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Adrian Mooy & Co

Welcome to our home page. We are a small firm of Chartered Certified Accountants and tax advisors in Derby. We help businesses like yours grow and be more profitable.  For a friendly service covering audit, tax, accounts, self assessment, VAT & payroll please contact us.

 

How can we help you?

We offer a traditional personal service and welcome new clients.

We specialise in cloud-based accounting solutions. With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button accounting is the future.

From start-up to exit and everything in-between - whether you’re struggling with company formation, bookkeeping, or annual accounts and taxation, you can count on us at every step of your business’s journey.

If you are looking for a Derby accountant then please contact us.

  • Quality checked firm - awarded the prestigious ACCA Quality Checked mark
  • Cloud-based accounting solutions
  • Tax solutions to help you keep more of your income
  • Transparent affordable pricing
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Blog ... our latest news

15 Feb

2017
If you buy and use cars in your business, you can claim capital allowances on their value, allowing you to deduct part of the value from your pre-tax profits using writing down allowances.  Read >
Tax Planning for individuals

Tax Planning for Individuals

Successful individual tax planning requires careful attention across a wide range of areas and time frames.

Tax Planning for small business

Tax Planning for Small Business

Effective tax-saving strategies for small businesses operating in a tough economic climate.

Planning your financial future

Planning your Financial Future

In today's complex financial and business world everyone needs reliable and professional help in managing their finances.

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Services

Web-based accounting

Xero is a web-based accounting system designed with the needs of small business owners in mind.

 

It can automatically connect to your bank and download your bank statements. From there it’s simple to tell Xero what transactions relate to and once told it remembers and looks out for similar transactions. This saves time and makes keeping your accounts up to date easier.

 

xero accounting softwareLog in from any web browser. As your accountant we are also able to log in and provide help and advice when needed.

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Xero makes keeping your accounts up to date easier.

Our process for delivering tax accounting vat self assessment and payroll services

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.

 

Our Process

Understand your needs

Firstly we listen and gain an understanding of your business and what you are aiming to achieve.

Actively communicate

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.

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Continuous improvement

We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.

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Get in touch for a free initial interview.

Testimonials

First class! Super accountant! We have been with Adrian Mooy & Co since 1994. They provide a prompt, accurate & reliable service. There is always someone at the end of the phone to help and advise us. They have always delivered and we are more than happy to recommend them.    Ian Cannon - Link a Bord Ltd

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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Helpsheets

 

Business expenses

Being savvy with your expenses is a large part of running a successful business, regardless of its size. Claiming expenses is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your tax payments. By claiming every allowable expense you’re making sure you don’t pay a penny more in tax than you have to.

 

For more information about exactly what expenses you can claim, see our helpsheets.

Accountant preparing tax return
  • Income Tax When You Rent Out A Property

    HMRC have recently published a series of case studies which aim to help landlords avoid common mistakes when working out and reporting income and profit from renting out property. Some of the situations covered by the case studies are explored below. The case studies are taken from HMRC’s guidance.

    Remortgaging - If you increase the mortgage on a buy-to-let property, the interest on the additional loan is deductible as a revenue expense, but only on total borrowings up to the capital value of the property when it was brought into the letting business. Interest on borrowings in excess of the value of the property when brought into the letting business is not deductible.

    The loan does not have to be secured on the rented property for relief to be available.

    The way in which relief for interest is given is changing from 6 April 2017, gradually moving from a tax deduction to a basic rate income tax reduction.

    Wholly and exclusively rule - Expenses can be deducted from rental income if they are incurred 'wholly and exclusively’ for the property rental business. If an expense was not incurred for the purposes of the property rental business in any way, it cannot be set against the rental income.

    Claiming part expenses - Sometimes a cost may be incurred which is not `wholly and exclusively’ for the purposes of the property rental business, although part of the cost is. Where a definite part or proportion of an expenses is incurred wholly and exclusively for the purposes of the property business, a deduction can be claimed for that part or proportion.

    Typical maintenance and repair costs - There are typical maintenance and repair costs that a landlord is likely to incur, and these can be claimed against rental income. The list includes:

    • repairing water or gas leaks and burst pipes;
    • repairing electrical faults;
    • replacing broken windows, doors, gutters and roof slates and tiles;
    • repairing internal or external walls, roofs and doors;
    • repainting and decorating (but not improving the property) to restore it to its original condition;
    • treating damp or rot;
    • repointing and stone cleaning;
    • hiring equipment to carry out necessary repair work; and
    • replacing existing fixtures and fittings, such as radiators, boilers, water tanks, bathroom suites and kitchens (but not electrical appliances).

    Don’t forget to deduct the cost of repairs to the property when working out the rental profit.

    Replacing domestic items - A deduction is available where domestic items are replaced. The amount of the deduction is the cost of the replacement item (on a like-for-like basis) plus any cost of disposing of the old item, less any proceeds received from the sale of the old item.

    More than one property - Where a landlord rents out more than one property, the income and expenditure from all of the properties are combined to determine the overall profit or loss.  Losses can be carried forward and set against future profits from the same property rental business.

    Uncommercial lets - Where a property is let on terms that are not commercial, for example at a reduced rent to a friend, expenses can only be deducted up to the value of the rent.

    Landlords should take a look at HMRC’s guidance at www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-case-studies

  • Rental Losses and the New Restriction on Finance Costs

    From 6 April 2017 the tax relief for loan interest and other finance expenses relating to let residential property will be restricted. How will this affect current and future losses from your buy-to-let property?

