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Interest & penalty charges for late filing & payment

Adrian Mooy - Monday, February 17, 2020
HMRC operates a severe penalty regime to encourage compliance with self-assessment requirements. Failure to submit a return on time may attract a late filing penalty.


Late returns - The exact amount of any late filing penalty depends on how late the return is:


Length of delay & penalty


1 day late - A £100 automatic fixed
penalty applies even if the
taxpayer has no tax to pay or
has paid the tax owed
3 months late - £10 for each following day
up to a 90 day maximum of
£900 This IS in addition to
the fixed penalty above


6 months late - £300 or 5% of the tax due
whichever is the higher. This
is in addition to the penalties
12 months late -  £300 or 5% of the tax due
whichever is the higher This
is in addition to the penalties


In serious cases, HMRC may seek a penalty of up to 100% of the tax due instead. In some cases, the penalties can be even higher than this. These are in addition to the penalties above.


Late payments - The following penalties apply to late balancing payments of income tax and late payments of capital gains tax under self-assessment.


Length of delay & penalty


30 days 5% of the unpaid tax
6 months 5% of the unpaid tax
12 months 5% of the unpaid tax


Penalties are payable within 30 days from the day on which the penalty notice is issued There is a right of appeal against both the imposition of a penalty and the amount involved. HMRC may reduce a late payment penalty in special circumstances, which does not include an inability to pay. In addition, a defence of reasonable excuse may be available.


Interest on late payments


For income tax purposes, interest is normally charged on overdue tax from the due date of payment (31 January or 31 July) to the date the tax is actually paid. Interest charges also apply to late payment of penalties and in respect of tax return amendments and discovery assessments. The rate of interest charged on unpaid tax is currently 3.25% (from 21 August 2018). Interest is payable gross and is not deductible for tax purposes.


Remuneration strategy following recent policy announcements

Adrian Mooy - Saturday, February 15, 2020
The government announced in November 2019 that the scheduled reduction in corporation tax (CT) from 19% to just 17% from 2020/21 was not going to happen. It could have been worse for companies, given that many political parties wanted to reverse the recent trend of falling CT rates.


Many small companies are set up to cover single projects - typically in construction or IT - and the shareholder/directors may want to minimise their exposure to high marginal rates of income tax/ NICs on salaries and/or dividends. Such companies might then be wound up on the successful completion of the project and the shareholder/ directors might well then stand to benefit from ER on any accumulated profits that have not so far been paid out as salary or dividends. In the right circumstances, ER can offer significant savings, although there are numerous criteria and now special anti-avoidance rules, aimed at preventing ‘phoenixing’ companies and re- starting in the same sector. However, a genuine commercial basis for winding up the company should prevent the anti-avoidance legislation from being triggered.




1. There is little point in trying to defer corporate profits to later than 1 April 2020 to get them taxed at lower rates.


2. Shareholder/directors will probably want in coming tax years to increase their gross salaries to just below the rising threshold at which NICs become payable, to optimise their overall efficiencies.


3. The increase in employers allowance will make taking on a spouse, civil partner or close family member for a higher salary more efficient, where they might otherwise waste tax-free personal allowance and lower tax bands.


4. Where profits have accumulated in the business and the directors/shareholders hope to benefit from ER, there may well be some cases where triggering a disposal in the current 2019/20 tax year could usefully 'bank' ER before it is potentially restricted or even abolished.


Proper tax advice and planning is essential.


Paying dividends before the end of the tax year

Adrian Mooy - Saturday, February 15, 2020
Family companies should review profit extraction policy and consider whether they can and should pay further dividends before the end of the tax year. Dividends can only be paid out of retained profits and thus, unlike payments of bonuses or salary, the amount that can be extracted from the company as dividends is capped at the level of the company’s retained profits.


Retained profits are broadly profits on which corporation tax has been paid and thus they have already suffered tax in the hands of the company. For the 2019 financial year (i.e. running from 1 April 2019 to 31 March 2020), the corporation tax rate is 19%.


Once retained profits have been paid out as a dividend, they represent taxable income in the hands of the recipient. Consequently, the profits are taxed again. The combined effect of corporation tax already paid on the profits, plus the dividend tax on the dividend, may be less than the income tax and National Insurance contributions (NICs) that would be payable on profits paid out as salary, despite the fact that salary payments and employers’ NICs are deductible in computing the family company’s taxable profits. Unlike salary and bonus payments, there are no NICs to pay on dividends.


