 6 April 2021 where the benefit taken in exchange is a car (other than an ultra-low emissions car), living accommodation, or school fees, and 6 April 2018 in all other cases.
To preserve the advantages associated with salary sacrifice arrangements for as long as possible, enter into an arrangement before 6 April 2017.
Buying a Property
Tax issues to consider:
1. Are you financing the purchase in a tax-efficient way? If the money is coming from a company that you own, for example, have you considered buying the property in the company, rather than taking income out of the company (possibly heavily taxed) to fund the purchase? ls it worth considering buying the property in an LLP in which your company is a member?
2. ls the buy-to-let loan interest relief restriction a problem? In many cases those affected by the restriction of loan interest relief to the basic rate (which is being phased in over four years starting in April 2017) is going to mean that they are paying an effective rate of tax of more than 50%, or even, in some cases, more than 100%.
Loan interest relief restriction doesn’t apply to limited companies. So, should you be considering buying the property in a company rather than individual names, if this is a practical option?
3. Might you be caught by the new 3% stamp duty land tax surcharge? This 3% surcharge applies to all company purchasers, and individual purchasers who have another property, and are not buying the property in question as their main residence. Is there scope, though (e.g. if there are other individuals such as family members around), for the property to be bought in the name of someone who doesn’t own any other residential property, and therefore won’t be caught by the 3% surcharge even if the property isn’t their main residence?
4. Does the property need work done on it? This question is relevant if you’re buying a property that you’re planning to let out or occupy for the purpose of some business. In this situation, budgeting to carry out the work gradually over a period, laying out small amounts at any one time, is both easier on your cash flow and more tax-efficient, because it’s less likely to be disallowed by HMRC as 'capital' improvement works.
5. Can you 'spread' the future capital gain?
6. Does anyone have capital losses such that an element of the gain can be tax-free when the property is ultimately sold.
7. Does anyone have rental losses? lf someone with these losses brought forward can be brought into ownership, and the property counts as part of the same property 'business' as the one where they’ve made the losses, you could be enjoying an income tax 'holiday' on the rents from the new property.
8. Can you structure the purchase to get rollover relief?
9. Can you structure the purchase to maximise inheritance tax business property relief?
10. Could you be moving the value of the property out of your inheritance taxable estate?
11. Are you buying the property for someone else to live in? If you are, consider whether you can extend the availability of main residence CGT relief by putting the property in a trust for that person.
12. Should you be making a main residence election?
Getting the Formalities Right - Share Issues
The formalities of operating and administering a company can easily be overlooked. However, aside from any adverse company law implications, this can have unfortunate tax consequences.
For example, if a small owner-managed trading company proves to be unsuccessful, the value of its shares may become negligible. The company's individual shareholders may be able to claim income tax relief for an allowable loss in value of the shares against their net income if certain conditions are satisfied.
One condition for share loss relief in such circumstances is that the individual must have subscribed for the shares. This condition might appear straightforward to prove. However, two recent cases suggest otherwise.
Were shares issued? - In Alberq v Revenue and Customs , the appellant entered into a trading venture with a business partner and paid £250,000 into a company in February 2008. The venture proved unsuccessful. The company went into administration in February 2009, and was dissolved in September 2011. HM Revenue and Customs (HMRC) refused the appellant's share loss relief claim (under s 131) for 2008/09 of £250,000. The key question was whether the company issued shares to the appellant in consideration of the £250,000 he put into the company.
Unfortunately for the appellant, he was unable to demonstrate the issuance of additional shares. The First-tier Tribunal noted that important forms of evidence of his shareholding in the company were not produced (e.g. the company's register of members, or share certificates for the appellant's shares). A draft shareholder’s agreement had been prepared by solicitors in February 2008, indicating a further allotment of shares to the appellant. However, the tribunal concluded that the shareholder’s agreement was never finalised and executed, and additional shares were never issued.
Share subscription - By contrast, in Murray-Hessian v Revenue and Customs  a company (GT Ltd) was incorporated in May 2011 by its initial shareholder (AG). Subsequently, the company's annual return to 13 May 2012 filed at Companies House included a list of shareholders showing that the appellant held 225 ordinary shares (22.5%). However, a further annual return to 14 May 2012 (i.e. one day after the date shown on the previous return) was filed showing AG as owning 100% of the ordinary shares, and the appellant holding none. Subsequently, the company entered administration. HMRC refused the appellant's claim for share loss relief against his other income. HMRC argued (among other things) that the appellant lent £272,372 to GT Ltd, and that the 225 shares had not been subscribed for.
However, the First-tier Tribunal found: the appellant had an agreement with AG that he would invest £272,000 in GT Ltd by way of subscription for shares; consequently, AG was from the outset holding a percentage of the shares as nominee, agent, etc., on behalf of the appellant until the shares could be registered in the appellant's name; and that AG subsequently transferred the legal title to the appellant. The tribunal concluded that the appellant had subscribed for 225 shares in GT Ltd for share loss relief purposes.