    Controversial new rules

    Since the new rules which will limit tax relief on interest and finance costs for landlords of residential properties were announced in 2015, they’ve been a source of controversy, largely because they are tricky to understand. One point which seems to cause a lot of confusion is how property rental losses will be affected.

    Interest - old rules v new rules

    Under the rules which apply until 6 April 2017 interest etc. counts as a deductible expense in the same way as any other. If your total expenses exceed your rental income it creates a loss, which is carried forward and used to reduce taxable rental profit (or increase a loss) for later years. From 6 April 2017 25% of interest etc. won’t count as an expense and so can’t be taken into account when working out a loss, but it can be carried forward and used in a different way. Note. The portion of interest not allowed for 2018/19 increases to 50%, for 2019/20 to 75%, and for 2020/21 and later years, it’s 100%.

    Example 1. In 2017/18 Amy receives £9,600 rent from a flat she bought in April 2017. Her expenses are £4,000, plus mortgage interest of £8,000. To arrive at her taxable profit she can deduct the £4,000 and 75% of the mortgage interest (£6,000). The result is a loss of £400 which can be carried forward. The disallowed interest of £2,000 can also be carried forward, but not as a loss; it is instead added to the interest paid in the next year.

    Example 2. ln 2018/19 Amy received rent of £10,000. Her expenses are £3,800, plus mortgage interest of £7,800. In 2018/19 the proportion of interest which can’t be claimed as an expense is 50%. This means Amy’s rental income profit is £1,900, i.e. income £10,000 less: expenses of £3,800, mortgage interest of £3,900 (being 50% of £7 ,800) and the loss brought forward of £400. She also has brought forward interest of £2,000 This is added to the disallowed interest for 2018/19 of £3,900. It’s here that things start to get tricky.

    Tax credit for interest etc. payments

    Amy’s disallowed interest of £5,900 (which is the total of the amounts brought forward from 2017/18 and the amount disallowed for 2018/19) is used to create a tax credit, which is knocked off her general tax liability. The maximum credit is the basic tax rate (20%) multiplied by the interest, i.e. £1,180 (£5,900 X 20%), but further restrictions can apply. These limit the tax credit to the lower of 20% of the:

    • disallowed finance costs, in Amy’s case that’s 20% of £5,900
    • property profits, i.e. for Amy that’s 20% of £1,900; and
    • adjusted total income.

    Any part of the disallowed interest that isn’t used to create a credit can be carried forward and used the next year.

    Tip. While you should already be keeping a record of losses carried forward because they must be declared on your tax return, for 2017/18 and later years you’ll also need to report the amount of carried forward interest (if any), so it’s important to understand how the new rules work.

  • Dividends

    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.

     

  • HMRC Offers Simpler Tax Method For Buy-To-Let Landlords

    One of the potential implications for buy-to-let landlords of ‘making tax digital' is to make income tax payers send in quarterly returns rather than annual returns.

    This will  multiply paperwork and aggravation for individuals and businesses, without actually making the process of tax collection any more eflicient. On 15 August 2016, HMRC published a consultation document called 'simplified cash basis for unincorporated property businesses’. This cash basis of working out your tax is something which has already been proposed for unincorporated trading businesses, and so what we are talking about here is extending the availability of the cash basis to buy~to-let landlords as well.

    MTD s still in consultation and not becoming fully operational until 2020. There will be a requirement to provide information every quarter to HMRC instead of doing an annual tax return. In conjunction with this there will be a requirement for everyone to keep their records on computer.

    Is there any advantage for landlords? One advantage is that, as a buy-to-let landlord, you don’t have to take into account rent receipts until you actually receive them.

    More interestingly, there is a proposal to give immediate 100% relief for capital expenditure. The example which HMRC give is of a tenant who requires expensive specialist furniture to be installed, costing £15,000. A little while later, that tenant moves out and the specialist furniture is sold for £6,000. Under cash accounting as proposed, the £15,000 would be an immediate deduction against the rents, when it was paid. On the flipside, the £6,000 you would get for selling the furniture is then a taxable receipt. The example HMRC give here is of a commercial letting, and that’s significant. Landlords of residential property are likely to be covered by the new 'replacement' rules which are replacing the wear and tear allowance (10% of rents) from this year.

    Who will be able to use this 'simpler' method of tax accounting? Basically, individuals and partnerships consisting only of individuals will be eligible. As the proposals are drafted, there’s no upper limit, although the consultation paper does ask the question as to whether  there should be an upper limit, for example based on rental turnover.

    There are possible complications with applying the cash basis ln its simplest and most rigorous form. For example, what do you do about tenant deposits which are paid at the outset and held by the landlord under very stringent rules, which basically prevent him spending the deposit on anything? If you take cash accounting in its simplest form, this deposit would be taxable when received, and you would only get tax relief in the period including the end of the tenancy, when the deposit was paid back. Does it make a difference whether this deposit has to be handed over to a government approved agency to hold, or whether the landlord, in the case of a particular tenancy, is enabled to hang on to the deposit? All of these and more are issues which taxpayers and landlords may need to address in the future. Hl\/lRC's consultation closed on 7 November 2016, and its outcome is awaited.

  • Lettings relief

    Lettings relief

    Lettings relief increases the amount of the gain that is sheltered from capital gains tax when you sell a property which has at some time been your only or main residence, and in respect of which some private residence relief is due.

