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Buying a property to let – the importance of keeping records

Adrian Mooy - Saturday, October 26, 2019
For tax purposes, good record keeping is essential. Without complete and accurate records, it will not be possible to provide correct details of taxable income or to benefit from allowable deductions. Aside from the risk of paying more tax than is necessary, landlords who fail to take their record keeping obligations seriously may also find that they are on the receiving end of a penalty from HMRC.


Recording expenses
A deduction is available for expenses that are incurred wholly and exclusively for the purposes of the rental business. A deduction is available for qualifying revenue expenses regardless of whether the accounts are prepared on the cash basis or under the traditional accruals basis.


Revenue expenses are varied and are those expenses incurred in the day to day running of the property rental business. They include:
 • office expenses
 • phone calls
 • cost of advertising for tenants
 • fees paid to a managing agent
 • cleaning costs
 • insurance
 • general maintenance and repairs


A record should be kept of all revenue expenses, supported by invoices, receipts and suchlike.
The treatment of capital expenditure depends on whether the cash or the accruals basis is used. For most smaller landlords, the cash basis is now the default basis.


Under the cash basis, capital expenditure can be deducted unless the disallowance is specifically prohibited (as in the case in relation to cars and land and property). Under the accruals basis, a deduction is not given for capital expenditure, although in limited cases capital allowances may be available. Capital expenditure would include improvements to the property and new furniture or equipment which does not replace old items.


Records should identify whether expenditure is capital or revenue and also whether it relates to private expenditure so that it can be excluded.
Records should also be kept of replacement domestic items and the nature of those items. A deduction is available on a like-for-like basis.
Start date
Although the property rental business does not start until the property is first let, records should start as soon as expenditure is incurred in preparation for the letting.
As well as allowing relief for expenses incurred while the property is let, relief is also available for expenses which are related to the property rental business and which are incurred in the seven years prior to the start of the business. Relief is given on the same basis as for expenses incurred after the start of the property rental business; expenses can be deducted as long as they are incurred wholly and exclusively for the purposes of the property rental business. Capital expenditure is treated in accordance with rules applying to the chosen basis of accounts preparation.


Relief is available under the pre-trading rules, as long as:


 • the expenditure is incurred within a period of seven years before the date on which the rental business started
 • the expenditure is not otherwise allowable as a deduction for tax purposes
 • the expenditure would have been allowed as a deduction has it been incurred after the rental business had started
Relief is given by treating the expenses as if they were incurred on the first day of the property rental business.
Expenses incurred in getting a property ready to let can be significant. It is important that accurate records are kept of all expenditure incurred wholly and exclusively for the purposes of the let from the outset so that valuable deductions are not overlooked.


Domestic reverse VAT charge for building and construction services

Adrian Mooy - Friday, October 25, 2019
The domestic reverse VAT charge for building and construction services was due to come into effect from 1 October 2019. However, in early September it was announced that the start date had been put back one year. As a result, the charge will now apply from 1 October 2020.


Who is affected?


The charge will affect individuals and businesses who are registered for VAT in the UK and who supply or receive specified services that are reported under the Construction Industry Scheme (CIS).


Nature of a reverse charge


The reverse charge means that the customer receiving the specified supply has to pay the VAT rather than the supplier. In turn, the customer can recover the VAT under the normal VAT recovery rules.


Supplies within the scope of the charge


The reverse charge will apply to supplies of building and construction services which are supplied at the standard or reduced rates that also need to be reported under the CIS. These are called specified supplies.


However, where materials are included within a service, the reverse charge applies to the whole amount. By contrast, where deductions are made from payments to subcontractors under the CIS, no deductions are made from any part of the payment that relates to material.


Move to monthly returns


The introduction of the reverse charge will mean that some businesses may become repayment traders claiming VAT back from HMRC rather than paying it over to HMRC. To aid cashflow and reduce the delay in claiming the VAT back, repayment traders can move to monthly returns.


Planning ahead


The delayed start date has given businesses an extra year to prepare for the charge. In order to be ready for its introduction, businesses within the CIS should:


 • check whether the reverse charge will affect their sales, their purchases or both
 • update their accounting systems and software to deal with the reverse charge from 1 October 2020
 • consider whether the change will impact on cashflow
 • ensure that staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate
Contractors should review their contracts with subcontractors to determine whether the reverse charge will apply to services received under the contract. Where it does, they will need to notify their suppliers.


