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61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
Phone

01332 202660

Blog

Exploiting the staycation trend – Buying a holiday let

Adrian Mooy - Tuesday, January 12, 2021
 
Those looking to buy an investment property may wish to consider a holiday let. Not only do the second and subsequent homes benefit from SDLT savings as a result of the temporary increase in the SDLT threshold, they can also benefit from the favourable tax regime for furnished holiday lettings.

 

Tax advantages

 

There are special tax rules for properties that qualify as furnished holiday lettings:

 

 • plant and machinery capital allowances can be claimed for furniture, equipment and fixtures;
 • capital gains tax reliefs for traders – business asset disposal relief, business asset rollover relief, relief for gifts of business assets --- are available;
 • profits count as earnings for pension purposes.
 
However, to qualify, the let must meet the conditions to qualify as an FHL.

 

Conditions

 

The property must be in the UK or in the EEA, it must be let commercially and it must be let furnished. In addition, it must meet three occupancy conditions:

 

1. pattern of occupancy condition -- the total of all lettings that exceed 31 days is not more than 155 days in the year;

 

2. the availability condition -- the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property); and

 

3. the letting condition –the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year (ignoring lets of more than 31 days unless the let exceeds 31 days as a result of unforeseen circumstances and lets to family or friends).

 

Second chances

 

If the let does not meet the letting condition (which may be the case, for example, if there are further lockdowns) all is not lost. Where the landlord has more than one property let as a FHL, the letting condition is treated as met if the average rate of occupancy for all properties is at least 105 days in the year. To take advantage of this, the landlord must make an averaging election no later than one year from 31 January following the end of the tax year (i.e. by 31 January 2023 in respect of an election for 2020/21).

 

The second way of qualifying as a FHL in a year where the letting condition has not been met is to make a period of grace election. This route can be taken where there was a genuine intention to meet the condition but this did not happen due to unforeseen circumstances (such as letting cancelled due to lockdowns). To be eligible to make an election, the pattern of occupation and the availability conditions must have been met and, for the first year for which a period of grace election is made, the lettings condition was met in the previous tax year.
 
Where a period of grace election is made, the lettings condition is treated as met. A further period of grace election can be made for the following year if the lettings condition is not met that year. However, if after two successive period of grace elections the letting condition is not met, the property will cease to qualify as a FHL.

 

Separate FHL business

 

Lettings that are FHLs are taxed as a separate FHL property business.

 

SDLT deadline
 
The residential SDLT threshold is increased to £500,000 where completion takes place between 8 July 2020 and 31 March 2020. This also benefits those purchasing second and subsequent residential properties as the 3% supplement is added to the residential rates, as reduced. However, the clock is running and completion must take place by 31 March 2021 to benefit from the savings.

 

More time to pay back deferred VAT and tax

Adrian Mooy - Saturday, January 09, 2021
 
At the start of the pandemic, VAT registered businesses were given the option of deferring payment of any VAT that fell due in the period from 20 March 2020 to 30 June 2020. Self-assessment taxpayers were also given the option of delaying their second payment on account for 2019/20, which was due by 31 July 2020. In his Winter Economy Plan, the Chancellor extended the deadlines by which the deferred tax must be paid, giving further help to those struggling to pay their tax bills as a result of Coronavirus.

 

VAT

 

VAT-registered businesses which took advantage of the opportunity to delay paying VAT that fell due between 20 March 2020 and 30 June 2020 were originally required to pay the deferred VAT by 31 March 2021. However, there is now another option for those for whom this presents a challenge, and they can instead pay the deferred VAT in smaller equal instalments up to the end of March 2022. Those wishing to take advantage of the instalment option will need to opt into the scheme; failure to do this will mean that the VAT owed will need to be repaid by 31 March 2021. Where businesses are able, they can if they so wish pay the deferred VAT in full by 31 March 2021.

 

Depending on the business’ VAT quarter dates, deferred VAT will relate to the quarter ending 29 February 2020, the quarter ending 31 March 2020 or the quarter ending 30 April 2020. VAT due after 30 June 2020 (i.e. for the quarter to 31 May 2020 and subsequent quarters) must be paid in full and on time. Where direct debits were cancelled, these should be reinstated if this has not already been done.