    Private residence relief (PPR) is available on the disposal of a property that has been used as the owner’s only or main residence at some point during the period of ownership. If the property has been the only or main residence throughout the whole period of ownership, there is no capital gains tax to pay – the full amount of the gain is eligible for the relief. However, if the property has been used for business or let out for some of the period of ownership, part of the gain will be taxable. However, if some PRR is due, the gain relating to the last 18 months of ownership is exempt.

    Nature of lettings relief

    Lettings relief provides an element of additional relief where part of the gain on the disposal of a residential property is taxable because the property has been let out during the period of ownership. The relief is only available if the property has at some point been the only or main residence and private residence relief is available in respect of part of the gain.

    The amount of lettings relief is the lowest of:

    • the amount of private residence relief;

    • £40,000; and

    • the amount of the gain that is chargeable by reason of the letting.

    Example

    David bought a flat on 1 September 2006 for £200,000. He lives in it as his main home for three years. He then moved in with his girlfriend, letting out the flat for seven years until he sold it on 31 August 2016 for £305,000. Costs of acquisition and sale were £5,000.

    Before taking account of any available reliefs, David realises a gain of £100,000 (£305,000 – (£200,000 + £5,000)).

    The property was David’s only or main residence for 3 years and qualifies for private residence relief for this period. Further, the last 18 months of ownership are also exempt, bringing the total period qualifying for private residence relief to four and half years.

    The gain eligible for PPR is therefore £45,000 (£100,000 x 4.5/10).

    The remaining gain of £55,000 is attributable to the letting and does not qualify for private residence relief.

    However, lettings relief is available. The amount of the relief is the lowest of:

    • the gain qualifying for private residence relief, i.e. £45,000;

    • £40,000; and

    • the gain attributable to the letting, i.e. £55,000.

    Letting relief is therefore £40,000.

    Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.

    Double the relief

    Although married couples and civil partners can only have one main residence between them for PPR purposes, each individual is entitled to lettings relief in respect of their share of the gain – doubling the potential letting relief available for spouses or civil partners to £80,000.

    Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.

  • VAT Flat rate scheme

    The VAT flat rate scheme is an optional simplified accounting scheme for small businesses. The scheme is available to businesses that are eligible to be registered for VAT and whose taxable turnover (excluding VAT) in the next year will be £150,000 or less. Once in the scheme, a business can remain in it as long as its taxable turnover for the current year is not more than £230,000.

    The flat rate scheme is designed to simplify the recording of sales and purchases. Under the scheme, a business works out the VAT that it is required to pay over to HMRC by applying a flat rate percentage to its gross (VAT-inclusive) turnover. The flat rate percentage depends on the type of business. The percentages for each business sector can be found on the gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay. The percentages are all less than the standard rate of VAT of 20%, reflecting the VAT that would be recovered on purchases.

    Example

    Jack is registered for the flat rate scheme. In a particular accounting period his turnover is £12,000. The flat rate percentage for his sector is 14%. Jack must pay VAT of £1,680 (14% of £12,000) over to HMRC. He does not need to work out the VAT on purchases.

    Advantages

    The main advantage is that it reduces the record keeping burden, as it is not necessary to keep records of the VAT incurred on purchases. As the VAT percentages are averages it is possible that the business may pay less VAT than accounting for VAT under the traditional rules, particularly if purchases are low. However, the business may also pay more if purchases are higher than average – you may need to do the maths to see if it is for you.

    Businesses also enjoy a discount of 1% from their flat rate percentage during their first year in the scheme.

    Limited cost businesses

    From 1 April 2017, a new flat rate percentage of 16.5% applies to a `limited cost business’. This is one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive expenditure in a prescribed accounting period or greater than 2% but less than £1,000 if their prescribed accounting period is one year. The figure of £1,000 is adjusted accordingly for periods that are not one year. In determining whether this test is met, capital expenditure, food and drink for consumption by the flat rate business or its employees, and vehicle, vehicle parts and fuel (except where the business is one that carries out transport services) are excluded from the calculation.

    However, a business with a VAT inclusive turnover of £20,000 in an accounting period would only need to incur expenditure of £400 or more to fall outside the definition of a limited cost business – for most businesses this will be doable, even taking account of the exclusions.

  • UK Resident Landlords

    This overview relates to a schedule A business, which is applicable to most individual landlords. Special rules apply to the rent a room scheme and to holiday lets. Hotels and guest houses are also excluded from these general rules.

    Rents & allowable expenses

    Rents less allowable expenses are taxable as part of the taxpayers total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.

    The two biggest items allowable as a deduction in calculating taxable net rental income will often be mortgage interest and travel where the cost is attributable to the rental income. The lettings agent will incur other costs and as long as these represent routine maintenance these too will be allowable. From 6 April 2017 individuals receiving rental income on residential property in the UK will receive relief on mortgage interest at the basic rate of income tax (to be introduced progressively over four years from 6 April 2017)

    Basis of determining ‘rent’

    The rental income for small lettings (under £15k p.a.) is normally calculated as the cash received. Taxable rent from all other lettings are taxable on an earned or receivable basis though relief is normally given for unrecovered rental.

    Losses

    Special rules apply to the treatment of losses. While profits are added to a taxpayer’s income and taxed at the taxpayers highest rates, losses generally may not be set off income from other sources other than some types of other property income. Losses may be carried forward to offset future profits, with some restrictions on the type of profits they may offset.