Subcontractors will need to contact their customers to obtain confirmation from them as to whether the reverse charge will apply, and also whether the customer is an end user or intermediary supplier.


Impact of change of start date


HMRC recognise that the start date was changed at short notice and that businesses may have changed their invoices to meet the needs of the reverse charge and cannot easily change them back. Where errors arise as a result, HMRC will take the change of date into account.


Nominating your main residence

Adrian Mooy - Thursday, October 24, 2019
Private residence relief shelters a gain on the sale of a residence from capital gains tax while the property has been the owner’s only or main residence. Where a property has been an only or main residence at some point, the final period of ownership (currently 18 months but reducing to nine months from 6 April 2020) is also exempt from capital gains tax.


Only one main residence at a time
As the name suggests, the relief is only available in respect of the only or main residence. Thus, where a person has more than one home, only one of those homes can be the ‘main residence’ at any given time.


However, as long as certain conditions are met, the taxpayer is free to choose which property is classed as the ‘main’ residence for capital gains tax purposes – it does not have to be the one in which the owner spends the majority of his or her time.
Only one main residence per couple
A couple who are married or in a civil partnership and who are not separated can only have one main residence between them.
Property must be a residence
Only properties that are lived in as a home can be a ‘main residence’ – a property which is let out can’t be a main residence while it is let.
Making an election
Where a person has only one residence, that residence is their only or main residence. Where they acquire a second residence, they have a period of two years to nominate which residence is the main residence for capital gains tax purposes. Where residences are acquired or sold, the clock starts again from the date on which the particular combination of residences changes, and the taxpayer then has another two years in which to elect which residence is the main residence.


The election should be made in writing to HMRC. The letter should include the full address of the property being nominated as the main residence and should be signed by all owners of the property.


No election made
In the absence of an election, the property which is the main residence will be determined as a question of fact and will be the property in which the person lives in as their main home. For example, if a couple has a family home and a holiday home, in the absence of an election, the family home will be treated as the main residence.
Advantages of flipping
There are a number of advantages to a property being the main residence at some point in the period of ownership as not only is any gain while the property is the only or main residence exempt from capital gains tax; the final period of ownership is also exempt. Where the property is let, occupying the property as a main residence at some point may open up the option of lettings relief (although it should be noted that the availability of lettings relief is to be seriously curtailed from April 2020).


Once an election has been made to nominate a property as a main residence, this can be varied any number of times (‘flipping’). This can be very useful from a tax planning perspective, for example, occupying a property as a main residence after it has been let but before it is sold can shelter some of the gain. Flipping properties and making use of the capital gains tax annual exempt amount to shelter any gain that falls into charge when the property is not the main residence can be beneficial in reducing the tax bill.


What is an EORI number and who needs one?

Adrian Mooy - Monday, October 21, 2019


An economic operator registration and identification (EORI) number will be needed for UK businesses to be able to continue to trade with the EU after the UK leaves the EU.


If there is a no-deal Brexit


In the event that the UK leaves the EU without a deal, an EORI number that starts with GB will be needed to move goods in and out of the UK.


An EORI number is not needed if goods are only moved between Northern Ireland and Ireland. However, one is required for imports and exports that move directly between Ireland and Great Britain without going through Northern Ireland.


A business that already has an EORI number starting with GB can continue to use it. It will be 12 digits long and include the VAT number where the business is registered for VAT.


VAT-registered businesses


Where a business is registered for VAT, HMRC send out EORI numbers automatically. It is advisable to keep the letter and a separate note of the number.


Businesses not registered for VAT


Businesses that are not registered for VAT will not receive an EORI number automatically. They will therefore need to apply for one if they wish to continue to trade with the EU post-Brexit.


This is a simple process and can be done online on the website (see Applicants will usually receive the number immediately; although it may take up to five working days if HMRC need to undertake more checks.