 

Regardless of whether the instalment option is chosen or not, the deferred VAT will need to be paid in addition to the usual VAT payments, and it is prudent to budget for this.

 

Self-assessment

 

Under the original proposals, self-assessment taxpayers could delay paying their second payment on account for 2019/20 due by 31 July 2020 and instead pay it by 31 January 2021, along with any balancing payment due for 2019/20 and the first payment on account due for 2020/21. For some taxpayers who have been affected financially by the pandemic, this will be something of a stretch. In recognition of this, self-assessment taxpayers who are finding it difficult to pay what they owe can set up an automatic time to pay arrangement online, as long as they do not owe more than £30,000 in tax.

 

Reclaiming SSP for periods of self-isolation

Adrian Mooy - Wednesday, January 06, 2021
 
The Coronavirus Statutory Sick Pay Rebate Scheme allows smaller employers to reclaim some or all of the Statutory Sick Pay (SSP) paid to employees who are absent from work due to a Coronavirus-related absence.

 

Eligible employers

 

An employer is eligible to use the scheme if the employer had fewer than 250 employees across all their PAYE payroll schemes on 28 February 2020 and has paid sick pay to an employee who was absent from work as a result of a Coronavirus-related absence.

 

The ability to reclaim SSP is not limited to that payable to employees with Coronavirus symptoms; it also applies to SSP paid to employees who are required to shield or to self-isolate as a result of Covid-19.

 

Reclaiming SSP related to periods of self-isolation
 
An employee is eligible for SSP if:

 

they are self-isolating because someone that they live with has Coronavirus symptoms or has tested positive for Covid-19;

 

they have been told to isolate by the NHS or a public health body because they have been in contact with someone who has tested positive for Covid-19;
 
or

 

they have been notified by the NHS to self-isolate before surgery for up to 14-days.

 

SSP payable from first day of sickness

 

The SSP rules have been relaxed in relation to Coronavirus absences and employees can receive SSP from the first day of a Coronavirus-related absence – the three waiting days do not need to be served before SSP is payable (as is the case for non-Covid absences).
 
As far as periods of self-isolation are concerned, SSP can be paid from the first day that the employee is off work because they are self-isolating where the period of self-isolation:

 

started on or after 13 March 2020 where someone they live with has Coronavirus symptoms or is self-isolating;

 

started on or after 28 May 2020 where the employee was notified by the NHS that have come into contact with someone who tested positive for Coronavirus; and

 

started on or after 26 August 2020 where the employee was notified by the NHS of the need to self-isolate prior to surgery.

 

Where an employee is required to self-isolate prior to surgery, only the days of self-isolation count as a Coronavirus-related absence. Any SSP paid for the day of the surgery and any recover days is not related to Coronavirus and cannot be reclaimed.

 

Reclaiming SSP

 

Eligible employers can reclaim up to two weeks’ SSP per employee where the employee has been absent from work due to Coronavirus, including where the employee is self-isolating or shielding. The claim can cover more than one period of absence, but where an employee has been absent from work for more than two weeks due to Coronavirus, the claim is capped at two weeks’ SSP – the employer must bear the cost of any further SSP paid.
 
Claims can be made online via the portal on the Gov.uk website.

 

Make the most of the dividend allowance

Adrian Mooy - Tuesday, January 05, 2021
 
The 2020/21 tax year comes to an end on 5 April 2021. The last few months of the year are a good time to undertake a review and to ensure that allowance for the year is not wasted.

 

Nature of the dividend allowance

 

One allowance that is available to all taxpayers, regardless of the rate at which they pay tax, is the dividend allowance. The allowance is set £2,000 for 2020/21.

 

Although called an ‘allowance’, the dividend allowance is more of a nil rate band. Dividends sheltered by the allowance are taxed at a zero rate of tax. However, the dividends covered by the allowance count towards band earnings.

