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Maintaining your NIC contributions record during Covid-19

Adrian Mooy - Monday, November 30, 2020
The Covid-19 pandemic has meant that many people will suffer a reduction in income in 2020/21. Not all individuals are eligible for support under the Coronavirus Job Retention Scheme or the Self-Employment Income Support scheme, and those who are eligible for the grants will not generally receive their full pay.


Where income drops this may have an effect on the National Insurance contributions payable and the individual’s contributions record, which in turn determines their entitlement to the state pension and contributory benefits. A person reaching state pension age on or after 6 April 2016 needs 35 qualifying years to receive the full single tier state pension.




Employees build up their entitlement via the payment of primary Class 1 National Insurance contributions. For a year to be a qualifying year, the employee must have been paid or credited with National Insurance on earnings equal to 52 times the lower earnings limit. For 2020/21, the lower earnings limit is £120 per week – 52 times this is £6,240. Where earnings are between the lower earnings limit and the primary threshold (set at £189 per week for 2020/21) contributions are payable at a notional zero rate, so the employee gets the benefit but does not have to pay anything.


Missed weeks need not be a problem in themselves, as long as contributions are paid or deemed to have been paid on earnings of £6,240 for 2020/21. However, where the employee earns just above the lower earnings limit, being furloughed or taking unpaid leave can cause earnings on which contributions are paid to drop below the magic level, with the result that the year is not a qualifying year.


Where a person is out of work for a period, depending on whether they receive benefits and what benefits they receive, they may get Class 1 National Insurance credits, which will serve to protect the year. Credits are also paid to those claiming child benefit.


The self-employed


Although the self-employed pay both Class 2 and Class 4 National Insurance contributions, it is the payment of Class 2 contributions (at £3.05 per week for 2020/21) that provides state pension and benefit entitlements. Where earnings are below the small profits level, set at £6,475, the self-employed earner is entitled but not liable to pay Class 2 contributions. If the earner opts not to pay Class 2 contributions (and does not pay sufficient Class 1 or receive NIC credits), the year will not be a qualifying year.


To pay voluntarily or not to pay


If a person already has 35 qualifying years or is likely to do so by the time that they reach state pension age, missing a year will not adversely affect their state pension entitlement. However, if they have less than 35 years (and will be able to reach the minimum 10 years needed for a reduced state pension by the time that they reach state pension age) making voluntary contributions can be worthwhile.


Those with earnings from self-employment of less than the small profits threshold (£6,475 for 2020/21) can pay Class 2 contributions voluntarily. At only £3.05 per week for 2020/21 this is a cheap and worthwhile option.


Where there are no earnings from self-employment, paying voluntary contributions means paying Class 3 contributions at £15.30 per week for 2020/21.


Extracting income from a family company with no retained profits

Adrian Mooy - Saturday, November 28, 2020
The Covid-19 pandemic has had an adverse effect on millions of family companies, potentially reducing or eliminating profits. Where there is cash in the business that can be withdrawn, possibly because the business has received a Coronavirus Bounce Back Loan or a Coronavirus Business Interruption Loan, and the family need to withdraw funds to meet their living costs, the lack of retained profits may affect how those funds are withdrawn.


No retained profits, no dividends


A popular and tax-efficient strategy is to pay a small salary and extract further profits as dividends. For 2020/21, the optimal salary is £9,500 (equal to the primary threshold for Class 1 National Insurance purposes) where the employment allowance is not available and £12,500 (equal to the personal allowance) where it is.


Dividends can only be paid out of retained profits, so where there are no retained profits, no dividends can be paid.


If funds are needed to meet personal living costs, other routes must be taken.


Higher salary or a bonus


Unlike dividends, profits are not needed to pay a salary or bonus; indeed these can still be paid even if doing so creates or increases a loss. Paying an additional salary or a bonus will come with a personal tax bill once the personal allowance has been utilised and will attract primary and secondary Class 1 National Insurance where earnings exceed the relevant thresholds, set, respectively, at £9,500 and £8,788 per year, and where secondary contributions are not sheltered by the employment allowance. It should be remembered that company directors have an annual earnings period for Class 1 National Insurance purposes.