Forgotten or misplaced EORI numbers


A business which has lost or misplaced its EORI number can contact the EORI helpline online using the contact form on the website at


EU EORI number


A business that wishes to trade with an EU country will also need an EU EORI number starting with the country code of the country that they wish to trade with. This should be obtained from the Customs authority of the EU country that the business will first trade with post Brexit.

Capital gains tax and chattels

Adrian Mooy - Wednesday, October 16, 2019
For capital gains tax purposes, not all chattels are equal. In some cases, it is possible to realise a profit on the disposal of a chattel and enjoy that profit tax free, whereas in other cases, capital gains tax must be paid. It all depends on whether the chattel is a wasting chattel or a non-wasting chattel, and where it falls in the latter camp, the amount of the disposal proceeds.
What is a chattel?


The word ‘chattel’ is a legal term that means an item of tangible movable property. This covers personal possessions, including items of household furniture, paintings and antiques, cars, motorcycles. Items of plant and machinery which are not fixed to a building are also chattels.


Exemption for cars


Private cars and other passenger vehicles are exempt from capital gains tax.


Wasting assets


A wasting asset is an asset with a predictable life of 50 years or less. Certain chattels are always treated as wasting assets, such as plant or machinery.
A gain or loss on a disposal of a wasting chattel is exempt from capital gains tax unless capital allowances have or could have been claimed on the asset. Capital gains tax also applies if a chattel with a predictable life of more than 50 years is loaned to a business which uses it as plant.


Non-wasting chattels


Chattels with a predictable life of more than 50 years are non-wasting chattels. This would include paintings and jewellery.


The capital gains tax position depends on the sale proceeds.


Chattels exemption – proceeds £6,000 or less


An exemption - the chattels exemptions – applies if a gain arises on the disposal of a chattel and the disposal proceeds do not exceed £6,000.


Example 1


Max purchases a painting from an unknown artist for £300. The artist becomes popular and Max sells the painting for £5,000, realising a gain of £4,700.


As the disposal proceeds are less than £6,000, the chattels exemption applies, and the gain is exempt from capital gains tax.


Chattels exemption – proceeds more than £6,000


Where the proceeds are more than £6,000, the gain is reduced by five-thirds of the difference between the amount of the consideration and £6,000.
Where the disposal proceeds are more than £15,000, the maximum gain will exceed the actual gain, so the relief is not in point.


Example 2


Ruby acquires an antique brooch for £3,000. It becomes a collectible item and she sells it for £10,000.


The maximum chargeable gain is 5/3 (£10,000 - £6,000) = £6,667


The actual gain is £7,000. As this exceeds the maximum permitted gain, the chargeable gain is £6,667.




In the same way that the exemption operates to reduce the chargeable gain, it also caps the allowable loss. If a loss arises and the consideration on disposal is less than £6,000, it is deemed to be £6,000 for the purposes of computing the loss.


Example 3


Lola buys a painting for £7,000 which turns out to be a fake. She is able to sell it for £100, realising an actual loss of £6,900.


However, in computing the allowable loss for capital gains tax purposes, the consideration is deemed to be £6,000. The allowable loss is therefore £1,000 (£6,000 - £7,000) rather than £6,900.


Sets of chattels


Special rules apply to sets of chattels. This is to prevent people from artificially splitting a set worth more than £6,000 and selling each item separately to the same person for less than £6,000 each to benefit from the chattels exemption. The anti-avoidance provisions work to treat the set as a single asset in respect of which only one £6,000 limit is allowed.


Calculating the Class 4 NIC liability

Adrian Mooy - Tuesday, October 15, 2019
The self-employed pay two classes of National Insurance contributions – Class 2 and Class 4.


Class 2 contributions are weekly flat rate contributions which provide the mechanism by which the self-employed build up their entitlement to the state pension and certain contributory benefits. By contrast, Class 4 contributions are based on profits from the self-employment and operate more like a tax in that they do not confer any benefit or pension entitlement.
Nature of Class 4 contributions


Class 4 National Insurance contributions are payable by self-employed earners aged 16 or over and below state pension age. The liability is triggered once profits from the self-employment reach the lower profits limit, set at £8,632 for 2019/20. This is aligned with the primary and secondary thresholds for Class 1 National Insurance purposes.