In the hands of the shareholder, dividends are treated as the top slice of income and taxed at the appropriate dividend rate of tax. The dividend tax rates are lower than the income tax rates, allowing for the fact that corporation tax has already been paid. Dividends are taxed at 7.5% to the extent that they fall within the basic rate band, at 32.5% to the extent that they fall within the higher rate band, and at 38.1% to the extent that they fall in the additional rate band.


All taxpayers, irrespective of the rate at which they pay tax are entitled to a dividend allowance (£2,000 for 2019/20). The allowance is really a nil rate band rather than a true allowance in that dividends which are covered by the allowance form part of band earnings. Dividends sheltered by the dividend allowance are taxed at a rate of 0% rather than at the relevant dividend rate. The dividend allowance is a useful tool.


Dividends come with company law rules, which must be adhered to. As well as restricting the amount of dividends that can be paid out to the level of the company’s retained profits, to comply with company law requirements dividends must be paid in proportion to shareholdings. Different dividends can be declared for different classes of share, providing the flexibility to tailor dividend payments to the circumstances of the recipient to ensure that dividends can be paid out in a tax-efficient manner.


Companies are advised to undertake a review so that they can decide whether it is desirable to extract profits from the company before the end of the tax year. If there are profits to be extracted, the company must decide how the profits should be extracted and who they should be paid to.


In order to answer these questions, it is not only necessary to establish what profits are likely to be available for extraction, but also what other income the family members have, whether their personal allowance and/or dividend allowance remains available and whether they have used up all of their basic or higher rate bands.


As a starting point, it is generally tax-efficient to pay a small salary and to extract further profits as dividends. Assuming the recipient’s personal allowance is available, the optimal salary is equal to the primary threshold for Class 1 NICs purposes (£8,632 for 2019/20) where the employment allowance is not available. If the employment allowance is available, the optimal salary is equal to the personal allowance (assuming that this is not used elsewhere), set at £12,500 for 2019/20. Above this level, it is generally more efficient to extract profits as dividends. Before paying out dividends, consider whether the optimal salary has been paid.


However, it should not be forgotten that there are other options for extracting profits, such as rent where the business is operated from a room in the family home, benefits-in-kind, pension payments etc.


Undertake a review prior to the year end to determine whether it is advisable to pay dividends before the end of the tax year.


When goodwill can help

Adrian Mooy - Saturday, February 15, 2020
The valuation of assets can be important for tax purposes. For example, a valuation may determine the amount of inheritance tax (IHT) payable on a lifetime transfer (e.g. the transfer of an investment property to a discretionary trust) or on an individual’s death estate. In addition, an asset valuation may be needed to determine the capital gains tax (CGT) liability on certain disposals (e.g. a gift of investment company shares from parents to adult children). However, asset valuations can also be a crucial factor in determining the availability of tax relief in some cases. Two notable examples are highlighted below.


1. Entrepreneurs’ relief


The basic definition of ‘trading company’ for CGT entrepreneurs’ relief (ER) purposes is ‘a company carrying on trading activities whose activities do not include to a substantial extent activity other than trading activities’.
There is no statutory definition of ‘substantial’ for ER purposes, but it is generally accepted to mean ‘more than 20%’. There are several factors, some or all of which might be considered in determining whether non-trading activities are ‘substantial’ (i.e. income from non-trading activities, the company’s asset base, expenses incurred, time spent by officers and employees of the company in undertaking its activities, and the balance of indicators). On the ‘company’s asset base’ test, HMRC states: ‘If the value of a company’s non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company.’ However, HMRC acknowledges that it may be appropriate to take account of business goodwill not shown on the balance sheet.


2. Business property relief


A business owner may be eligible for IHT business property relief (BPR) if certain conditions are met. However, the relief does not apply (subject to limited exceptions) to a business (or an interest in it) or company shares and securities where the business carried on consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.