However, on the plus side, salary payments and any associated secondary National Insurance contributions are deductible when working out the company’s taxable profits.


Take a loan


Rather than paying a higher salary, it may be preferable to take a loan from the company. Most family companies are close companies, such that if the loan is not repaid within nine months and one day of the end of the accounting period in which it was taken, a section 455 charge arises and 32.5% of the outstanding balance must be paid by the company over to HMRC (although if the loan is repaid, this is repayable nine months and one day after the end of the accounting period in which the loan is paid). A benefit in kind tax charge will also arise on the director if the loan balance tops £10,000 at any point in the tax year, even if only for one day. The amount charged to tax is the interest that would be payable at official rate (set at 2.25% from 6 April 2020), less any interest actually paid.


Taking a loan can be tax efficient, particularly if paid back before the trigger date for the s. 455 charge. It may be an attractive option to get over a difficult period where a return to profitability is anticipated, allowing a dividend to be declared to clear to loan balance.




The provision of benefits in kind can also be attractive as the recipient will pay tax on the cash equivalent value rather than having to meet the full cost personally. Benefits in kind are even more attractive where an exemption can be utilised allowing them to be provided tax free. The trivial benefits exemption can be put to use here where the cost is not more than £50 (and the total cost of trivial benefits is not more than £300 for the tax year).


From the company’s perspective, Class 1 National Insurance will be payable on the cash equivalent amount, but the cost of the benefit and the NIC cost is deductible in computing taxable profits for corporation tax purposes.


Employees - expenses for working from home

Adrian Mooy - Friday, November 27, 2020
The Covid-19 pandemic has meant that more employees worked from home than ever before. This trend looks set to continue following the Government’s latest advice to continue to work from home where you can do so. Further, many business plan to embrace flexible working beyond the end of the pandemic, allowing employees to work from home some or all of the time where their job allows this.


However, while working from home may save the cost of the commute, there are expenses associated with working from home. Is the employee able to claim tax relief where these are not met by the employer?


Additional household expenses


As a result of working from home, an employee will incur the cost of additional household expenses, such as additional electricity and gas costs, additional cleaning costs, and such like. During the Covid-19 pandemic, HMRC confirmed that employees are able to claim a deduction for additional household expenses attributable to working from home of £6 per week without supporting evidence. Where the actual additional costs are more than £6 per week, tax relief can be claimed for the full amount, as long as the employee can substantiate the claim. For example, this could be done by comparing bills prior to working from home with those during the working at home period.


Homeworking equipment


Employees may have needed to buy office equipment, such as a computer and a printer, to enable them to work from home. Where these costs are not reimbursed by the employer, HMRC have confirmed that employee can claim a tax deduction for the actual expenditure incurred, as long as it was incurred ‘wholly, exclusively and necessarily’ in the performance of the duties of the employment.


Other expenses


To claim relief for other expenses employees will need to pass the general test that the expense was incurred ‘wholly, necessarily and exclusively’ in the performance of the duties of the employment. Care must be taken to distinguish between expenditure which puts the employee in the position to do their job as opposed to being incurred in the performance of it. Childcare, for example, would fall into the former category.
Relief is also denied for dual purpose expenditure, such as an office chair which enables the employee to be comfortable while working, as this fails the ‘exclusively’ part of the test.


Making claims


Where the conditions for tax relief are met, a deduction can be claimed on form P87 (available on the website) or, where the employee completes a tax return, on the employment pages of the return.


Employment allowance – Have you claimed it?

Adrian Mooy - Thursday, November 26, 2020
The National Insurance employment allowance enables eligible employers to reduce the amount of employer’s National Insurance that they pay over to HMRC. The allowance, which is set at £4,000 for 2020/21, is available to most employers whose Class 1 National Insurance liability was less than £100,000 in 2019/20, with some notable exceptions, including companies where the sole employee is also a director.


The employment allowance must be claimed, but this can be done at any point in the tax year. There is no obligation to claim the allowance from the start of the tax year.


The allowance is set against employer’s Class 1 National Insurance until it is used up. It cannot be used against Class 1A or Class 1B liabilities, or to reduce the amount of National Insurance payable by employees.