Class 4 contributions are payable at the main rate on profits between the lower profits limit and the upper profits limit and at the additional rate on profits in excess of the upper profits limit. For 2019/20, the upper profits limit is set at £50,000, aligning with both the upper earnings limit for Class 1 National Insurance purposes and the rate at which higher rate tax becomes payable.
The main Class 4 rate is set at 9% for 2019/20 and the additional Class 4 rate is set at 2%.


Example 1


John is self-employed as a personal trainer. In 2019/20 his profits from self-employment are £7,250.
As his profits are below the lower profits limit, he does not need to pay any Class 4 National Insurance contributions for 2019/20.
However, as his profits exceed the small profits limit of £6,365 for Class 2 National Insurance purposes, he must pay weekly Class 2 contributions of £3 per week.


Example 2


Jane is self-employed as an interior designer. In 2019/20 her profits from self-employment are £32,000.
She must pay Class 4 National Insurance contributions on her profits to the extent that they exceed the lower profits limit for 2019/20 of £8,632.
Her Class 4 National Insurance liability is as follows:
9% (£32,000 - £8,632) = £2,103.12
Jane must also pay Class 2 contributions of £3 per week.


Example 3


Jackie is a self-employed accountant. For 2019/20 her profits from self-employment are £77,000. She must pay Class 4 National Insurance contributions on her profits to the extent that they exceed the lower profits limit for 2019/20 of £8,632.
Her Class 4 National Insurance liability is as follows:
(9% (£50,000 - £8,632)) + (2% (£77,000 - £50,000)) = £4,263.12
Jackie must also pay Class 2 contributions of £3 per week.


Paying the Class 4 National Insurance liability


Class 4 National Insurance contributions are payable with tax under the self-assessment system. The liability must be paid by 31 January after the end of the tax year to which it relates – so Class 4 National Insurance contributions for 2019/20 must be paid by 31 January 2021.


Unlike Class 2 contributions, Class 4 contributions are taken into account in computing payments on account. Payments on account must be made where the previous year’s tax and Class 4 National Insurance liability was £1,000 or more unless at least 80% of the tax due for that year was collected at source. Each payment on account is 50% of the previous year’s liability. Payments on account must be made on 31 January in the tax year and on 31 January after the tax year, with any remaining liability (for example where current year’s bill is higher than the previous year’s) being paid by 31 January after the end of the tax year.


Worthless assets and negligible value claims

Adrian Mooy - Monday, October 14, 2019


Where an asset has been lost or destroyed or the value of the asset has become negligible, it may be possible to take advantage of an allowable loss for capital gains tax purposes. It should be noted, however, that the loss will only be an allowable loss if any gain on the disposal of the asset would have been a chargeable gain.


A distinction is drawn between assets that have ceased to exist and those that have become of negligible value.


Assets that have been lost or destroyed


The entire loss, destruction, dissipation or extinction of an asset is treated as a disposal or that asset, regardless of whether or not any compensation is received. The resulting loss is allowable for capital gains tax purposes. If any compensation is received, this is treated as proceeds from the disposal.


Negligible value claim


If the asset still exists but has become of negligible value, as long as one of two conditions – A or B – is met, a negligible value claim can be made by the owner of the asset.


The legislation does not define ‘negligible’ but HMRC take the view that it means that is worth ‘next to nothing’.


Condition A is that the asset has become of negligible value while still owned by the person.


Condition B is that:


 • the disposal by which the person acquired the asset was a no gain/no loss disposal (as is the case between spouses and civil partners)


 • at the time of that disposal, the asset was of negligible value


 • between the time when the asset became of negligible value and the disposal by which the person acquired it, any other disposal of the asset was on a no gain/no loss basis


Asset must still exist


For a negligible value claim to succeed, the asset must exist when the claim is made. If the asset has ceased to exist, for capital gains tax purposes there has been an actual disposal of the asset (as outlined above in relation to assets lost or destroyed).


No time limit


There is no time limit by which a negligible value claim must be made. However, the asset must be of negligible value at the date of the claim. The claimant must be able to demonstrate that the asset became of negligible value while owned by them (or where acquired from a spouse or civil partner in a no gain/no loss disposal, while owned by their spouse or civil partner). Evidence should be retained to support the claim.