    Tax returns

    All UK residents with un-taxed income or profits are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. Landlords must also notify HMRC when gross rental income exceeds £10,000. Unless the taxable amount is under £2,500 and HMRC can collect the tax due through the PAYE scheme, HMRC will require submission of a Tax Return. The landlord’s Tax Return must include the additional property pages. All Income Tax Returns must be filed by 31st January following the end of the Tax Year (the previous 5th April) if filed online, otherwise the deadline is the previous 31st October. The calculation of the tax liability takes into account all the landlord’s other income and allowances, and for this reason is necessarily complicated.

    Sale of property

    On disposal of the property any increase in value is potentially subject to capital gains tax. The gain is calculated by comparing the sales proceeds with all the acquisition costs. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property at any time as his only and principal private residence.

    Residence

    You are resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. If you believe you may be non-resident then you must pass several precise tests.

    This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. We will be pleased to advise on any individual situation.

  • Furnished Holiday Lettings

    Individual taxpayers who are residential property landlords will be aware that a profit on disposal of a property will normally be subject to capital gains tax (CGT). For disposals in 2016/17, the basic and standard rates of CGT are 10% and 20% respectively (previously18% and 28%). However, gains on the disposal of interests in residential properties (that do no qualify for private residence relief) are subject to higher CGT rates of 18% and/or 28% instead.

    Does it qualify? - However, the commercial letting of furnished holiday accommodation is subject to special tax treatment, if certain conditions are satisfied. Broadly there are three basic conditions:

    • Availability - The property must be available for commercial letting as holiday accommodation to the public for at least 210 days during the relevant period;
    • Letting - The property must be commercially let as holiday accommodation to the public for at least 105 days during the relevant period (but a period of 'longer term occupation' does not count as a letting of it as holiday accommodation); and
    • Pattern of occupation - The total of all lettings that exceed 31 continuous days (i.e. periods of 'longer term occupation') is not more than 155 days during the relevant period.

    For CGT purposes, if the property satisfies the conditions for the commercial letting of furnished holiday lettings, the special tax treatment available for individual landlords (compared with the general treatment of rental property) includes certain CGT reliefs, such as business asset rollover relief and gift relief.

    Entrepreneurs’ relief - A further CGT relief available to individual landlords of commercial furnished holiday lettings is entrepreneurs' relief (ER). A CGT rate of 10% broadly applies to qualifying gains, up to a lifetime limit of £10 million.

    Certain conditions must be satisfied to be eligible to claim ER. The relief applies (among other things) to the disposal of the whole or part of a business carried on by a sole trader or partnership. The business must be owned for at least one year ending with the date of disposal. The disposal of an asset used (in a sole trader or partnership business) upon cessation is also a material disposal if the one-year ownership requirement is met and the disposal takes place within three years after the business has ceased.

    ER is not generally available on the disposal of a buy-to-let property rental business. For ER purposes, ‘a business' is defined as anything which is a trade, profession or vocation, and is conducted on a commercial basis and with a view to the realisation of profits. A buy-to-let property rental activity is capable of amounting to a business, but will not normally be a trade.

    However, a qualifying furnished holiday lettings business is treated as a trade for certain tax purposes, including ER. This potentially provides individual furnished holiday lettings business owners with the opportunity to sell the business and claim ER, if the relevant conditions are satisfied.

    Conclusion: By ensuring that the furnished holiday lettings and ER conditions are both satisfied, the CGT rate on disposal can be reduced from 28% to 10%. If the qualifying furnished holiday lettings business consists of a single property that is sold, the business has clearly ceased as there has been a disposal of the whole business. However, if the furnished holiday lettings business contains several let properties and there is a disposal of only some of the properties, a claim for ER may be challenged by HMRC on the basis that there has been no disposal of part of the business.

  • 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:

    • final - normally recommended by the directors and then approved in a general meeting of the shareholders; or
    • interim - paid between general meetings and authorised by the directors - the shareholders must ultimately approve the accounts against which the interim dividends are paid.

    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.

    However:

    • if the distributable profits per those latest accounts are not enough to cover the desired level of dividends, interim accounts may be drawn up to demonstrate that there are, now, sufficient reserves; and
    • if the company has just started and there have been no accounts yet laid before the company in a general meeting, initial accounts may be drawn up to 'prove' there are sufficient profits.

    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:

    • checking there are sufficient distributable profits (reserves) in place to support the dividend and evidencing it;
    • shareholder meeting or resolution to demonstrate that shareholders approve a final dividend as recommended by the directors; or
    • confirmation that the directors have authorised an interim dividend - and either 'physical' payment or contemporaneous entries in the company’s books if effected by journal entry;
    • dividend waivers must be effected before the right to the dividend arises; and
    • dividend vouchers to confirm that the dividend has been paid to the shareholder.

     

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  • 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?

  • Travel Expenses - Intermediaries: The New Rules

    The Finance Bill 2016 introduces new rules which restrict the ability of workers providing their services through an intermediary to claim a deduction for the cost of travelling between home and work.

    Employees are not allowed a deduction for home to work travel costs (ordinary commuting) and the new rules deny relief in certain situations to workers working through an intermediary for travel. However it should be noted that the rules do not affect all workers providing their services through an intermediary - a deduction for home-to-work travel is only denied if certain conditions are met.