Employment allowance and the CJRS


The Coronavirus Job Retention Scheme (CJRS) enabled employers to place employees on furlough and claim a grant from the Government to pay them furlough pay of 80% of their wages (capped at £2,500 per month) while on furlough.


Payments made to furloughed employees are liable for tax and Class 1 National Insurance as for usual payments of wages and salary. For pay periods up to an including 31 July 2020, employers were able to claim the associated employer’s National Insurance on grant payments, to the extent that it was not covered by the employment allowance.


This meant that if an employer had claimed the employment allowance form the start of the tax year, they would not be able to reclaim the associated National Insurance on grant payments until the employment allowance had been used up. By contrast, employers who delayed claiming the employment allowance could reclaim the employer’s National Insurance on grant payments from the Government under the CJRS and use the employment allowance against their secondary liability once the reclaim option came to an end. This was a beneficial strategy and one that HMRC have not raised objections to.
Remember to claim


If the employment allowance was not claimed at the start of the tax year to make the most of the CJRS, and has still not been claimed, eligible employers should now look to claim the allowance so that they can benefit from it.
The allowance must be claimed each year – claims do not roll forward automatically. HMRC guidance confirms that claims can be made ‘at any time in the tax year’.


Claims can be made via the payroll software.


Late claims


If the claim is made late in the tax year and the full amount of the available employment allowance (set at the lower of £4,000 and your employer Class 1 National Insurance liability for the year) is not used, any unclaimed allowance at the end of the year to pay any tax (including VAT and corporation tax) or National Insurance that you owe. Where no tax is paid, the employer can ask HMRC for a refund. Employers can check their HMRC online account to see how much of their employment allowance for the year they have used.


Where the employment allowance has not been claimed for previous years, claims can be made retrospectively for the previous four tax years.


Paying back deferred VAT

Adrian Mooy - Tuesday, November 24, 2020
At the start of lockdown, the Government announced a number of measures to help businesses weather the pandemic. One of those measures was the option for VAT-registered businesses to defer VAT payments that fell due between 20 March 2020 and 30 June 2020. This window meant payment of VAT for the following quarters could be deferred:


 • quarter to 29 February 2020 – due by 7 April 2020;
 • quarter to 31 March 2020 – due by 7 May 2020; and
 • quarter 30 April 2020 - due by 7 June 2020.
However, businesses opting to defer payments were still required to file their VAT returns on time.
VAT due after 30 June 2020
Normal service is resumed in respect of VAT which falls due after 30 June 2020. This must be paid on full and on time. Consequently, VAT for the quarter to 31 May 2020 must be paid by 7 July 2020, even if the trader has yet to pay their VAT for the quarter to 29 February 2020. This applies for successive VAT quarters too.
Set up cancelled direct debits
Where VAT is normally paid by direct debit but the direct debit was cancelled to enable the trader to take advantage of the deferral option, the direct debit needs to be set up again so that payments can be taken automatically. If this has not yet been done, payments will need to be triggered manually to ensure that VAT reaches HMRC on time until the direct debit is back up and running.
Paying VAT that has been deferred
Deferred VAT remains due – the measure simply provides a longer payment window; it does not cancel the liability. VAT that fell due in the period from 20 March 2020 to 30 June 2020 was originally due to be paid in full by 31 March 2021.
However, in delivering his Winter Economy Plan on 24 September 2020, the Chancellor, Rishi Sunak, announced that instead, he will allow businesses to spread the repayment of deferred VAT over 11 smaller repayments during 2020/21, with no interest to pay.
Struggling to pay?
Businesses in certain sectors, such as hospitality and leisure, are still not able to operate normally. Where, despite the longer repayment period, a business thinks that it may struggle to repay its deferred VAT, it should contact HMRC to set up a time to pay agreement, which can spread the repayments over a longer period. This should be done before the first payment becomes due.


Homeworking equipment and returning to the office

Adrian Mooy - Monday, November 23, 2020
Before the Government U-turn, many employees had started to return to office-based jobs. Where the employee had previously worked from home and had been provided with homeworking equipment, there may be tax implications to consider if the employee is allowed to keep the equipment for personal use.


The tax implications will depend on the way in which the equipment was made available to the employee.