Effect of a successful claim


A successful negligible claim gives rise to a deemed disposal of the asset, with the asset immediately being reacquired for the amount specified in the claim. The loss on the deemed disposal is an allowable loss, provided that any gain that had arisen on the disposal of the asset had been an allowable loss. It should be noted that the allowable loss arises from the deemed disposal rather than from the negligible value claim itself.
In certain circumstances where the claim relates to qualifying shares, the loss can be set against income.


Be aware of 60% tax rate risk on bonuses

Adrian Mooy - Friday, October 11, 2019
In the lead up to Christmas and the end of the financial year for many businesses, some directors and employees may be fortunate enough to be thinking of a bonus. If this is the case, it might be worth reviewing things beforehand to see if there is a risk of suffering effective tax rates of up to 60%, and if so, whether this can be avoided.


The risk of paying a high effective tax rate on a bonus stems from the abatement of the personal tax allowance where the individual’s ‘adjusted net income’ is equal to, or above, £100,000 for a particular tax year. The personal tax allowance for 2019/20 is £12,500, but this will be reduced by £1 for every £2 the taxpayer’s income is over that limit. The personal allowance may be reduced to nil from this income limit. Broadly, ‘adjusted net income’ is total taxable income before any personal allowances, less certain tax reliefs (including trading losses, Gift Aid donations, and pension contributions).


As a consequence of the personal allowance abatement rules, a taxpayer with income between £100,000 and approximately £119,000 will suffer marginal tax rates of up to 60% as the personal allowance is withdrawn.


Graham is an employee of a company from which he draws a salary of £100,000 per annum He has no other sources of income. In December 2019 he will be paid a bonus of £7,000. He is entitled to a personal tax allowance of £12,500 in 2019/20, but he loses £3,500 of it (£1 for every £2 earned over £100,000 ((£107,000 – £100,000) /2)), leaving him with an allowance of £9,000. He will pay tax of £2,800 (£7,000 × 40%) on the bonus, plus an extra £1,400 due to lost allowances (£3,500 × 40%). His total tax attributable to the bonus is therefore £4,200. Graham will therefore pay tax on the bonus at an effective rate of 60% (£4,200/£7,000 x 100).


Hannah on the other hand, receives an annual salary of £125,000 from employment. She also has no other sources of income. Hannah is also expecting to receive a bonus of £7,000 in December 2019. She is entitled to a personal tax allowance of £12,500 in 2019-20, but she loses entitlement to all of it because her basic salary exceeds the point at which the allowance is fully withdrawn (£125,000). Receiving the bonus, therefore, results in no further adjustment to her personal allowance. She will simply pay tax of £2,800 (£7,000 × 40%) on the bonus, which means that her effective tax rate on that part of his income is only 40%.
So, what action can be taken to minimise exposure to these marginal rates?
Taxpayers with income slightly exceeding the £100,000 ceiling may avoid losing some or all of their personal allowance by taking steps to reduce ‘adjusted net income’ to below the abatement threshold. Options worth considering may include:
 • Increasing pension contributions - for example, a taxpayer with income of £105,000 might consider making a pension contribution of £5,000. They will get 40% tax relief on the contribution, and the full personal allowance will be reinstated.
 • Making donations to charity under the Gift Aid scheme. For the charity, the donation is assumed to be made net of basic rate tax, which the charity claims back from HMRC. For the taxpayer, their basic rate tax band is increased by the value of the gross donation, which in turn reduces the amount of income to be taxed at the higher rate.


 • Consider transferring income-producing assets to a lower-earning spouse or partner.


As with all tax planning opportunities, the wider picture should be considered before taking any action. In particular, the benefits of any tax saving need to outweigh the cost and administrative inconvenience of the transaction.


When and how to incorporate

Adrian Mooy - Wednesday, October 09, 2019
Over the last decade, corporation tax rates for most companies – irrespective of size - have fluctuated between 19% and 21%. The main rate of corporation tax is expected to be cut to 17% from April 2020.