This ‘wholly or mainly’ test broadly means that if (say) a ‘hybrid’ company, i.e. comprising a trading business and an investment business (e.g. a company operating a manufacturing business and a residential lettings business) is 49% trading and 51% investment, an individual’s shares would not be eligible for any BPR at all, even in relation to the company’s trading activities. HMRC’s guidance on valuing a business for BPR purposes states that the company’s balance sheet will be the main source of information about the value of business assets (and liabilities) at the date of death/transfer. HMRC includes goodwill within the list of assets to be taken into account, even where no goodwill is shown on the balance sheet.


The valuation of goodwill is a specialist area. HMRC will normally refer the matter to its Shares and Assets Valuation division. Taxpayers and advisers are strongly advised to seek assistance from a valuation expert.


Writing off small tax bills

Adrian Mooy - Friday, February 14, 2020
Tax bills not worth the effort


For many years HMRC adopted a policy of not assessing tax if the amount involved was small. 40 years ago the limit was £30 and eventually became £70. However, that was in the days when the Inland Revenue, as it was then, had to go through the rigmarole of manually writing or typing an assessment, posting it to the taxpayer and notifying the collector of taxes to issue demands. The so-called assessing tolerance disappeared with the introduction of self-assessment in 1996. However, HMRC has found it necessary to renew this old policy, but not in all situations.


Taxes management


If you submit self-assessment tax returns you’ll have to settle the tax bill that results, however small the amount. HMRC routinely make adjustments to eliminate very small debts, typically no more than £2. The legislation gives HMRC management powers to do this. It can, but very rarely does, use the same rules to write off larger sums, but it’s not open to negotiating a debt down.
HMRC will seemingly write off a debt if it loses track of someone who owes it money. This is usually no more than a temporary reduction. So if you change address when HMRC eventually tracks you down it will reinstate the tax charge and add interest to the bill.


HMRC statements


Currently HMRC issues informal tax calculations known as P800s. The idea behind these is that rather than force individuals with simple tax affairs to complete self-assessment returns HMRC uses the information it has to decide if you you’ve over - or underpaid tax. It then asks you to pay or refunds you. The debt is not enforceable and so if you refuse to pay HMRC is likely to send you a self-assessment form to fill in or, if you have income that’s taxed through PAYE, adjust your tax code to increase the amount you pay on your salary etc.
P800s are often inaccurate and you should check them, especially if they include estimated figures (savings or investment income is usually estimated). HMRC must adjust the P800 if you provide it with the correct figures.


HMRC simple assessments


A few years ago legislation was introduced to allow HMRC to issue simple assessments in certain circumstances where a P800 is not suitable. Tax payable on a simple assessment is enforceable, but they too often include estimates and should be checked. Unlike P800s you must formally notify HMRC within 60 days if you disagree with the figures.
HMRC’s practice of not issuing assessments or P800s for small amounts is back. It should not assess you if you owe less than £50. If you receive such an assessment/ P800 call HMRC on the number shown on the document and ask for the debt to be cancelled. It will usually agree to this.
If you’ve completed a self-assessment return you must pay the demand, assuming the amount requested ties up with your calculations, no matter how small it is. However, if the demand is in respect of a Form P800 or simple assessment and is for less than £50, HMRC ought not to have sent it. It will usually cancel the charge if you ask.


Capital gains tax annual exemption

Adrian Mooy - Wednesday, February 12, 2020
The capital gains tax (CGT) annual exemption is useful tax break for many taxpayers. It is generally available to individuals (£12,000 for 2019/20), personal representatives (for the tax year of death and the two following years) and trustees.


The CGT annual exemption is a use it or lose it allowance. Any unused exemption for one tax year cannot be carried forward.


Tax planning involving the CGT annual exemption is often aimed at ensuring that multiple exemptions are used in respect of the same asset.


There are two main methods:


1. Disposing of the asset in stages over two or more tax years, so that the gains falling into each tax year are reduced by the annual exemption for that year. This may happen where an interest in the investment property is transferred from (say) parent to adult child in one tax year, and a further interest in the property is transferred in the following tax year.


