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Cash basis accounting - effect on tax of reducing profits

Adrian Mooy - Wednesday, March 11, 2020
There are circumstances where using the cash basis of accounting can reduce your profits and create a permanent tax saving. These include where calculating your profits using the normal basis of accounting means:


 • you’re liable to the high income child benefit charge (HICBC)
 • some of your income falls into a higher tax bracket; or
 • your taxable income exceeds £100,000.


John is self-employed. His accounts (prepared on the normal accruals basis) for the year ended 31 March 2019 show a profit of £61,000.
If the cash basis of accounting were used his profit would be £52,000. John’s spouse receives child benefit for two children for 2018/19 of £1,789.
Because his profit for that year is greater than £50,000 John is liable to the HICBC. The maximum charge would apply because his income exceeded £60,000, i.e. the charge would be £1,789. However, using the cash basis of accounting would reduce John’s profits and therefore the HICBC to £358 saving him £1,431.


Apply to reduce self-assessment payments on account

Adrian Mooy - Tuesday, March 10, 2020
You can apply in writing or by using HMRC’S online service to reduce the amounts of income tax payable on account of your self-assessment tax liability.
If applying in writing, send details of:


 • how much you want to reduce the payments to; and


 • the reason why you think your tax liability will be less than the existing payments on account. For example, the income on which you pay tax through self-assessment, say dividends, is lower than for the previous year or you’re entitled to more tax deductions say, for additional pension contributions.


You should address your application to the HMRC office shown on your most recent tax statement of account.


Alternatively, you can complete an application online, print and send it to HMRC. To start your application, go to:
To use the online service, sign in to your HMRC account, choose the self-assessment service and on the following screen click “Claim to reduce payments on account” (which is usually near the bottom of the page). Follow the on-screen instructions from there.


Salary sacrifice and minimum wage

Adrian Mooy - Tuesday, March 10, 2020
Minimum wage.


The government is cutting minimum wage red tape on salary sacrifice schemes. High profile cases, like Iceland’s Christmas savings club, saw employers penalised for diverting earnings to saving schemes for their employees which took their pay below the minimum wage. In future such schemes will be permitted, subject to conditions such as making good the shortfall.


Further changes.


There’s also good news regarding the methods for calculating hourly pay rates for workers for minimum wage purposes. The changes are expected to apply from 6 April 2020.


In future you won’t be fined for offering salary sacrifice and other schemes to workers where initially this causes their pay to fall below minimum wage rates. The methods for calculating hourly pay rates are also being changed from 6 April 2020.


HMRC confused over compensation payments

Adrian Mooy - Tuesday, March 10, 2020
Poor wording.


HMRC has amended its internal guidance regarding compensation payments for discrimination. While there was nothing incorrect about the old text it was open to misinterpretation. The new version is more helpful and precise.


The new guidance explains that if, as an employer, you make a compensation payment, you must consider the tax position for each element. For example, it might include not just an amount for injury to feelings caused by discrimination but also loss of earnings. Depending on whether the employee still works for you or the payment relates to the termination of their employment, the different elements might be entirely outside the scope of tax; taxable as earnings; or taxable as a termination payment (meaning that up to £30,000 is exempt).


HMRC has improved its guidance regarding compensation for discrimination payments made to employees. Employers must consider the tax treatment of each element of the payment not just the whole.


Acceptable reasons for not paying your VAT on time

Adrian Mooy - Monday, March 09, 2020
You were late with your VAT payment because your bookkeeper was ill. HMRC will automatically issue a penalty notice. The First-tier Tribunal (FTT) recently ruled on whether reliance on a third party was a reasonable excuse for the late payment.


Disputed penalty


Eglas Ltd offers landscape gardening services via its sole director, Mr Evans (E). Like many small businesses E concentrated on the firm’s core business and used a qualified specialist (G) to manage its bookkeeping and accounts. When a cycling accident left G unable to work for nearly seven months, E filed the VAT returns on time, but payment slipped and he ended up with a late payment penalty (surcharge) of nearly £600. E said G’s long absence on sick leave was a reasonable excuse for the late payments. HMRC said that E had ten weeks to make alternative arrangements and so didn’t have a reasonable excuse. E asked the First-tier Tribunal (FTT) to rule on the matter.


HMRC will only accept an appeal against a penalty if it considers it to be reasonable. However, it can’t arbitrarily dismiss an appeal; you either have to formally withdraw it or refer it to a tribunal to decide. The definition of “reasonable excuse” has always been a grey area. HMRC’s view is unfairly narrow and so can be worth challenging. HMRC only accepts an excuse is reasonable if the event which triggered the penalty was unexpected, unforeseen and out of your control, like the death of a close relative or last minute problems with IT.


On its website under the heading “What will not count as a reasonable excuse” HMRC explicitly says that failure by someone else on whom you’re relying isn’t a valid excuse but tribunals have contradicted this view on several occasions.


In E’s case G’s role was vital because E’s knowledge of Sage was “non existent”. He relied on G totally. Until G’s accident she had always prepared VAT returns and accounts and made sure VAT was paid on time. In her absence, E’s accounting was “paralysed”. HMRC said E had chosen to rely on G, so had to take the risk involved in that decision. It said E didn’t exercise reasonable foresight or due diligence in carrying out his tax responsibilities. The FTT disagreed.
The FTT heard that E had tried to obtain alternative help and had no luck because Sage temps weren’t available locally. E showed he knew compliance was a problem without G, and made efforts to put that right, including contacting a nearby university and other training centres, and making enquiries through a chain of accountancy offices - all without success. Either the distances were too far for daily travel or there was no one available. Despite all his efforts, E only managed to get a Sage temp for a day - and they had taken a day’s holiday from their usual job to do it. E’s excuse was reasonable despite HMRC’s attempt to narrow the definition. Don’t be put off by HMRC’s hard line on excuses. If you can show that you took all reasonable steps to prevent a delay, be prepared to call HMRC’s bluff and ask the FTT to rule.