    Who is affected? - The new rules apply where a worker:

    • personally provides services to another person;
    • is employed through an employment intermediary; and
    • is under the supervision, direction or control of any person in the manner in which they undertake their work.

    Employment intermediary - The rules apply where the worker does not provide his or her services direct to the client, but those services are provided through an intermediary. Thus, the intermediary provides an additional layer between the worker and the client. The intermediary may be a psc, an umbrella company, an employment agency or similar.

    Supervision, direction and control -  The 'supervision direction and control' test is critical in determining whether a worker who provides services through an intermediary is able to claim a deduction for the cost of travel between home and work. The new rules only bite where the worker is subject to, or is subject to the right of 'supervision, direction and control' of any person as to the manner in which the worker provides his or her services.

    The 'supervision, direction and control' test is met if there is a right to supervise, direct or control, even if there is no actual supervision, direction or control. The supervision, direction or control can be provided by 'any person'. It does not have to be provided by the client - the test is met if it is provided by an agency, a project manager, a consultant, a manager, etc.

    The worker only needs to meet one part of the test for it to apply.

    Supervision - The 'supervision' element of the test is met if someone watches or oversees how the worker provides his or her services or checks the work that the worker is doing to make sure that it is done correctly or to the right standard.

    Direction - Direction over the manner in which a worker provides his or her services means providing a worker with instructions, guidance or advice so that they do their work in a particular way.

    Control - A person is subject to control as to how they do their work if another person tells or instructs them how to do the work. It is the right of a person to say to the worker 'don’t do it like that' or 'do it like this'.

    A worker who provides personal services through an intermediary is still able to claim a deduction for home to work travel if they are not subject to supervision, direction & control.

  • What Income Counts Towards The VAT Registration Threshold?

    When the taxable turnover of a business reaches the VAT registration threshold (currently £83,000 per annum), it must register for VAT. The key point here is the words ‘taxable turnover'. Any income that you receive that is not counted as ‘taxable turnover’ is excluded from the £83,000 turnover figure when calculating VAT registration threshold.

    This causes small businesses a surprising amount of problems, as they are often unsure what to include and what to leave out.

    What is taxable turnover? - A business’s taxable turnover is its business income excluding any exempt or 'outside the scope’ (see below) supplies that it makes. This will include any supplies that would be:

    • standard rated;
    • reduced rate (5%); or
    • zero-rated

    if it were registered for VAT.

    What is not included? - There are a number of income streams that can be ignored when deciding if your business needs to register for VAT.

    You do not take into account any income that is exempt from VAT. This will include the following common sources:

    • any income from financial services or selling insurance;
    • any rental income from properties or the sale of land or existing buildings; and
    • betting, gaming or lotteries.

    There are other sources of exempt income, but most businesses are unlikely to have them.

    You also do not include any income which is 'outside the scope of VAT’. This would include any sales of goods that take place outside the UK, for example buying goods in China and having them sent directly to a customer in the USA. The place of supply is outside the UK and the sale will not count towards your taxable turnover for VAT registration purposes.

    Supplies of services to business customers in another EU member state or any customer outside the EU are treated as outside the scope of UK VAT and do not count towards your turnover for VAT registration purposes (e.g. supplying consultancy services to a business customer in France).

    Other non-business income is also excluded, such as disbursements incurred on behalf of a client, grants, or any income from employment.

    Businesses can also ignore one-off sales of capital assets.

    Charities can also ignore any income from donations, one-off fund raising events and educational and training courses that they undertake.

    When to register? - Businesses have to monitor their turnover on a rolling twelve-month basis, so at the end of each month you should check your turnover for the past twelve months to see if it has gone over the registration limit. You then have 30 days to inform HMRC and are registered from the first day of the following month.

    If a business fails to register on time it will be subject to a penalty for late registration, so registering on time is important in order to avoid a penalty of up to 15% of the tax due.

    Conclusion: Businesses need to monitor their turnover so that they register on time and avoid a penalty - but some turnover can be ignored for VAT registration purposes.

  • New Lifetime ISA – earn up to £1,000 a year

    Plans to introduce a new Lifetime ISA were unveiled in the 2016 Budget. The Lifetime ISA will be available from April 2017. It can be used either to save for a deposit for a first home or to save for retirement.

    Who can open one?

    A Lifetime ISA can be opened by anyone between the ages of 18 and 40. The procedure for opening a Lifetime ISA will be similar to that for existing ISAs. Savings into a Lifetime ISA will count towards the overall ISA limit for the year.

    Government bonus

    Sums saved in the account before the saver’s 50th birthday will earn a Government bonus of 25% of the amount saved. The Government bonus will be paid on savings of up to £4,000 a year, making it possible to earn up to £1,000 a year by investing in a Lifetime ISA. The bonus will be paid at the end of each tax year.

    Save for your first home

    The Lifetime ISA can only be used to save for a deposit on a first home or to save for retirement. However, a person must hold the Lifetime ISA for at least 12 months before they can make withdrawals that include the Government bonus. The savings, together with the Government bonus, can be put towards the purchase of a house in the UK costing up to £450,000. Where a house is purchased jointly, each purchaser can use savings from a Lifetime ISA, together with the Government bonus.

    Where a person already has a Help-to-Buy ISA, they can either keep it and use it to save for a first home or transfer it into a Lifetime ISA. It is possible to have both a Help-to-Buy ISA and a Lifetime ISA, but only the Government bonus from one of the accounts can be used to buy the first home.