2. Gifting parts of an asset (commonly a business asset on which gift holdover relief can be claimed) to (say) other family members such as spouses (or civil partners) and children prior to disposal of the asset, so that each individual can use their annual exemptions to reduce the overall CGT liability. Gains on investment properties cannot be ‘held over’ in this way (unless they are qualifying furnished holiday lettings).
HMRC is alert to the use of the annual exemption as an ‘avoidance device’. HMRC’s guidance accepts that not every ‘fragmented’ disposal is for tax avoidance purposes, and that a gift may be genuine even though there is an overall tax benefit. However, HMRC may challenge artificial arrangements by opening an enquiry into the tax return of the person(s) making the disposal. For example, HMRC might look at the disposal of an asset where it suspects that an unconditional contract for its sale took place before an interest in the asset was gifted. Alternatively, HMRC may seek to contend that a gift was a ‘sham’. Information and documentation to support transactions (e.g. correspondence, contracts) should be retained for possible inspection.
HMRC’s guidance on the exploitation of the annual exemption concludes: ‘When considering any challenge to any arrangements you should also give consideration to the amount of tax at risk.’ The potential tax savings vary. For individuals, the normal CGT rates (for 2019/20) are 10% (basic rate taxpayer) and/or 20% (higher rate taxpayer). However, those rates are increased to 18% and 28% in respect of residential property and carried interest. The possible tax savings (for 2019/20) therefore range from £1,200 to £3,360.


Capital gains

Adrian Mooy - Tuesday, February 11, 2020
If you’re lucky enough to own shares which have increased in value you might be liable to capital gains tax (CGT) if you sell or transfer them. Working out the taxable gain isn’t always as easy as comparing how much the shares cost you with the amount you receive from selling them. When you buy or acquire shares of the same type in the same company at different times, their cost for CGT purposes is averaged. This is known as pooling.
Pooling can work for or against you. Shares on which you think you’ve made a loss or a small gain could show a large gain for tax purposes, or vice versa.
Example - part 1. In 2004 Ali bought 10,000 10p shares in Acom Plc for £12,000. He inherited a further 5,000 shares from his father in 2007 when they were worth £2.20 each and bought 1,500 more in 2018 for £6,500. In January 2020 Ali sold the 1,500 shares for £10,000. Ali assumes he’s made a capital gain of £3,500 (£10,000 less £6,500). But because all his shares in Acom are pooled and their costs averaged, the taxable gain is actually £7,818.
Using your annual exemption


If Ali made no other capital gains in 2019/20 he would not have to pay tax on his gain from selling his Acom shares because it would be less than the annual CGT exemption, which is £12,000 for the year. But if he had already made gains from selling other assets his miscalculation could result in an unexpected tax bill. Note. If Ali had made capital losses in 2019/20 these reduce the amount of taxable gains before applying the exemption.
Example - part 2. Prior to selling the Acom shares, Ali had made a capital gain of £8,000 from selling a property. He had assumed the gain on his Acom shares of £3,500 would push his total gains to £11,500, i.e. within the CGT exemption with a little to spare. But actually his taxable gains are £15,818 (£8,000 + £7,818) meaning that he’ll have to pay tax on £3,318 (£15,818 - £12,000 exemption).


CGT efficiency


Selling assets to utilise your annual CGT exemption is good tax planning. It prevents large gains building up in shares and so can significantly reduce tax in the long run.


If you’re married it’s relatively easy to double the annual CGT exemption by transferring assets to your spouse to sell. HMRC accepts this type of tax-saving arrangement.


Example. Instead of them selling all 1,500 Acom shares, Ali gave half to his wife to sell. The effect of the special rules which apply to transfers of assets from one spouse to the other means that when they sell they each make a gain of £3,909 (£7,818/2). Adding this gain to Ali’s others for 2019/20 means that his total gains are £11,909 - just within his annual CGT exemption of £12,000. Assuming his wife hasn’t made other gains exceeding £8,091 in 2019/20, those which she makes from selling the shares in Acom will be covered by her annual CGT exemption.

Is a working holiday tax deductible?

Adrian Mooy - Monday, February 10, 2020
Business, private and mixed expenses


The general rule for expenses; to be tax deductible they must be incurred “wholly and exclusively” for the business. This condition is modified for directors and employees who incur travel expenses; to be tax deductible they must be incurred in the performance of their job. However, this rule is not as straightforward as it might seem.