Current corporation tax rates are still pretty favourable and are indeed generally lower than those paid by many individuals. In addition, there are other areas where company formation may help save tax. Although the costs and regulations involved with running a company are usually greater than trading as a sole trader or in partnership, and more administration is generally needed, using a company as a vehicle through which to trade remains a popular choice.


The starting point for dealing with companies and company directors is to remember that a limited company exists in its own right, which means that the company’s finances are separate from the personal finances of the company owners. Strict laws mean that the shareholders cannot simply take money out of the company whenever they feel like it.
When to incorporate
The question of whether to incorporate commonly arises as a business expands – the limited liability status that company formation provides is often needed to start winning contracts with bigger companies. However, incorporating may not be such a good deal in the early days of trade, or if there is no intention to grow beyond the status of a solely owned business. This may be particularly relevant if losses are envisaged in the early years of trading – for sole traders and partnerships, it is possible to carry back losses made in the first four years and offset them, where applicable, against personal income of the three preceding years. This often results in a substantial refund of tax becoming due and may offer a much-needed cash boost to the business.
How to incorporate
Firstly, the company must choose a name, which cannot be the same as another registered company’s name. If it is too similar to another company’s name or trademark it may have to be changed.


The company must have at least one director who is a natural person, and a public company must have at least two directors. A private company need not appoint a company secretary, although in practice many choose to do so.
There must be at least one shareholder or guarantor, who can also be a director.


The company will need to prepare a 'memorandum of association' and 'articles of association', as provided for by Companies Act 2006. Broadly, these documents set out how the company will be run.


Private limited companies are also required to maintain a register of those persons who have significant control of the company – known as a ‘PSC Register’. The function of the Register is to increase corporate transparency for the purpose of combating tax evasion, money laundering and terrorist financing.


The company must register with HMRC for corporation tax and PAYE as an employer at the same time as registering with Companies House. This must be done within three months of starting to do business. The company may also be required to register for VAT if it meets the registration criteria.


Although there are disadvantages to incorporating a business, the lower tax rates and other reliefs currently on offer still make it an attractive proposition. Some advantages worth considering include:


 • ability to pay dividends to shareholders, which may in turn reduce liability to National Insurance Contributions (NICs)


 • flexible succession planning, particularly for inheritance tax purposes


 • great investment opportunities, for example potential to raise money through tax-efficient schemes such as the Enterprise Investment Scheme (EIS)


 • limited liability status for shareholders, although directors may be asked to give personal guarantees of loans to the company and may still be held liable for the debts of a company


 • potential increased saleability


Business owners are recommended to evaluate the advantages of incorporation on an on-going basis.


VAT refunds for DIY builders

Adrian Mooy - Friday, October 04, 2019


If you build your own house or convert an existing property into a home, you may be eligible to apply for a VAT refund on building materials and services. You do not need to be VAT registered to claim a refund.


What qualifies?


Refunds can be claimed in respect of building materials that are incorporated into the building and which cannot be removed without tools or without damaging the building. Refunds are available for materials used to build both new homes and for certain conversions.


A new home will qualify if it is separate and self-contained and you build it for you and your family to live in. The property must not be used for business purposes, although you are permitted to use one room as a home office. Conversions will qualify if the property was previously used for non-residential purposes and is converted for residential use.


Conversions of residential building will only qualify if they have not been lived in for at least 10 years.


Where you use a builder, the builder’s services will normally be zero-rated where they work on a new home. However, you can claim a refund for VAT charged by a builder working on a conversion.


What does not qualify?


Refunds are not available in respect of:


 • materials or services on which no VAT is payable because they are zero-rated or exempt;


 • professional fees, such as architects’ fees or surveyors’ fees;


 • costs of hiring machinery or equipment;


 • building materials which are not permanently attached to or part of the building;


 • fitted furniture, some gas and electrical appliances, carpets and garden ornaments.


A refund is also denied if the building is not capable of being sold separately, for example, as a result of planning restrictions.


How to claim


The claim is made on form 431NB where it relates to a new build and on form 431 where it relates to a conversion. The forms are available on the website. The claim must be made within three months of the date on which the building work was completed.


You must include all the relevant supporting documentation with your claim, such as valid VAT invoices to support the amount claimed. The refund will normally be issued within 30 days of making the claim.


Partner note: