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Making Tax Digital (MTD) – The Sign Up Process

Adrian Mooy - Tuesday, July 23, 2019
The first mandatory submission for quarterly VAT filers will be the 30th June with the VAT return due by the 7th August.
Please remember that HMRC do not automatically know that a business will be required to comply with MTD, instead each business must itself determine if and when it needs to comply with MTD and complete a two-stage sign-up process before the relevant MTD style submission can be made.


Firstly, notification to HMRC has to be made via their website that the business needs to comply with MTD going forwards. Secondly, the business needs to connect the MTD compatible software to HMRC’s systems (which should only be done once the confirmation email is received back from HMRC).


As it can take up to 72 hours for HMRC to confirm each sign up, this shouldn’t be left until the point at which the submission is to be made, and we would recommend that all affected businesses aim to have their sign ups completed by mid-July.

Incorporation no longer automatically resets the two year requirement for sole traders

Adrian Mooy - Monday, July 22, 2019
Entrepreneurs’ Relief (ER) entitles a business owner to significant relief from Capital Gains Tax (CGT) on the disposal of their business, often halving the consequent tax bill.


To qualify for ER, the company must normally have been the business owner’s personal company for the whole of the last two years and they must have been an officer or employee throughout.


Until now, this has created problems for sole traders who have recently incorporated, as incorporation has had the effect of resetting the two year requirement.


However, provisions contained in the Finance Act 2019 mean that the conditions for ER will be considered to have been met where the shares in a newly incorporated business have been issued to the business owner in exchange for all business assets or all assets other than cash and as a going concern.


Failing to transfer business vehicles or premises, for example, into the new company can mean that a business owner must wait an additional two years before disposing of the company in order to qualify for ER.


Sole traders and owners of other unincorporated businesses wishing to take advantage of ER should seek professional advice at the earliest opportunity.

SMEs unaware of £1 million annual investment allowance

Adrian Mooy - Friday, July 19, 2019
A new study has found that more than half (58 per cent) of SMEs are not aware of a temporary two-year increase in the annual investment allowance (AIA), which could help them secure £1 million in funding.


Last year, the Government increased the AIA from £200,000 to £1 million from 1 January 2019 to 31 December 2020 to assist businesses with plant and machinery investments.


AIA allows businesses to write off 100 per cent of qualifying capital expenditure against taxable profits for the same period up to the annual limit and yet many businesses are not aware of the opportunity currently on offer.


The research from Close Brothers Asset Finance also found that only 13 per cent of companies had intentions to increase investment significantly in 2019 because of the rise, meaning that around nine out of 10 businesses had no specific plans to make use of the increase in AIA.


It is thought that the complexity of the rules surrounding AIA may have been off-putting for some businesses.


Will Silsby, Technical Officer at the Association of Taxation Technicians, told Accountancy Daily: “AIA in the final three months of the chargeable period to 31 March 2021 is restricted to the time-apportioned fraction of the normal £200,000 limit, so just £50,000.


“For the first straddling period, the calculation is logical. The AIA cap for expenditure in the first part of the chargeable period (the months up to 31 December 2018) has to be the normal £200,000 limit regardless of the number of months in that part.
“There is currently no provision to allow any element of under-spend in the pre-January 2021 months to be carried over into the post-December 2020 months.”


Taxpayers’ bills delayed by payment on account errors

Adrian Mooy - Thursday, July 18, 2019
The Association of Taxation Technicians (ATT) has revealed that problems with HMRC’s IT systems earlier this year, relating to calculations for payment on account, mean that some taxpayers will not receive tax demands this month.


The glitches in the tax authority’s systems during the self-assessment tax return season also mean that calculations for payment on account on some returns may not be adjusted correctly.


It was apparently made clear at the time that HMRC’s systems had not processed payments on account for 2018/19 correctly. Unless affected taxpayers contacted HMRC to correct the position, they will not have received a demand in June or July for the second payment on account due by 31 July 2019.


Instead, those affected by this HMRC failure will need to pay their total 2018/19 self-assessment tax bill by the end of January 2020 and the ATT is advising them to set additional money aside to make sure their bill is covered.


Jon Stride, Co-Chair of the ATT’s technical steering group, said: “If a taxpayer does not make any payments on account during 2019, then their tax bill in January 2020 could be significantly larger than they are expecting and could come as quite a shock.


“Individuals who do not receive expected demands should either set aside the funds needed ready for next year or, if they wish, they can make a voluntary payment on account to HMRC of their July payment – and their January payment if that was also missed.”


The ATT has been told by HMRC that if no 2018/19 payments on account have been demanded, then the taxpayer will receive a demand from HMRC for the full amount of tax in January 2020.


Self-assessment taxpayers with annual tax demands of £1,000 or less do not have to make payments on account, while those in the regime who have 80 per cent or more of their total annual tax collected at source, such as by PAYE, do not have to make payments on account either.


Managing a rental business from home

Adrian Mooy - Wednesday, July 17, 2019


A landlord will often manage their property rental business from home, and in doing so will incur additional household expenses, such as additional electricity and gas, additional cleaning costs, etc. As with other expenses, the landlord can claim a deduction for these when working out the profits of the rental business.


Most unincorporated landlords will now prepare accounts on the cash basis.


Wholly and exclusively incurred


The basic rule for an expense to be deductible in computing the profits of a rental business is that the expenses relate wholly and exclusively to that business. This applies equally to a deduction for household expenses – they can be claimed where they relate wholly and exclusively to the rental business.


Actual costs


Where the expenses are wholly and necessarily incurred, a deduction can simply be claimed for the actual expenses. In reality, this will take some working out as household bills will not be split between personal and business expenses. Any reasonable basis of apportionment can be used – such as floor area, number of rooms, hours spent etc. Records should be kept, together with the basis of calculation.


Simplified expenses


Where a landlord spends more than 25 hours a month managing the business from home, the simplified expenses system can be used to work out the deduction for the additional costs of working from home. The expenses depend on the number of hours worked in the home each month, and the deduction is a flat monthly amount, as shown in the table below.


Hrs of business use p/m       Flat rate p/m

25 to 50 hours                       £10
51 to 100 hours                     £18
101 hours or more                 £26


The hours are the total hours worked at the home by anyone in the property rental business.




Nadeem runs his property rental business from home. In 2018/19, he spends 60 hours a month working on the business in all months except August and December, in respect of which he spends 30 hours in each on those months working on the business.


For 2018/19 he is able to claim a deduction of £200 for expenses of running his business from home (10 months @ £18 plus 2 months @ £10).


The simplified expenses rule does not cover telephone and internet, which can be claimed in addition to the deduction for simplified expenses.


Property partnerships

Adrian Mooy - Tuesday, July 16, 2019
A person may own a property jointly that is let out as part of a partnership business. This may arise if the person is a partner of a trading or professional partnership which also lets out some of its land and buildings. A less common situation is where the person is in a partnership that runs an investment business which does not amount to a trade, but which includes or consists of the letting of property.
When is there a property partnership?


The letting of a jointly-owned property in itself does not give rise to a partnership – and indeed a partnership is unlikely to exist where joint owners simply let a property that they own together. Whether there is a partnership depends on the degree of business activity involved and there needs to be a degree of organisation similar to that in a commercial business. Thus, for there to be a partnership where property is jointly owned, the owners will need to provide significant additional services in return for money.


Separate rental business


A partnership rental business is treated as a separate business from any other rental business carried on by the partner. Thus, if a person owns property in their sole name and is also a partner in a partnership which lets out property, the partnership rental income is not taken into account in computing the profits of the individual’s rental business – it is dealt with separately.


Further, if a person is a partner in more than one partnership which lets out property, each is dealt with as a separate rental business – the profits of one cannot be set against the losses of another.




Kate has a flat that she lets out. She is also a partner in a graphic design agency, which is run from a converted barn. The partnership lets out a separate barn to another business.


Kate has two property rental businesses. One business comprises the flat that she owns in her sole name and lets out, and the partnership rental business consisting of the barn which is let out as a separate rental business. This is a long-term arrangement.


Kate must keep her share of the profits or losses from the partnership property business separate from those relating to her personal rental business. She cannot set the profits from one against losses from the other. They must be returned separately on her tax return.


Partner note: HMRC’s Property Income Manual at PIM1030.


Rental deposits

Adrian Mooy - Monday, July 15, 2019
A landlord will usually take a deposit from a tenant when letting a property to cover the cost of any damage caused to the property by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in an official tenancy deposit scheme.


The purpose of the deposit is to cover items such as damage to the property that extends beyond normal wear and tear. The items covered by the security deposit should be stated in the letting agreement.


The deposit charged cannot now exceed five weeks rent.


Is it taxable?


The extent to which the deposit is included as income of the rental business depends on whether all or part of the deposit is retained by the landlord. In a straightforward case where a security deposit is taken by the landlord, held for the period of the tenancy and returned to the tenant at the end of the rental period, the deposit is not included as income of the property rental business.