    Trap

    The bonus is only available to first time buyers.

    Save for retirement – and earn a bonus of up to £32,000

    The other purpose of the Lifetime ISA is to save for retirement. A person who saves £4,000 a year from age 18 to age 50 will accrue savings of £128,000 (before interest) and earn a Government bonus of £32,000, giving them a savings pot of £160,000 (plus interest). The savings and the Government bonus can be withdrawn from age 60.

    Beware other withdrawals

    The aim of the Lifetime ISA is to encourage long-term saving for specified purposes. Although individuals will not be prohibited from making withdrawals for other purposes, they will lose the Government bonus on any withdrawals that they make for other purposes. In addition, they will suffer a 5% charge. So, if you save £100 either towards a first home or retirement, that £100 will be worth £125 (plus interest). However, if you use the savings for other purposes, be warned, you will only get £95 of your initial £100 back (plus any interest earned).

    Practical tip

    Use a Help to Buy ISA for your first home and the Lifetime ISA to save for retirement. For other savings, choose a different account.

  • Cars and Benefits-in-Kind

    Cars and leasing arrangements

    The rules for car benefits have been problematic for employers. The days when a company car was a 'perk' are long gone for most employees except for the most fuel-efficient cars the benefit-in-kind charge is based on an amount far higher than the real benefit that the employee gets from it. It has become more common for employees to buy their own cars and claim back a mileage allowance from the employer. But employees then miss out on the buying power and freedom from hassle given by employer fleet management, and employers fear that the employees will not buy cars that project the right image when they visit clients.

    So an alternative approach has been for the employer to be responsible for a fleet of cars that are leased to the employees. The employee has a commercially calculated, all-inclusive, lease payment to include servicing, repairs, etc., deducted directly from net pay, and pays for fuel. The employer reimburses the employee at the HMRC approved rates for the business mileage the employee reports. The net result will normally be much less expensive for the employee than having a company car and the accompanying benefit-in-kind charge.

    Unfortunately, HMRC did not like this approach, and challenged it in a case, Apollo Fuels v HMRC [2016]. The history of this case is unusual, in that the taxpayer won all the way through the courts, but for different reasons at each stage. HMRC’s argument was that the benefit-in-kind legislation only required the employer to have provided the car by reason of the employment without a transfer of the property in it for the company car rules to bite. The First-tier Tribunal held that the lease gave the employee some ownership rights, so there was a transfer of the property in the car, and hence no benefit-in-kind charge. The Upper Tribunal disagreed, but said the company car rules were displaced by a

    charge under s 62 on zero. The Court of Appeal, which is where the case has recently been decided, held that the arrangements were commercial and did not, on a purposive construction, give rise to a benefit-in-kind at all.

    While the taxpayer has therefore succeeded three times, the victory won't hold in the longer term. Finance Bill 2016 includes provisions to prevent such arguments from succeeding in 2016/17 and subsequent years.

    The legislation affects living accommodation, company cars or vans, and loans. In all three areas wording about 'fair bargain’ is introduced in similar terms. For cars and vans it says: 'In determining for the purposes of this Chapter whether this Chapter applies by virtue of subsection (1) to a car or van made available to an individual it is immaterial whether or not the terms on which the car or van is made available constitute a fair bargain’.  For cars and vans there is an additional provision to deal with any argument that the vehicle is provided for reasons other than employment. This provision deems any car or van that an employer provides to an employee (or member of their family) to have been made available by reason of the employment except in two situations. The first is where the employer is an individual and the vehicle is provided in the normal course of domestic, personal or family relationships, and the second is where the employer runs a vehicle hire business and the vehicle is provided to the employee as a normal member of the public.

    So any future Apollo Fuels type of scheme will be caught because the employer is 'providing' the car, and cannot argue that this is not because of the employment relationship. The first of the only two exceptions will be when, for example, a father employs his daughter in the business, and separately lets her have a car that she can use because she is his daughter. If the daughter is in a job where all the employees get cars, the exception will not apply. The other exception will require the employer to be running a car hire business, but it will not be possible to argue that the company fleet of lease cars is such a business. In order to meet the rules for the exception, not only would the vehicles have to be made available to the public for hire, they would also have to be hired by the employee acting as an ordinary member of the public. In other words, an employee of a genuine car hire company does not have to go to a competitor to hire a car when he needs one for a few months for fear of triggering a benefit-in-kind charge if he hires one from his employer, but a car hire company cannot use the exception to set up an Apollo Fuels type scheme for its employees.

  • Company Owners Beware of unpaid PAYE & NI Liabilities

    Imagine a situation where an owner-managed company owed HM Revenue and Customs (HMRC) substantial amounts of PAYE income tax and National Insurance contributions (NIC) when it ceased trading and was liquidated. Those company liabilities may relate to remuneration paid to its owners. HMRC can pursue the individuals for the unpaid tax, broadly if there has been a failure to deduct PAYE, and HMRC considers that the company wilfully failed to make the deductions from relevant payments to them. A similar provision applies for NIC purposes in respect of the individual's primary contributions, if there is a wilful failure to pay by the company.

    Whether the company owner(s) are liable for the unpaid PAYE and NIC of the business under the above rules will depend on the particular facts and circumstances, as two contrasting tribunal cases illustrate.

    Personally liable: In Marsh & Anor v Revenue and Customs [2016] , two individuals were directors and equal shareholders of a trading company. The company eventually experienced cashflow problems. Historically, the individuals received small amounts by way of salary from the company. Most of their income was received in dividends. However, for the tax year 2010/11, the director shareholders increased their salaries. The company had outstanding income tax and NIC, most of which related to the director shareholders. In April 2011, the company went into administration. HMRC sought to transfer the liabilities to the individuals.

    The First-tier Tribunal noted that the individuals drew substantial salaries when the company’s profits could not support them. It was clear to the tribunal that the company was already in financial difficulties when the director shareholders decided to take salaries instead of dividends. The failure to make deductions from their salaries was held to be wilful, and the tribunal concluded that the director shareholders were personally liable to pay the relevant tax and NIC.

    Not Iiable: By contrast, in West v Revenue and Customs [2016], the appellant was the sole director and shareholder of a trading company. For a number of years, the appellant drew money from the company as director’s loans. However, the director’s loans remained outstanding and increased over a number of years. Following advice from an insolvency practitioner, the appellant's accountant was instructed to prepare accounts showing an amount of director’s remuneration which, after deducting PAYE and NIC, would be sufficient to offset the drawings on the director’s loan account. Subsequently, a resolution was passed for the winding up of the company. PAYE and NIC liabilities were still outstanding. HMRC sought to formally transfer the liabilities from the company to the appellant, on the basis that he received payments from the company knowing that it had wilfully failed to deduct sufficient tax.

    The tribunal judge noted that the PAYE obligations fell on the employer, and this basic rule was set aside only in limited circumstances: (1) The employer did not deduct PAYE; (2) The failure was wilful and deliberate; and (3) The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax. HMRC had to show that all three circumstances were present. On the first condition, the tribunal judge found that tax was deducted from the remuneration provided by the company to the appellant; the total amount of PAYE and NIC liabilities was shown in the company's records. Thus the first condition was not satisfied. As all three conditions must be fulfilled, there was no basis for transferring the company's PAYE liability to the appellant. Furthermore, the tribunal judge found, on the facts and evidence, that the company's failure to pay the NIC liability was not wilful or deliberate. The appellant's appeal was allowed.

    The decision in West begs the question whether it leaves the door open for company owners to pay themselves large amounts of remuneration, and allow the company to be liquidated owing substantial PAYE and NIC liabilities. In West, the tribunal panel reached different decisions (but the tribunal judge had the casting vote). The other tribunal member expressed concerns on this point. The tribunal judge commented: 'Although I have concerns as to the consequences of allowing Mr West’s appeal, I do not consider that the legislation in its current state is sufficient to deal with the problems to which [the disagreeing tribunal member] refers.’ A change in the law therefore seems a possibility.

  • Tax-Free Savings

    The tax benefits associated with individual savings accounts (lSAs) have always made them attractive to those wishing to save, but for many years there were only two types of ISA available to investors - cash lSAs, and stocks and shares lSAs. Broadly, cash ISAs are available to investors aged 16 and over, who are resident in the UK; to hold a stocks and shares ISA, the investor must be aged 18 or over and resident in the UK. The maximum annual investment limit is £15,240 for 2016/17. Interest received is tax-free and there is no income tax or capital gains tax payable on investments.

    The popularity of these accounts has led the government to expand the range of lSAs on offer, with the objective of encouraging more people to save for their future requirements.

    Junior ISAs - Junior ISAs have been available since 1 November 2011 for UK-resident children (under-185). Junior ISAs are tax- relieved and have many features in common with existing ISA products. They are available as a cash or 'stocks and shares’ product. The maximum investment limit for 2016/17 is £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren.

    Until April 2015 it was only possible for children who did not hold child trust funds to invest in Junior ISAs, which meant that many young savers were trapped in accounts yielding poor interest rates. However, since April 2015 all children who are UK resident should be able to hold a Junior ISA & transfers from CTF accounts to Junior lSAs are allowed.

    Help-to-buy ISAS - Help-to-buy ISA were introduced from 1 December 2015 and are specifically designed to help first time buyers aged 16 and over) save a deposit to purchase their first home. Broadly, investors can save up to £200 a month towards their new home and the government will boost their savings by 25%. Key features include:

    • new accounts will be available for four years, but once open, there is no limit on how long the investor can hold it;
    • initial deposits of £1,000 may be made when the account is opened in addition to normal monthly savings;
    • there is no minimum monthly deposit, and the maximum monthly investment limit is £200;
    • accounts are limited to one per person rather than one per home, so those buying together can both receive a bonus;
    • the bonus is available to first time buyers purchasing UK properties;
    • the minimum bonus payable is £400 per person, and the maximum is £3,000 per person;
    • the bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside London; and
    • the bonus will be paid when the investor buys their first home.

    The maximum that can be saved in a help-to-buy ISA is £12,000. The government bonus is added to this amount, so total savings towards the property purchase can be up to £15,000. Since accounts are limited to one per person rather than one per home, a couple buying together will be able to save up to £30,000 towards the purchase of their first home. It will take around four and a half years to achieve this level of savings under the scheme.

    Innovative finance ISAS (IFISAs) - Launched in April 2016, innovative finance lSAs can hold peer-to-peer (P2P) loans, which often pay significantly higher returns than cash accounts.

