understands your needs?
helps you keep more of your income?
delivers custom solutions?
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.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
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.
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.
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.
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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`Relevant goods’ and the VAT flat rate scheme?
The VAT flat rate scheme is a simplified VAT scheme, which allows small traders to account for the VAT that they pay to HMRC by reference to a percentage of their VAT-inclusive turnover.
Prior to 1 April 2017, the percentage depended only on the business sector in which the business operated. However, from 1 April 2017 it is also necessary to determine whether the business counts as a `limited cost business’. Where a business meets the definition of a limited cost business, the VAT payable to HMRC is calculated as 16.5% of VAT-inclusive turnover for the period rather than by reference to the (lower) flat rate percentage for the business sector. The calculation needs to be performed separately for each VAT period.
A limited cost business is one where the spend on `relevant goods’ is either:
Relevant goods are goods that are used exclusively for the business. Crucially, they must be `goods’ not `services’. VAT Notice 733 gives the following examples of goods that count as relevant goods:
The above list is not exhaustive and other goods may count as relevant goods depending on the nature of the business.
A person receives `goods’ where ownership is passed to the business from another person or where title passes at a later date, such as goods purchased on hire purchase. The supply of water, power, heat, refrigeration, and ventilation is also a supply of goods (although hiring equipment to provide these is a supply of services).
In the main, items that are services rather than goods do not count as relevant goods. VAT Notice 733 contains the following list of examples of supplies that aren’t relevant goods:
The list is not exhaustive. Further guidance can be found in VAT Notice 733.
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).
A quick overview of capital gains tax
Capital gains tax is payable on net gains to the extent that they exceed the annual exempt amount.
Capital gains tax is a tax on the profit that is made on the disposal of an asset. Normally, this will apply when an asset is sold, but a taxable gain may also arise when an asset is given away as a gift or exchanged for something else. A tax charge may also arise if compensation, such as an insurance payout, is received when the asset is destroyed. Exemptions and reliefs may be available.
Chargeable assets - Capital gains tax is only payable if the asset in question is a chargeable asset. Chargeable assets include personal possessions which are worth more than £6,000, any property which is not your main home, shares (other than those held in a tax-free scheme or investment), and business assets.
Allowable costs - In working out the chargeable gain, you deduct any allowable costs. These include not only the cost of buying the asset in the first place but also any incidental costs of buying and selling, such as advertising, commission, etc., and anything spent on the asset to enhance its value.
Losses - Losses are worked out in the same way as gains. Losses and gains arising in the same tax year are set against each other to arrive at the net gain for the year. Where there is a net loss, this can be carried forward and set against future gains.
Annual exempt amount - All individuals are entitled to an annual exempt amount. For 2017/18, this is set at £11,300 for 2017/18. For 2016/17, the figure was £11,100.
The annual exempt amount is set against net gains for the year (gains less losses). Any brought forward losses can be used to shelter any gain remaining once the annual exemption has been applied.
If the annual exempt amount is not used in the tax year in question, it is lost – unused amounts cannot be carried forward.
Rates - For 2017/18, capital gains tax is payable at the rate of 10% to the extent that total taxable income and gains do not exceed the basic rate band of £33,500, and at 18% where the income and gains exceed this limit. Higher rates of, respectively, 18% and 28%, apply to gains on property (where not exempt) and to carried interest.
Spouses - Transfers between spouses and civil partners are deemed to be at a value that gives rise to neither gain nor a loss. This means it is possible to transfer assets between spouses and civil partners tax-free prior to a disposal to a third party, to take advantage of an unutilised annual exempt amount.
The capital gains tax rules can be complex. It is advisable that professional advice is sought, ideally before making the disposal.
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.
NICs and the self-employed
Following the Spring Budget, the National Insurance treatment of the self-employed hit the headlines after it was announced the main rate of Class 4 contributions would be increased to 10% from April 2018 and to 11% from April 2019. The measure, billed as the `white van man tax’, was short-lived. Amid criticism that the Government had gone back on their election promise not to increase National Insurance, they performed a U-turn a week later – giving a further promise that the Class 4 rates would remain unchanged during this Parliament. Then Theresa May announced a General Election…
So where are we now with NICs and the self-employed?
The self-employed currently pay two Classes of National Insurance contributions – Class 2 and Class 4.
Class 2 is a flat weekly rate payable where profits exceed the small profits threshold (set at £6,025 for 2017/18) for each week of self-employment in the tax year. For 2017/18, the Class 2 rate is £2.85 per week. It is Class 2 contributions that currently earn the self-employed rights to the state pension and certain contributory benefits.