However, if at the end of the tenancy agreement the landlord retains all or part of the deposit to cover damage to the property, cleaning costs or other similar expenses, the amount retained is included as income of the property rental business. The retained deposit is a receipt of the business in the same way as rent received from the tenant. However, the actual costs incurred by the landlord in making good the damage or having the property professionally cleaned are deducted in computing the profits of the business.


The retained deposit is reflected as rental income of the property rental business for the period in which decision to retain the deposit is taken, rather than for the period in which the deposit was initially collected from the tenant.




Kevin purchases a property as a buy to let investment. He collects a security deposit of £1,000 from the tenant. The terms of the deposit are set out in the tenancy agreement.


The let comes to an end in July 2019. When checking out the tenant, it transpires that the tenant has failed to have the carpets cleaned, as per the terms of the agreement, and also that he has damaged a door, which needs to be repaired.


After discussion, Kevin and the tenant agree that £250 of the deposit will be retained to cover cleaning and repair costs. The balance of the despot (£750) is returned to the tenant in October 2011.


Kevin spends £180 having the property professional cleaned and £75 having the door repaired.


When completing his tax return, he must include as income the £250 retained from the tenant. However, he can deduct the actual cost of cleaning the property (£180) and repairing the door (£75). As the amount actually spent (£255) exceeds the amount retained, he is given relief for the additional £5 in computing the profits of his property rental business.


The balance of the deposit returned to the tenant is not taken into account as income of the business.


Student loan deductions

Adrian Mooy - Monday, July 15, 2019


Employers fulfil many collection roles for HMRC, one of which is the collection of student loan repayments.
There are now three types of student loans for which employers may be responsible for deducting loan repayments from an employee’s pay. These are:


 • Plan 1 Student Loans;
 • Plan 2 Student Loans; and
 • Post-graduate Loans (PGLs).


Repayment thresholds


Employees must make repayments in respect of a student loan when their income exceeds the threshold for their particular loan type. Each loan has its own repayment threshold. The thresholds are as follows:


                                    Annual     Monthly    Weekly
Plan 1 Student Loan  £18,935  £1,577.91  £364.13
Plan 2 Student Loan  £25,725  £2,143.75  £494.71
Post-graduate Loan   £21,000  £1,750.00  £403.84


Repayments are made at the rate of 9% on income in excess of the threshold for Plan 1 and Plan 2 Student loans, and at a rate of 6% on income in excess of the threshold for PGLs.


Where an employee has both a student loan and a PGL, deductions will be made at the combined rate of 15% where income exceeds the higher loan threshold.


Starting deductions


An employer will need to start making deductions in respect of a student or PGL if any of the following apply:


 • a new employee is taken on and has a ‘Y’ in the student loan box on their P45;
 • a new employee tells the employer they are repaying a student loan;
 • a new employee completes a starter checklist confirming that they have a student loan;
 • the employer receives a SL1 start notice from HMRC;
 • the employer receives a PGL1 start notice from HMRC; or
 • the employer receives a Generic Notification Service Student Loan reminder.


The employer should check they are aware of the type of loan that the employee has, confirming the loan type with the employee where necessary.


Stopping deductions


The employer should only stop making student loan deductions if they receive a SL2 stop notice or a PGL2 stop notice from HMRC; deductions should not be suspended at the request of the employee.


Where a stop notice is received, the employer should stop the deductions from the first payday from which it is practical to do so.


Paying deductions over to HMRC


The employer should pay amounts deducted from employees’ pay in respect of student loan deductions over to HMRC, together with payment of tax and National Insurance, taking care to ensure that the payment reach HMRC by 22nd month where payment is made electronically or by 19th month where payment is made by cheque.




If an employee in respect of whom student loan or PGL repayments are being deducted leaves, the employer should enter a ‘Y’ in box 5 of the P45. This will tell the new employer to make deductions for student loan repayments. A ‘Y’ should be entered in this box even if the employee’s income is below the repayment threshold so no deductions have yet been made. An entry should not be made on the P45 if a stop notice has been received.


Penalties for late self-assessment returns

Adrian Mooy - Wednesday, July 10, 2019
The normal due date for a self-assessment return where filed online is 31 January after the end of the tax year to which it relates. This means that self-assessment tax returns for 2017/18 should have been filed online by midnight on 31 January 2019, and self-assessment returns for 2018/19 must be filed online by midnight on 31 January 2020.