Employer provided the equipment


If the employer provided equipment to enable the employee to work from home, no tax charge arises in respect of the provision, as long as the main reason for providing the employment was to enable the employee to work from home, any private use is insignificant and the employer retains ownership of the equipment. This remains the case if the employee retains the equipment to enable them to work from home on a more flexible basis.


If, at the end of the working from home period, the employee simply hands back the homeworking equipment to the employer, there are no tax implications.
However, if ownership of the equipment is transferred to the employee, there will be tax to pay unless the employee pays at least the market value at the date of transfer for the equipment. The amount charged to tax is the market value of the equipment at the date of transfer, less any contribution from the employee.


Employer reimburses the cost of the equipment


At the start of lockdown, many employees were required to work from home at very short notice. As a result, it was often easier for the employee to buy their homeworking equipment, and the employer to reimburse the cost. The reimbursement is tax-free as long as the employee acquired the equipment to allow them to work from home and any private use is insignificant.


However, if the employee buys the equipment, the title remains with the employee (unless it is transferred to the employer as a condition of the reimbursement).
Consequently, if the employee no longer needs to work from home when they return to the office, but keeps the equipment for personal use, there is no tax charge – the employee is simply keeping equipment they already own.


Employee buys equipment


If the employee buys their own homeworking equipment and the employer does not meet the cost, the employee can claim tax relief for their expenditure. If the employee uses the equipment personally once they return to the office, there are no associated tax implications as the employee already owns the equipment.


SDLT and linked transactions

Adrian Mooy - Saturday, November 21, 2020


Special stamp duty land tax (SDLT) rules apply where there are multiple sales or transfers between the same buyer and seller.


Linked transactions


Where two or more property transactions involve the same buyer and seller, they may be ‘linked’ for SDLT purposes. HMRC may treat a person connected to the buyer, such as a spouse or civil partner, a child or a sibling, as the same buyer and persons connected to the seller as the same seller when seeking to apply the linked transaction rules.


Transactions count as ‘linked’ if:


 • there is more than one transaction;

 • the same transactions are between the same buyer and seller (or people connected to them); and

 • the transactions are part of a single arrangement or scheme or part of a series of transaction.


Transactions may be linked because they form part of the same single arrangement or scheme, regardless of whether they are documented separately. So, transactions would be linked if the husband purchases a house and his wife purchases associated land from the same seller. The buyers are connected and purchasing the property and land from the same seller is part of the same deal.


Transactions may also be linked where they form a series. There is no limit to the time between transactions for them to be regarded as linked.


The whole picture


Where transactions are linked, it is necessary to look at the whole picture - the buyer pays SDLT by reference to the total value of all the linked transactions rather than separately on the value of each individual transaction. This may mean that more SDLT is payable than if each transaction is assessed individually – only one threshold is available and the SDLT may be payable at the higher rates.


The approach is to work out the SDLT on the total value of all the linked transaction and apportion it to the individual transactions.


SDLT rate


Where all the linked transactions are residential, SDLT is charged using the residential rates, including the 3% additional property supplement where relevant. The residential SDLT threshold is increased to £500,000 from 8 July 2020 to 31 March 2021.


If one or more property is non-residential – the non-residential and mixed property rates of SDLT apply.




Harry buys two houses to let out from the same builder – one for £450,000 and one for £650,000. The builder has given him a discount for purchasing more than one property. The sales complete in July 2020 and August 2020. SDLT @ 3% is payable on the first property – a total of £13,500 (£450,000 @ 3%).


On the second purchase, the SDLT is worked out on the total consideration of £1.1 million. The SDLT is £71,750 ((£500,000 @ 3%) + (£425,000 @ 8%) + (£175,000 @ 13%)). This equates to £35,875 per property, so Harry must pay £38,875 on completion of the second purchase and a further £22,375 on the earlier purchase.


Had the SDLT been worked out separately on the second property, the bill would have been £27,000 ((£500,000 @ 3%) + (£150,000 @ 8%)) – a total for both properties of £40,500.


Applying the linked property rules increases the bill by £31,250.


Same buyer and seller but no link


The linked rules do not apply to transactions between the same buyer and seller if there was no prior agreement or option, no special price or discount was agreed and there was nothing else to link the transactions. The additional SDLT cost should be weighed up against any discount negotiated.