Class 4 contributions are essentially a further tax on profits. They currently confer no benefit entitlement. For 2017/18, Class 4 contributions are payable at the main rate of 9% on profits between the lower profits limit of £8,174 and the upper profits limit of £45,000, and at the additional rate of 2% on profits above £45,000.
Both Class 2 and Class 4 contributions are collected via the self-assessment system.
New rules from April 2018
National Insurance contributions for the self-employed are to be reformed from April 2018.
Class 2 National Insurance contributions are being abolished from 6 April 2018 and Class 4 reformed to take on the role of providing benefit entitlement for the self-employed.
The new-look Class 4 structure that will apply from that date will closely resemble Class 1 contributions as applied on an annual basis (as for, say, company directors). A new small profits limit will be introduced and aligned with the lower earnings limit for Class 1 purposes (£113 per week for 2017/18). A zero rate will apply to profits which fall between the small profits limit and the lower profits limit which, like the Class 1 equivalent, will earn state pension and benefit rights for self-employed earners whose profits fall in this band. As is currently the case, contributions will be payable at the main rate between the lower and upper profits limits, and at the additional rate on profits above the upper profits limit.
As at the time of writing, the plan appears to be for the main rate to remain at 9%. However, as we enter a new Parliament, the Government may be free of the shackles imposed by previous election promises and the statutory NIC lock and decide after all to raise the main rate from April 2018. It is a case of watch this space.
MTD - Extending the Cash Basis
The cash basis is an easier way for smaller businesses to work out their taxable profit. Under the cash basis it is only necessary to take account of money in and money out. By contrast, under the traditional accruals method, income and expenditure is recorded when invoiced or billed.
Prior to 6 April 2017, the cash basis was only available to unincorporated business and partnerships (as long as partners are individuals) whose turnover was less than the VAT threshold - £83,000 from 1 April 2016, increasing to £85,000 from 1 April 2017.
As part of the consultations on the Making Tax Digital reforms, the Government consulted on measures designed to simplify tax for unincorporated businesses. The measures included increasing the turnover threshold for the cash basis to make it accessible to more businesses. Following the consultation, it was announced that the threshold will be increased to £150,000 from 6 April 2017. Once in the cash basis, businesses can remain in it as long as their profits do not exceed the exit threshold. This is set at double the cash basis threshold and consequently increases to £300,000 from 6 April 2017.
Changes are also made to the cash basis rules, particularly in relation to the treatment of capital items. The general rule which prohibits a deduction for capital items in computing the profits of the business is replaced by a more limited disallowance for capital expenditure. Under the new rules, capital expenditure can be deducted in working out taxable profits unless the expenditure is incurred on or in relation to the acquisition of disposal of a business or in connection with the provision, alteration or disposal of:
• an asset that is not a depreciating asset (i.e. one with a useful life of more than 20 years);
• an asset that is not acquired or created for use on a continuing basis in the trade;
• a car;
• a non-qualifying intangible asset, including education and training; or
• a financial asset.
The new rules apply from 6 April 2017.
Extension to landlords
The availability of the cash basis is also extended to unincorporated property businesses from 6 April 2017 where the rental income of the property business (calculated according to cash basis rules) is not more than £150,000 a year. Where this is the case, the cash basis is the default basis and landlords within the cash basis threshold who want to use the accruals basis will now need to elect to do so.
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.
Property development – are you trading?
For many, buying a property, doing it up and selling it for a profit is an attractive proposition. However, it will not always be clearcut when the line between simply investing in property and trading is crossed. From a tax perspective, the distinction is important as the tax consequences are not the same.
Which tax? - Assuming the goal of selling the property for more than it cost to buy and do up is realised, for tax purposes, it is important to determine whether that surplus is a chargeable gain liable to capital gains tax or a trading profit liable to income tax.
A gain in an investment property is taxed as chargeable gain (and conversely, if the property market fell and the property was sold at a loss, the loss would be an allowable loss). To the extent that it would remain available, any gains in excess of the annual exempt amount would be charged at the residential property rates of capital gains tax, which for 2017/18 are 18% where the taxpayer is a basic rate taxpayer and 28% where the taxpayer is a higher or additional rate taxpayer.
By contrast, a property developer who is trading and running an unincorporated business would be taxed at his or her marginal rate of tax once the personal allowance has been utilised – 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 45% for an additional rate taxpayer.