Tip: The First-tier Tribunal in Alberg considered that the issuance of shares required the appellant to be written up in the register of members of the company as the owner of the shares (following National Westminster Bank Plc v Inland Revenue Commissioners .
However, in Murray-Hession, the tribunal considered that Hl\/lRC’s reliance on the NatWest case was misplaced for various reasons, including that it concerned the offering of shares to the public and the more rigorous requirements applicable to a plc. Furthermore, company law had changed since NatWest. Even if the shares had been allotted to the appellant in Murray-Hessian without being registered, the tribunal was not sure that NatWest would have affected the issue for other reasons.
Overpaid PAYE and how to get it back
There are various reasons why a PAYE overpayment may arise. This can happen simply because an error was made when paying PAYE and too much was paid or a payment was made twice. An overpayment may also arise where an employer has recovered a statutory payment or where the employer forgot to deduct the employment allowance to which they were entitled when making the payment to HMRC.
Where the PAYE account appears to be in credit, the first step to getting a refund is to establish why the overpayment has arisen and to check that it is not simply due to an error in the FPS or the EPS. Where the FPS or EPS is wrong, the error should be corrected by submitting an amended FPS or EPS, as appropriate.
Overpayment in current tax year
Where the overpayment relates to the current tax year, getting a refund is straightforward in that the amount by which the PAYE account is in credit can simply be deducted from subsequent payments to HMRC in the same tax year, until everything is square again.
Overpayment relates to a previous tax year
Things become somewhat more complicated where the PAYE overpayment relates to a previous tax year, not least because HMRC are reluctant to accept an overpayment is genuine. Where the overpayment is more than £500, HMRC require an acceptable explanation as to why it arose before they will consider repaying or reallocating it. It is therefore vital to identify why the overpayment arose and provide evidence to support the explanation.
Claiming a refund
Employers seeking a refund for a PAYE overpayment in a previous tax year need to make a claim, either by calling the Employer Helpline on 0300 300 3200 or writing to HMRC at the following address:
National Insurance Contributions and Employers Office
HM Revenue and Customs
The following information should be provided:
• business name and address;
• PAYE reference;
• contact telephone number;
• amount overpaid for each tax year for which a claim is made;
• tax month in which the overpayment arose (if possible);
• for each year for which a claim is made, why you overpaid; and
• whether this overpayment has been claimed before.
However, it should be noted that HMRC will allocate the overpayment against any PAYE owing for the current or other earlier years before making a refund. They will also set it against any other tax that may be owing, such as any outstanding corporation tax, before making a repayment.
Once they are satisfied that the repayment is due, it will be made directly to the employer’s bank account if an EPS containing bank details has been submitted.
Correcting mistakes in your tax return
Mistakes happen and where a mistake has been made in your tax return it is possible to file an amended return to correct the mistake.
The amended return must be filed within 12 months of the original deadline.
The normal deadline for filing a self-assessment tax return online is 31 January after the end of the tax year. The self-assessment return for 2015/16 should have been filed by 31 January 2017. The filing deadline is extended where the notice to file was issued within three months of the filing deadline. Where this is the case, a later deadline of three months from the issue of the notice to file applies (so if the notice to file a 2015/16 tax return was given on 15 November 2016, the return must be filed by 15 February 2017). Paper returns must be filed by 31 October after the end of the tax year – so a deadline of 31 October 2016 for 2015/16 paper return.
Thus, where the normal online filing deadline applies, amended returns for 2015/16 must be filed by 31 January 2018. Where a paper return is submitted, an amended paper return for 2015/16 must be sent to HMRC to arrive by 31 October 2017.
Amendment process – online returns
Where the original return was filed online, it is a relatively straightforward process to amend it online. The process is as follows:
Amendment process – paper returns
Where a paper return was filed, a mistake in the return can be corrected by downloading a new tax return and sending the corrected pages to HMRC. Write `Amendment’ on each page and make sure the taxpayer’s name and UTR is included.
Write to HMRC
Alternatively, you can write to HMRC with details of the corrections. If the window for filing an amended return has passed, you will need to write to HMRC to tell them of any corrections. A refund can be claimed up to four years from the end of the tax year to which it relates.
Changes to your tax bill
Correcting a mistake in your tax return may also change the amount of tax that you owe for that tax year. Where an amended return is filed online, the calculation is also updated. Within three days of filing an amended return, the tax account will also be updated. If you owe more tax, this, plus the associated interest, should be paid without delay. If you have paid too much, you can request a repayment online. However, HMRC warn that you should allow up to four weeks to receive it.
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