Returns do not have to be filed online – paper returns can be submitted. However, an earlier deadline of 31 October after the end of the tax year applies, so 31 October 2018 for 2017/18 paper self-assessment returns and 31 October 2019 for 2018/19 paper self-assessment returns.


A later deadline may apply if the notice to file the return was issued after 31 October following the end of the tax year. In this scenario, the deadline is three months from the date of issue of the notice to file, which will fall after the normal 31 January deadline. For example, if notice is given on 2 December, the filing deadline is the following 2 March. Where the notice to file is issued after 31 July but on or before 31 October, the deadline for filing a paper return is three months from the date of the notice (which will be after the usual 31 October deadline); however, the deadline for filing an online return will remain at 31 January, as this will be at least three months from the notice date.


Late returns


Penalties are charged where tax returns are filed late (unless, the taxpayer can demonstrate that they have a reasonable excuse for filing late which is acceptable to HMRC). The penalties can soon mount up.


A penalty will apply where a paper return is not filed by 31 October after the end of the tax year (or such later deadline as applies where the notice to file was issued after 31 July) or where an online return is not filed by 31 January after the end of the tax year (or by such later deadline as applies where the notice to file was issued after 31 October). If the paper filing deadline is missed, a penalty can be avoided by filing a return online by the online filing deadline.


Penalty amounts


An initial penalty of £100 is charged if the filing deadline is missed. The penalty applies even if there is no tax to pay.


If the return remains outstanding three months after the filing deadline, further penalties start to apply. For online returns, the key date here is 1 May, from which a daily penalty of £10 per day is charged for a maximum of 90 days (a maximum of £900). At this point, it is advisable to file the return as soon as possible – each day’s delay costs a further £10 in penalties.


Further penalties are due if the return remains outstanding after another three months have elapsed (i.e. at 1 August where an online return was not filed by 31 January). In this case, the penalty is £300 or, if greater, 5% of the tax outstanding.


A further penalty of the greater of £300 or 5% of the tax outstanding is charged if the return has not been filed 12 months after the deadline (i.e. before the following 1 February).


The penalties can soon mount up, and can reach £1,600 or more where the return is 12 months late. Outstanding returns should be filed as a matter of urgency. Penalties are also charged for any tax paid late.


Getting ready for off-payroll working changes

Adrian Mooy - Tuesday, July 09, 2019
From 6 April 2020 the off-payroll working rules that have applied since 6 April 2017 where the end client is a public sector body are to be extended to large and medium private sector organisations who engage workers providing their services through an intermediary, such as a personal service company.
There are tax and National Insurance advantages to working ‘off-payroll’ for both the engager and the worker. The typical off-payroll scenario is the worker providing his or her services through an intermediary, such as a personal service company. Providing services via an intermediary is only a problem where the worker would be an employee of the end client if the services were provided directly to that end client. In this situation, the IR35 off-payroll anti-avoidance rules apply and the intermediary (typically a personal service company) should work out the deemed payment arising under the IR35 rules and pay the associated tax and National Insurance over to HMRC.


New rules


Compliance with IR35 has always been a problem and it is difficult for HMRC to police. In an attempt to address this, responsibility for deciding whether the rules apply was moved up to the end client where this is a public sector body with effect from 6 April 2017. Where the relationship is such that the worker would be an employee if the services were supplied direct to the public sector body, the fee payer (either the public sector end client or a third party, such as an agency) must deduct tax and National Insurance from payments made to the intermediary.
These rules are to be extended from 6 April 2020 to apply where the end client is a large or medium-sized private sector organisation. This will apply if at least two of the following apply:


 •turnover of more than 10.2 million;
 •balance sheet total of more than £5.1 million;
 •more than 50 employees.


Where the end client is ‘small’, the IR35 rules apply as now, with the intermediary remaining responsible for determining whether they apply and working out the deemed payment if they do.


Getting ready for the changes


To prepare for the changes, HMRC recommend that medium and large private sector companies should:
 • look at their current workforce (including those engaged through agencies and intermediaries) to identify those individuals who are supplying their services through personal service companies;
 • determine whether the off-payroll rules will apply for any contracts that extend beyond 6 April 2020 (HMRC’s Check Employment Status for Tax (CEST) tool can be used to determine a worker’s status);
 • start talking to contractors about whether the off-payroll rules apply to their role; and
 • put processes in place to determine if the off-payroll working rules will apply to future engagements. These may include assigning responsibility for making a determination and determining how payments will be made to contractors who fall within the off-payroll working rules.
Workers affected by the changes should also consider whether it is worth remaining ‘off-payroll’; providing their services as an employee may be less hassle all round.