Investment vs trading – a question of intention
The starting point for determining whether the taxpayer is investing in property or trading is the original intention when buying the property.
Scenario 1 - Ben buys a run-down property as a long-term investment with a view to doing it up and then renting it out. Following a change in his personal circumstances, he sells the property shortly after completing the renovations, realising a gain of £30,000. His intention was to hold the property as an investment and this has not changed as a result of the sale. The gain is, therefore, chargeable to capital gains tax.
Scenario 2 - Bill also buys a run-down property, but he sees it as an opportunity to make a quick profit. He renovates the property and sells it once the renovations are complete. He makes a profit of £30,000 which he invests in another property that he also does up and sells, this time realising a profit of £50,000.
Unlike Ben, Bill is trading. His intention is to buy and sell property to make a profit. The profit is charged to income tax as trading income.
Determining intention will not always be clear cut. HMRC will consider factors such as how long the taxpayer owned the property, whether the sale and purchase is a one-off or one of series of transactions, whether the property has been rented out, whether it was acquired for personal enjoyment and whether there is a connection with the existing trade. This will provide a picture that determines whether the taxpayer is investing in or trading in property.
To ensure that the unwary do not get caught by unintended tax consequences, the question of whether the taxpayer is making an investment or trading should be determined at the outset.
Residence nil rate band and downsizing
The residence nil rate band (RNRB) is an additional nil rate band, which is available where a death occurs on or after 6 April 2017 (or, in the case of married couples and civil partners, the death of the second spouse/civil partner occurs after that date) and the property is left to direct descendants.
The RNRB is set at £100,000 for 2017/18, £125,000 for 2018/19, £175,000 for 2019/20, and £175,000 for 2021/21.
The allowance is reduced by £1 for every £2 by which the value of the estate exceeds £2 million.
As with the normal nil rate band, any unused portion is transferred to a spouse or civil partner on his or her death.
Downsizing - Availability of the RNRB may be preserved where a person downsizes on or after 8 July 2015. If at the date of death the estate does not qualify for the full RNRB, a downsizing addition may be available if the following conditions are met:
The amount of the downsizing addition will generally be equal to the amount of the RNRB that is lost because the residence no longer forms part of the estate. Assets at least equal to the RNRB plus downsizing addition must be left to direct descendants.
Calculating the downsizing addition - Work out the RNRB that would have been available when the disposal of the former home took place (set at £100,000 where this is between 8 July 2015 and 5 April 2017) plus any transferred RNRB available at the date of death.
Case study - Jack and Eva sold their family home in September 2016 for £500,000 and bought a retirement flat. Eva died in April 2017, leaving all her estate to Jack. Jack died in August 2020, leaving his estate, valued at £900,000 equally to the couple’s two daughters. The retirement flat is valued at £280,000.
The downsizing addition is calculated as follows:
If Jack and Eva had not purchased a new home, the downsizing addition would be equal to the RNRB available at death.
Employment allowance – can you benefit?
The National Insurance employment allowance can reduce an employer’s National Insurance bill by up to £3,000 – but not all businesses can benefit.
Nature of the allowance
Where available, the allowance is set against the employer’s secondary Class 1 National Insurance bill. The allowance, set at £3,000, reduces the National Insurance payable by the employer until it is used up or, if sooner, the tax year ends. Qualifying employers whose secondary National Insurance liability for a tax year is £3,000 or less will not pay any employer’s National Insurance. Employers whose secondary National Insurance liability is more than £3,000 will benefit in a £3,000 reduction in their National Insurance bill.
The way the allowance works means that employers will pay less or even nothing at the start of the tax year and the full month’s liability once the allowance has been used up.
Not for everyone
Not all businesses are able to benefit from the employment allowance. Since 6 April 2016, it has not been available to one-man companies where the sole employee is also the director. However, in a family company scenario, having a set up where there is more than one paid employee or the only employee is not also a director will preserve the allowance. This can be beneficial in formulating a profit extraction strategy and setting an optimal salary level.
The employment allowance is also not available where someone is employed for personal, household, or domestic work, such as a nanny or a gardener (although the allowance is available where the personal employee is a care or support worker). Service companies operating under IR35 where the only income is the earnings of the intermediary and public bodies and those doing more than 50 per cent of their work in the public sector are similarly denied the allowance.
The allowance must be claimed through the employer’s real time information software package. To the extent that the allowance is not used up during the tax year, it is lost – any unused balance cannot be carried forward to the following year.
Corporation tax and trading losses
Relief may be available where you operate your business through a company and you make a loss. The loss may be set against total profits of the current or previous accounting periods or may be carried forward and set against future trading income from the same trade.
Computing the trading loss - A trading loss is computed in the same way as a trading profit and normal rules apply. However, it should be noted that trading income does not include any chargeable gains, so chargeable gains are not taken into account in computing the loss.
The loss may be augmented by capital allowances and reduced by any balancing charges.
Entitlement to relief - A company can only obtain relief for a loss while the company carrying on the trade is within the charge to corporation tax in respect of that trade. This is the case where the company is either resident in the UK or resident abroad and carrying on a trade in the UK through a branch or agency.
Relief against total profits of same period - The first way in which relief for a trading loss may be given is against total profits of the accounting period for which the loss was incurred. Chargeable gains are not included in the computation of the trading loss, so if the company has chargeable gains in the period in which the loss was incurred, these can be sheltered by the loss.
Relief against total profits of a previous period - Once a claim has been made to set a trading loss against total profits of the period in which the loss was incurred, the balance of the loss can be carried back and set against the total profits of previous accounting periods to the extent that they fall within the period of 12 months immediately preceding the start of the loss-making accounting period. It is only possible to carry a loss back once it has been set against total profits of the period of the loss. However, any loss remaining after set-off against current year profits does not have to be carried back – it can go forward.
Carry forward against future trading profits - The loss may also be carried forward against future trading profits from the same trade. Note that any losses carried forward can be set only against trading profits and not against future chargeable gains.
A loss can be carried forward without the need first to make a claim against total profits of the current period. Where losses remain after carrying back to a previous period, these too can be carried forwards against future trading profits from the same trade.
Group relief - Where the company is a member of a group, losses may be able to be surrendered to other companies in the group.
Terminal loss - A loss in the last 12 months of trading (a terminal loss) can be carried back against total profits of the preceding three years.
Anti-avoidance – There are a number of anti-avoidance provisions that apply to prevent abuse of the loss relief rules, including restrictions where there is a change in the nature of the trade and where losses are uncommercial.
Planning - In general, the aim is to obtain relief sooner rather than later, but at the highest possible rate. Speak to your adviser as to what is best for you.
Cash basis threshold increased
Cash basis threshold increased
The cash basis is a simpler way for smaller businesses to work out their taxable profit. Under the cash basis, profit is calculated by reference to cash in and cash out, rather than by reference to income earned in the period and expenditure incurred, as is the case under the traditional accruals basis.
Prior to 6 April 2017, the cash basis was only open to sole traders and unincorporated businesses with a turnover below the VAT registration threshold (which was set at £83,000 from 1 April 2016 and increased to £85,000 from 1 April 2017).
However, in preparation for the introduction of Making Tax Digital, under which businesses will be required to maintain records digitally and to provide digital updates to HMRC quarterly, the cash basis threshold has been increased. Availability of the cash basis is also extended to unincorporated landlords from 2017/18 onwards.
New look cash basis
From 6 April 2017, the entry threshold for the cash basis is increased to £150,000. Once using the cash basis, businesses can remain in it until their turnover exceeds the exit threshold, set at double the entry threshold. Thus, the exit threshold is £300,000 from 6 April 2017.
From 6 April 2017, the cash basis also becomes the default accounting basis for unincorporated businesses with rental income of £150,000 or less. Such businesses can still use the accrual basis if they prefer – but will need to elect to do so.
Simplified rules for treating capital expenditure under the cash basis are also introduced from 6 April 2017. Instead of the general prohibition on capital expenditure that applied prior to that date, the new rules only prohibit the deduction of certain items, namely:
• capital items incurred in connection with the acquisition or disposal of a business or part of a business;
• any asset not acquired or created for use on a continuing basis in the trade;
• a car;
• certain intangible assets, including education or training; and
• financial assets.
Capital expenditure that does not fall into the above categories can be deducted as for revenue expenditure.
Is it for me?
The cash basis will suit many small businesses, but it is not for all businesses. This may be the case if the business has high stock levels or has losses that would be beneficial to offset against other businesses. On the plus side, tax is only payable on money that has actually been received by the year end.
Making money from your spare room
Under the rent-a-room scheme, it is possible to earn tax-free income from letting out a furnished room in your own home to a lodger. You can even use the scheme if you run a bed-and-breakfast or a guest house.
Rent-a-room is not available if the room is unfurnished, or if you let accommodation in a UK home while living abroad. The Government also intends to amend the rules so the scheme is not available to those who let accommodation via Airbnb and similar sites.
Automatic exemption - No tax is payable if the gross receipts from letting are less than the rent-a-room threshold, set at £7,500 a year from 6 April 2016. The exemption is automatic and does not need to be claimed. Even better, there is no need to tell HMRC about the income.
Gross receipts include rental income before expenses, any amounts received in respect of the provision of services, such as cleaning, meals or laundry, and any balancing charges.
Gross receipts exceed £7,500 - If your gross receipts from letting a furnished room in your home exceed the rent-a-room threshold of £7,500, you can still benefit from the scheme. However, whether it is beneficial to do so will depend on the level of the associated expenses.
Where receipts exceed £7,500, you have a choice as to how to work out the rental profit on which you pay tax. Under method A, you simply deduct the associated expenses and any capital allowances and pay tax on the actual profit. Under method B, you deduct the rent-a-room threshold and pay tax on the difference.
So, if expenses are less than the rent-a-room threshold, method B is beneficial, whereas if they exceed the threshold, method A is better.
Example - In 2016/17, Greg lets out two furnished rooms in his own home to lodgers. He receives rental income of £8,000. His associated expenses are £1,000. Under method A, he would pay tax on the actual profit of £7,000 (£8,000 - £1,000). Under method B, he would only pay tax on £500 (£8,000 - £7,500).
The rent-a-room scheme is beneficial. Greg opts into the scheme on his tax return and claims the allowance.
Losses - Rent-a-room will not be beneficial if you make a loss, even if your rental receipts are below the rent-a-room threshold. Under the rent-a-room scheme, you cannot create a loss. Losses can be carried forward and set against future rental income.
More than one landlord - If a house is owned jointly by two or more people, the rent-a-room limit is halved so each person has a tax-free allowance of £3,750. This is the case regardless of the number of people receiving rental income from letting rooms in the property – so tax-free rental income per property cannot exceed £7,500.
Opt in and out - You can choose each year whether it is beneficial to use the scheme and opt in and out on your tax return by the normal filing date of 31 January after the end of the tax year.
Company cars in 2017/18
Company cars are a popular benefit and are often something of a status symbol. But, they have also been an easy target for the taxman.Where a company car is available for private use, the employee is taxed on the associated benefit that this provides. The amount that is charged to tax – the cash equivalent value – depends on the list price of the car and the appropriate percentage.The list price is essentially the manufacturer’s price when new. This remains the reference point by which the tax charge is calculated – it does not matter how much was actually paid for the car, whether it was bought second-hand or that cars tend to depreciate rapidly.The appropriate percentage – the percentage of the list price charged to tax – depends on the car’s CO2 emissions.Adjustments are made when calculating the cash equivalent to reflect the periods when the car was unavailable, capital contributions and contributions to private use.Appropriate percentage - Linking the appropriate percentage to the CO2 emissions has the effect of rewarding those who choose lower emission cars. However, it also provides the Government with an easy mechanism for increasing the tax charge year on year by making the emissions criteria stricter.The appropriate percentage is set for a year for the relevant threshold (95g/km). For 2017/18, the appropriate percentage for a car with CO2 emissions of 95g/km is 18% - For 2017/18, it was 16%.Thereafter, the appropriate percentage is increased by 1% for every 5g/km by which the CO2 emissions exceed the relevant threshold, to a maximum of 37%. Diesel cars attract a 3% supplement on top of what the relevant percentage is; however, the over percentage is capped at 37%.Increasing the appropriate percentage each year means that a company car driver will pay more tax in 2017/18 than in 2016/17 on the same car, despite the fact it is a year older, has higher mileage and will have generally depreciated.Example - Max has a company car. It has CO2 emissions of 120g/km. The car cost £30,000 when new. Max is a higher rate taxpayer.In 2016/17, the appropriate percentage was 21% and in 2017/18 it was 23%. This means that the cash equivalent value of the benefit has increased from £6,300 for 2016/17 to £6,900 for 2017/18 and the associated tax bill has increased from £2,520 to £2,760 – an increase of £240.Fuel - A separate charge applies where fuel is provided for private motoring in a company car. The amount taxed is the appropriate percentage as determined for the purposes of the tax charge on the car multiplied by the multiplier for the year, set at £22,600 for 2017/18. In the above example, if Max were to receive fuel for private journeys, he would be taxed on a benefit of £5,198 – a further tax bill of £2,079.20.Unless private mileage is very high, employer-provided fuel is rarely an efficient benefit.Practical tip – Choosing a cheaper low emission company car will minimise the associated tax charge.
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