 

Once the dividend allowance and any remaining personal allowance have been used up, any further dividend income (treated as the top slice of income) is taxed at the relevant dividend tax rate:

 

7.5 for dividends falling within the basic rate band;

 

32.5% for dividends falling within the higher rate band; and

 

38.1% for dividends falling within the additional rate band.

 

Personal and family companies

 

If you have a personal company and have sufficient retained profits, consider paying a dividend if you have not already done so to mop up your dividend allowance and any unused personal allowance. Although dividends are paid from profits which have already suffered corporation tax, the availability of the dividend allowance allows retained profits to be extracted without incurring any additional tax. A further benefit is that there is no National Insurance to pay on dividends.

 

In a family company scenario, making family members shareholders provides scope for family members to utilise their dividend allowances, allowing profits to be extracted in a tax-efficient manner.

 

There are some points to watch. Dividends can only be paid from retained profits and must be paid in proportion to shareholdings. However, the use of an alphabet share structure whereby each family member has a different class of shares (e.g. A shares for one person, B shares for another, and so on) provides the flexibility to declare different dividends for each person, depending on their available allowances and their marginal rate of tax.
 
Example

 

Mr Wilson is a director of W Ltd. His wife and two adult daughters, Emily and Evie, are both shareholders. The shareholdings are as follows
 
Mr Wilson – 100 A Ordinary shares;

 

Mrs Wilson – 100 B Ordinary shares;

 

Emily Wilson – 100 C Ordinary shares

 

Evie Wilson – 100 D Ordinary shares.

 

Mr Wilson is a higher rate taxpayer. None of the family has used their dividend allowance for 2020/21.

 

Mr Wilson wishes to declare a dividend of £8,000 for 2020/21.

 

If he declares a dividend £80 per share for A ordinary shares only, he will receive a dividend of £8,000, of which the first £2,000 will be covered by the dividend allowance of £2,000. The remaining £6,000 will be taxed at the higher dividend rate of 32.5%, giving rise to a tax bill of £1,950.
 
However, if instead, he declares a dividend of £20 per share for A, B C and D Ordinary Shares, each member of the family will receive a dividend of £2,000, which will be sheltered by their dividend allowance and received tax-free. By taking this route, the family’s tax bill is reduced by £1,950.

 

What tax do I need to pay by 31 January 2021?

Adrian Mooy - Monday, January 04, 2021
 
The self-assessment tax return for 2019/20 must be filed by midnight on 31 January 2021. If you miss this deadline, you will automatically receive a late filing penalty of £100, regardless of whether you owe any tax, unless you are able to convince HMRC that you have a reasonable excuse for filing your tax return after the deadline.

 

You must also pay any outstanding tax that you owe for 2019/20 by 31 January 2021, unless you have agreed a Time to Pay agreement with HMRC. The amount of tax that is outstanding for 2019/20 will depend on whether you opted to defer payment of the second payment on account for 2019/20, which would ordinarily have been due by 31 July 2020.

 

To help taxpayers who were struggling financially as a result of the Covid-19 pandemic, self-assessment taxpayers could opt to delay payment of the second payment on account for 2019/20, paying it instead by 31 January 2021. Where this option was taken, the balance owing for 2019/20 will be the total liability for the year (tax plus, where relevant, Class 2 and Class 4 National Insurance), less any amount paid on account by 31 January 2020.
 
If you decided instead to pay your July payment on account as normal (or if you paid it later than normal but have now paid it in full), you will only owe tax for 2019/20 if the total liability is more than what has already been paid on account.

 

Payments on account

 

If your total tax and Class 4 National Insurance liability was at least £1,000 for 2019/20 and less than 80% of your total liability is collected at source, for example, under PAYE, you will need to make payments on account for 2020/21. Each payment is 50% of the 2019/20 tax and Class 4 National Insurance liability. The first payment is due by 31 January 2021, along with any tax owing for 2019/20. The second payment should be paid by 31 July 2021.
 
Struggling to pay

 

For many, 2020 has been a difficult year financially. Where the option to delay the July 2020 payment on account has been taken, taxpayers may struggle to pay the higher than normal January tax bill in full by 31 January 2021. Where this is the case, they can agree with HMRC to pay the tax that they owe in instalments over the year to 31 January 2021.

 

If the amount that is owed is £30,000 or less, an agreement can be set up online. Where the amount outstanding is more than £30,000 or the taxpayer needs more than 12 months to pay, contact HMRC to discuss setting up an arrangement to suit.

 

As payments on account for 2020/21 are based on pre-pandemic profits, consider reducing the payments if profits for 2020/21 are likely to be lower.

 

Should I reduce my payments on account?

Adrian Mooy - Wednesday, December 30, 2020
 
The deadline for filing your 2019/20 tax return is fast approaching, as is the due date for the first payment on account for 2020/21. Now is the time to think about whether you can reduce your payments on account.

 

Need to make payments on account

 

If you pay tax under self-assessment you may need to make payments on account. These are advance payment towards your tax and Class 4 National Insurance bill.
You will need to make payments on account if your last self-assessment bill was at least £1,000 unless you paid at least 80% of what you owe under deduction at source, for example, under PAYE.

 

Payments on account based on previous year’s liability

 

When making payments on account, the assumption is that the current year’s liability will be roughly the same as the previous year’s liability. Thus each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Class 2 National Insurance contributions are not taken into account in working out payments on account.

 

When are they due?

 

Payments on account are due on 31 January in the tax year and 31 July after the end of the tax year. Consequently, payments on account for 2020/21 are due on 31 January 2021 and 31 July 2021.

 

Falling profits

 

Payments on account for 2020/21 are based on profits for 2019/20. Thus, where a business has been adversely affected by the Covid-19 pandemic, the payments on account will not reflect this because they will be based on pre-pandemic profits.

 

Where pandemic has taken its toll, cashflow is likely to be tight and there is little sense in making higher payments on account than are needed. You can elect to reduce your payments on account so that they better reflect your likely taxable profits for 2020/21. However, when working out your projected profits for 2020/21, remember to take into account any SEISS grants and other taxable Government support payments that you received.

 

Reduce your payments on account

 

There are various ways in which you can tell HMRC that you want to reduce your payment on account. This can be done by signing into your online personal tax account via the Government Gateway and using the ‘reduce payments on account’ option or by completing form SA303 and sending it to HMRC. You can also tell HMRC that you want to reduce your payments on account in the other information box on the self-assessment tax return. You will need to specify what you want to pay and the reason for the reduction.

 

Beware paying too little

 

Where cashflow is tight, it may be tempting to reduce payments on account to reduce your outgoings in January and July. However, if you reduce your payments below the actual amount that is due (i.e. 50% of the liability for that year), you will be charged interest on the shortfall between what you should have paid and what you have paid. Remember, if you are struggling to pay tax due on 31 January 2021, you can set up a 'Time to Pay' agreement to pay your tax in instalments. As long as you do not owe more than £30,000, this can be done online.

 

Statutory redundancy pay and furloughed employees

Adrian Mooy - Wednesday, December 23, 2020
 
Employers may face the difficult decision to make some employees redundant. Legislation was introduced at the end of July to protect furloughed employees.

 

Entitlement

 

An employee is entitled to statutory redundancy pay if they have at least two years’ continuous employment when they are made redundant. Where an employee has been furloughed during the Coronavirus pandemic, the time that they are on furlough counts as part of their continuous employment.
 
Amount

 

The amount of statutory redundancy pay to which an employee is entitled depends on:

 

 • how many complete years they have been employed at the date that they are made redundant;

 

 • their age at the date of redundancy; and

 

 • how much they are paid.

 

It is paid at the rate of:

 

 • one and a half week’s pay for each full year the employee was aged 41 or older;

 

 • one week’s pay for each full year the employee was 22 or older but younger than 41; and

 

 • half a week’s pay for each full year that the employee was younger than 22.

 

The number of years’ service that is taken into account in calculating statutory redundancy pay is capped at 20 and is counted back from the date of the redundancy. This works in the employee’s favour as the rate at which statutory redundancy is paid increases with age.

 

Pay is also capped. For 2020/21, the cap is set at £538 per week, meaning that the maximum statutory redundancy pay that is payable for 2020/21 is £16,140 (£538 x 1.5 x 20).

 

Pay and furloughed employees

 

Where an employee has been furloughed and a grant claimed under the Coronavirus Job Retention Scheme, the employee may only be receiving minimum furlough pay of 80% of their pay to a maximum of £2,500 per month, rather than their usual pay.

 

However, when working out an employee’s statutory redundancy pay, the employee’s pre-furlough pay is used rather than their furlough pay where this is lower. This applies where the calculation date for statutory redundancy pay is on or before 31 October 2020 (the date on which the furlough scheme comes to an end).

 

Where the employee’s pay varies, statutory redundancy pay is based on average pay over the previous 12 weeks. Where that period includes at least one week where the employee was furloughed, the averaging calculation must be performed over 12 weeks of full pay.

 

Terminal loss relief

Adrian Mooy - Tuesday, December 22, 2020
 
Sadly, not all businesses will survive the Covid-19 pandemic, and many may take, or be forced to take, the decision to close where losses make the business untenable.

 

The tax legislation provides various relief for losses including a special relief for losses made in the last 12 months of trading, known as terminal loss relief. A form of the relief is available for both income tax and corporation tax.

 

Income tax

 

Under the income tax rules, a terminal loss can be set against profits of the same trade for the year of cessation and against profits of the same trade for the three tax years prior to that in which the business was discontinued, with relief being given against profits of a later year before those of an earlier year.
 
The terminal loss comprises:

 

 • the loss made in the tax year in which the trade ceases; and

 

 • the loss make in that part of the previous tax year beginning 12 months before the date that the trade ceased.

 

If either component is a profit, it is treated as nil in computing the terminal loss.

 

Where there is unused overlap relief, this will increase the terminal loss.

 

Example

 

Tina runs a café as a sole trader. She prepares accounts to 31 March each year. Her business failed to survive the Covid-19 pandemic and she ceases trading on 30 September 2020, making a loss of £20,000 for the period from 1 April 2020 to 30 September 2020.

 

She made a profit of £18,000 in 2019/20, a profit of £20,000 in 2018/19 and a profit of £15,000 in 2017/18.
She has unused overlap profits of £2,000.

 

Her terminal loss for the last 12 months of trading is £20,000:

 

 • 1/4/2020 to 30/9/2020: £20,000

 

 • 1/10/2019 to 31/3/2020: £nil (profit of £4,000 for the period).

 

The loss is increased by the overlap profits of £2,000 to give a terminal loss of £22,000.

 

She has no other income in 2020/21.

 

The loss is relieved as follows:

 

 • £18,000 against the profits of 2019/20; and

 

 • the remaining £4,000 against the profits of 2018/19 of £20,000, reducing the taxable profits to £16,000.

 

It is not possible to tailor the claim to preserve personal allowances.

 

Corporation tax

 

A similar relief is available for corporation tax, allowing companies to claim terminal loss relief when they stop trading.
Any trading losses occurring in the final 12 months of trading can be carried back and set against the profits made in the previous three years. The loss must be set against the profits of the most recent year first.

 

Using your own car in your property business

Adrian Mooy - Monday, December 21, 2020
 
A landlord running an incorporated business is likely to need to use their own car for the purposes of the business. Where this is the case, what can they claim by way of expenses?

 

Two options

 

Costs incurred wholly and exclusively for business purposes can be deducted when working out the profits of a property business. When it comes to cars, a deduction can be claimed for the cost of fuel and associated running costs. There are two options for working out the deductible amount:

 

 • using the simplified expenses system; or

 

 • by reference to actual costs.

 

Depending on the method used to work out the deductible amount, it may also be possible to claim capital allowances in respect of the cost of the car.
 