Example. A director often travels from home to visit a customer on the way to the firm’s offices. One interpretation of the rules suggests that none of the cost of the journey to the office from home is tax deductible because travel between your home and your normal place of work (a commute) counts as a private journey. Alternatively, the travel is two journeys, one from home to the customer and one from the customer to work. The second part meets the condition while the first doesn’t because any journey beginning or ending at home is commuting.


Because both interpretations have flaws HMRC usually accepts that a journey incorporating a business element which starts from or ends at your home meets the condition for a tax deduction.


Example. You travel 200 miles to visit several customers. You stay overnight in a hotel. In the evening you go to the cinema. While the cost of travel from your hotel to the cinema is clearly private, HMRC says this won’t jeopardise the tax deductibility of the main journey from your home or office to visit customers. HMRC’s guidance confirms this.


A business trip with pleasure


In the example above the purpose of the journey is clearly business which happens to offer an opportunity to undertake private activities. What’s more, it’s easy to identify and separate the business from the private element of the trip. This means the cost of travel from home or work to the hotel and the customer is tax deducible, while the cost of travelling to and from the cinema is not. A similar approach can be used to differentiate between deductible and non-deductible expenses if the main purpose of your journey is private but you undertake some business while away.


Example. You’ve booked your family’s summer holiday in southern Spain. You intended to leave them to their own devices for a couple of days while you fly to Barcelona to visit some work colleagues to discuss business. The cost of your and your family’s travel and accommodation in southern Spain is obviously not related to travelling in the performance of your job even though it is one leg of your trip to visit work colleagues. None of it is tax deductible. Conversely, the cost of your flight to and accommodation in Barcelona is business, and therefore tax deductible, even if you visit a bar or two in the evening with your colleagues.
If you’re combining business with pleasure keep detailed records that identify the tax deductible and non-deductible cost elements.


The main purpose of a trip determines if tax relief is allowed. If it’s private, no relief is allowed even if there’s a business element. However, separate costs you incur wholly for business while on holiday, say paying for travel to visit a customer, qualify for relief.


Benefits of putting a property into joint names prior to sale

Adrian Mooy - Monday, February 10, 2020
Where a property qualifies in full for private residence relief, it is perhaps academic, from a tax perspective at least, whether a couple own it jointly or it is the one name only. In either case, the relief shelters any gain that arises and there is no tax to pay.


However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.


Take advantage of the no gain/no loss rules for spouses and civil partners


There are some breaks in the tax system for married couples and civil partners, and one of them is the ability to transfer assets between each other at a value that gives rise to neither a gain nor a loss. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. This enables a couple to utilise available annual exempt amounts and lower tax bands.


Capital gains tax on residential property gains is charged at 18% where total income and gains do not exceed the basic rate limit (set at £37,500 for 2019/20) and 28% thereafter.


Case study


Ron and Rita have been married a number of years and in addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.


Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).


If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000 after deducting his annual exempt amount of £12,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of £24,640 (£88,000 @ 28%).


However, as Rita has her basic rate band and annual exempt amount available, making use of the no gain/no loss rule to put the property in joint names prior to sale can save the couple a lot of tax. Each will realise a gain of £50,000.


As far as Ron is concerned, £12,000 of his gain will be sheltered by his annual exempt amount, leaving a chargeable gain of £38,000 on which tax of £10,640 will be payable.


Rita will also have a gain of £50,000, of which the first £12,000 is covered by her annual exempt amount, leaving a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.


By taking advantage of the no gain/no loss rule to put the property into joint names prior to sale, the couple will be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110.


Reporting a pension annual allowance charge

Adrian Mooy - Monday, February 10, 2020
If your pension savings for a year exceed your annual allowance (AA), either you or your pension provider must pay the tax.
The first step is filling in the “Pension savings tax charge”’ part on your tax return. For help, look at form SA101 and use HMRC’s HS345 pension savings help sheet (see the links below).


Use Box 10 on the Pensions Savings Charges page if you have a charge, even if the scheme pays some or all of it. If they contribute, put the amount they pay in Box 11. You will need your scheme’s Pension Scheme Tax Reference to fill in Box 12.


If you forget to report the AA charge on your tax return you have twelve months from the filing deadline to amend it. For example, if you forget something off your 2018/19 return, which had to be filed by 31 January 2020, you have until 31 January 2021 to notify HMRC.
For the SA101


For the HS345