    Help-to-save - Details of a new help-to-save cash account, designed to help people on low incomes save have recently been published. The accounts, which will be provided by National Savings and Investments (NS&l) and administered by HMRC, are expected to be available by April 2018. Investors will be entitled to a 50% bonus on savings of up to £50 a month - people will be able to save up to £2,400 over four years, and benefit from total government bonuses worth up to £1,200.

    Conclusion: In most cases the personal allowance and the new personal savings allowance will cover any tax liability arising on interest earned. Therefore, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment, rather than the tax-free status of the account.

  • 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 [2016], 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 [2016] 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 [1994].

    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.

  • Overdrawn Directors' Loan Accounts

    Overdrawn Directors' Loan Accounts – Traps to Avoid

    The loans to participators provisions are relatively well-known among affected taxpayers. The legislation imposes a 25% tax charge in respect of loans or advances to participators.

    The tax charge can be prevented on an overdrawn directors loan account to the extent that the 'Ioan' is repaid up to nine months after the end of the company's accounting period in which it is made. There is also relief if the loan is repaid or written off after that period.

    'Bed and breakfasting’

    There are anti-avoidance rules to rules to block 'bed and breakfasting’.

    This practice involves the shareholder repaying the overdrawn loan account balance either just before the end of the accounting period or within the following nine months, so that the 25% tax charge is not due. The shareholder might then withdraw a similar (or greater) amount from the company shortly thereafter.

    lf the anti-avoidance provisions apply, relief from the above tax charge is broadly denied (or withdrawn, if already given). The provisions can apply in the following circumstances:

    •  '30 day' rule - i.e. where, within any 30-day period, loan account repayment(s) of £5,000 or more are made to the close company, and a further amount of £5,000 or more is withdrawn by that person in an accounting period subsequent to the one in which the loan was made; or
    •  'arrangements rule' - i.e. where a loan (e.g. overdrawn Ioan account) is at least £15,000, and at the time of the repayment there are arrangements for replacement withdrawal(s) by that person of at least £5,000, and the withdrawal(s) is subsequently made (at any time after the repayment). 'Arrangements' is considered to have a wide meaning in HMRC's view.

    If 'caught' by either of the above rules, the effect is broadly that the repayment is treated as repaying the 'new' loan(s), rather than the earlier ('old') one(s). Relief from the 25% charge is therefore wholly or partly denied (or withdrawn) in respect of the 'old' loan(s) (i.e. relief will only be potentially available to the extent that the repayment exceeds the 'new' loan(s)).

    Repayments not 'caught'

    However, the above anti-avoidance rules do not apply if the directors' loan account repayment gives rise to an income tax charge on the director shareholder (see below).

    HMRC accepts that repayments can be made via 'book entries' in the company's accounting records, at the date when the book entries are made.

    ...Or are they?

    The most common ways to repay an overdrawn directors' loan account balance in a 'taxable' form is by crediting the loan account with their salary or a bonus from the company. Similarly, a dividend from the company may be credited to the loan account.

  • Buy-To-Let Property: Too Costly to Sell?

    Many landlords will be weighing up their options in light of the new regime to restrict tax relief for interest costs.

    The new regime for restricting income tax relief on the finance costs of buy-to-let (BTL) properties is now only a few months away. lt threatens to punish many residential property businesses, to the extent that some landlords will almost certainly conclude that they are better off either fully or partly selling up and exiting the BTL sector. Unfortunately, the costs of exit may prove prohibitive.

    The new regime applies only for income tax purposes, so companies are largely unaffected. While it is potentially possible to incorporate a property business relatively tax- efficiently, some portfolios will not be suitable, and in other cases landlords may wish to shed certain properties before incorporating the remainder.

    Risks vs Rewards - Rationalising a rental property business may allow the landlord to pay down some or all of the debt that generates the finance costs at the heart of the problem. This must, however, be weighed up against the costs incurred on the property disposal:

    • negative equity and a depressed market;
    • finance cancellation costs; and
    • capital gains tax.

    Whilst one factor may be manageable on its own, it will probably be a combination of factors that will see the worst outcomes.

    Negative equity and a depressed market - While many areas in the UK have more than ‘bounced back' from the depths of the recession in 2008/09, it has been reported in the press that house prices in 53% of towns and cities were still below their peak 2007 values, with a particular concentration in the North of England. The average house price in Liverpool at the beginning of 2016, for example, was 23% down on the 2007 figure.

    Given the current economic uncertainty over Brexit, it seems unlikely that house prices will have fared significantly better by the end of this year. lf, as some fear, a large proportion of landlords are forced to sell properties as the new regime starts to bite, BTL property values may be harder hit as availability rises and appetite wanes.

    Finance cancellation costs - A further potential problem is the cost of cancelling mortgage deals early, within a discount or similar period. One of the key saving graces of the recent recession has been that interest costs have been low and stable, allowing some landlords to tread water over the last few years in spite of negative equity. Some deals, however, have long clawback periods that trigger financial penalties if the mortgage is settled too soon.

    Capital gains tax - lt seems that Mr Osborne was determined to milk landlords for every penny that he could: aside from the new interest restriction regime, he arranged for capital gains tax (CGT) on dwellings to remain at 28% while practically everything else was reduced to 20%. Most homeowners will be able to avoid CGT thanks to 'only or main residence relief’. The 28% CGT charge will most likely fall most often on BTL landlords.

    Conclusion - Some landlords are still struggling with negative or substantially reduced equity, together with high gearing and early redemption penalties which will lead to some difficult decisions having to be made.

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Phone: 01332 202660

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