Simplified expenses

 

As the name suggests, the simplified expenses system is an easy way to work out the allowable deduction. The landlord only needs to keep a record of business mileage for the year and calculate the deduction by reference to the permitted mileage rates. However, it is not an option if capital allowances have been claimed for the car – the rates include an element to reflect depreciation.
The system can also be used where a van or motorcycle is used for the purposes of the property business.
The mileage rates used to calculate the deduction are as follows:

 

Vehicles                                                      Rate per mile
 
Cars and vansFirst 10,000 business miles       45p
 
Subsequent business miles                              25p
 
Motorcycles                                                       24p

 

Actual costs

 

The landlord can instead claim a deduction by reference to the actual costs. This will necessitate more work but may give a higher deduction.
Where the car is used for both the business and privately, the costs must be apportioned – a deduction is only given to the extent that they relate to the business.

 

When working out a deduction based on running costs, the following should be taken into account:

 

 • fuel;

 

 • insurance;

 

 • repairs;

 

 • servicing;

 

 • MOT;

 

 • tyres;

 

 • breakdown cover; and

 

 • road tax.

 

If the cash basis is used to prepare the accounts, the deduction is given in the period when the expenditure is incurred; if the accruals basis is used, the expenditure must be matched to the period to which it relates.

 

Capital allowances

 

Capital allowances can only be claimed if simplified expenses have not been used to work out the deductible amount. Where the deduction is based on actual costs, writing down allowances can be claimed for the cost of the car. As with expenses, if the car is used both for business and private mileage, an apportionment is necessary.

 

Cars do not qualify for the annual investment allowance or a deduction under the cash basis capital expenditure rules.

 

Letting a property at less than market rent

Adrian Mooy - Saturday, December 19, 2020
 
This year has been difficult for many and landlords may not have been able to secure the full market rent for a property. Landlords may have reduced the rent charged to long-standing tenants struggling as a result of the pandemic. Alternatively, they may have allowed family or friends to occupy the property, either rent-free or for a notional rent.

 

Letting a property at a rent that is below the commercial rent will reduce the landlord’s income. It will also impact on the extent to which they can claim a deduction for expenses associated with the property and the let.

 

General rule for deduction of expenses

 

The general rule is that expenses can be deducted in calculating the taxable profit for the property income business to the extent that they are revenue in nature and incurred wholly and exclusively for the purposes of the business.

 

Where the expenditure is capital in nature, relief will depend on whether the accounts are prepared under the cash basis or accruals basis. Under the cash basis, which is the default basis for most unincorporated landlords, most capital expenditure can be deducted in working out profits, unless it is of an excluded type, such as cars or land.

 

Lets not at a commercial rent

 

If a landlord does not charge the full market rent for a property, HMRC take the view that it is unlikely that the expenses of the property are incurred wholly and exclusively for the purposes of the business. As a result, the general rule for deductibility is not met. This means that, strictly, they cannot be deducted in arriving at the taxable profit. Taking the strict position would mean that the landlord would be taxed on any rental income received without relief for any associated expenses.

 

However, fortunately, HMRC do not take such a harsh line. Where a property is let at below market rent, the landlord can deduct expenses incurred up to the level of the rent received. Where the expenses are more than the rent, the net result is neither a profit nor a loss. However, no relief is given for expenses in excess of the rent – these cannot be deducted to create a loss, nor can they be carried forward to be used in a later tax year. Consequently, no relief is available to the extent that the expenses exceed the rent.

 

House sitting

 

A landlord may allow a friend or relative to house sit between commercial lets. If expenses are incurred in this period, they will be deductible as long as the property remains genuinely available for commercial letting and the landlord is actively seeking tenants. However, expenses incurred in a period where the property is occupied by a friend or relative rent-free and the property is not available for commercial letting are not deductible.

 

Timing of expenses

 

If there are likely to be periods where the property is occupied rent-free orf at below market rent, where possible the landlord should seek to incur expenses related to the property while it is being let at a commercial rent to preserve their deductibility.

 

Period of grace election

 

Where the landlord intended to let the property at full want but was unable to do so, for example, as a result of the pandemic, a period of grace election could be considered.

 


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