If you need to plug a gap in key staff but are unsuccessful and this results in late VAT or other tax returns, keep records of what steps you took to find a replacement. If you can show a genuine skills shortage but HMRC refuses to accept the reason the FTT has ruled that the excuse can be reasonable.


Maximise your VAT claim for road fuel

Adrian Mooy - Monday, March 09, 2020
If your business pays for fuel for work and private journeys, there are different methods to work out the VAT reclaimable. There are further complications if your business is partially exempt.


Different methods


Until 2014 if a business paid for road fuel for its owners or workers which they used for business and private journeys, it was expected to reclaim none of the VAT or all of it. If it opted for the latter, it had to account for VAT on the private use using HMRC’s scale charges. Some businesses did well out of the arrangement while others did badly. These days while the scale charges still exist and continue to be used, you can instead work out the amount reclaimable on fuel costs by applying the general VAT rules. These say you can use any fair and reasonable method of apportioning the VAT between business (reclaimable) and private (not reclaimable) use.


Scale charge pros and cons


One advantage of HMRC’s scale charge is that it’s simple to use. The drawback is you can end up paying too much VAT. As a rule of thumb, the less fuel paid for by the business the less likely it is that the scale charge will be the most VAT-efficient option. To use the apportionment method instead you’ll need to keep a record of business and total mileage for each car for which the business pays for fuel.


For each return period you can choose which method to use and opt for the most VAT efficient. What’s more, you can use different methods for each car for which your business pays the fuel.


Partial exemption


If you want to work out the most VAT-efficient method, and your business is partially exempt, you’ll need to consider another factor. You must decide if the cost of fuel is attributable to taxable or exempt supplies your business makes, or both. In virtually all cases car journeys will be for the business as a whole and therefore the VAT on the fuel falls in the last category. This is known as the “residual VAT” or “residual input tax”. You can now decide whether to claim/account for VAT using the scale charge or by apportionment.


You can change methods each VAT period and for each car for which your business has bought fuel. The options are to pay HMRC VAT based on its scale charges or account for private mileage. If your business is partially exempt you must reduce your claim according to the partial exemption rules. The scale charge can be similarly reduced.


HMRC’s new guidance on cryptoassets and business taxes

Adrian Mooy - Monday, March 09, 2020
Until now, HMRC’s guidance on the tax consequences of using or trading in cryptoassets, such as digital currencies like Bitcoin, was mainly aimed at individuals. It’s now published new guidance for businesses.


Types of cryptoassets


In November 2019 HMRC issued new guidance on cryptoassets. It prefers this name to cryptocurrencies because, in common with most governments and banks, it doesn’t recognise Bitcoin etc. as currency or money. Instead it views them as types of token: exchange tokens, utility tokens or security tokens. The differences between these three is subtle, but for now HMRC has limited its latest guidance to exchange tokens. HMRC says that an exchange token is ”intended to be used as a method of payment and encompasses cryptocurrencies like bitcoin” for which “there is no person, group or asset underpinning these, instead the value exists based on its use as a means of exchange or investment.”


Tax and exchange tokens


The tax treatment of crypto exchange tokens depends on how you use them, and whether your business operates through a company or is unincorporated.


Paying with cryptoassets


Where cryptoassets are used as a means of payment, the value on the transaction must be recorded in your books in a recognised currency. For example, for transactions in the UK the value must be recorded as sterling.


The value is that at the time of the transaction. This is especially important for VAT because invoices must show values in a recognised currency.


If your business owns cryptoassets at the end of an accounting period, it must show their monetary value at that date in your accounts balance sheet. For UK tax returns this must be shown in sterling.


No effect on VAT


VAT is due in the normal way on goods or services you sell in exchange for cryptoassets. It applies to the value of the transaction (in sterling) at the time of the transaction. If you’re the seller you’ll need to make the valuation to show the VAT amount in sterling (or for overseas sales another recognised currency) on your invoice. You can’t show the value of the sale or the VAT in, say, bitcoin.


Investing in cryptoassets


Other than where you use cryptoassets as a means of payment, buying or selling them is a capital transaction. That means gains resulting from buying, selling or changing values of cryptoassets by companies are liable to corporation tax. Owners of unincorporated businesses are liable to capital gains tax on gains made from the sale of cryptoassets. Gains from changes in value aren’t taxable until there’s an actual sale.


Buying and selling and data mining


If you or your company frequently trade in cryptoassets, or if you “mine” them, any gains you make are taxable as profits rather than as capital gains.


For VAT and direct tax purposes all transactions in cryptoassets must be given a value in a recognised currency, e.g. sterling. If your business makes a profit from owning cryptoassets, it usually counts as a capital gain and so is liable to corporation tax for companies and capital gains tax for other businesses.


Buying and selling, or mining cryptoassets - tax consequences

Adrian Mooy - Monday, March 09, 2020
Buying and selling cryptoassets
Buying and selling cryptoassets such as bitcoin may count as a trade. To decide you should consider to what extent the so-called “badges of trade” apply to the activity. The “badges” are the factors which the courts have over time determined need to be materially present for an activity to be considered a trade.
The main badges are:
 • degree and frequency of activity
 • level of organisation
 • intention to make a profit and the risk of making a loss.
You can find more information about the badges of trade in here:
Cryptoasset mining
The badges of trade are also the criteria that should be considered to determine whether cryptoasset mining is a trade or a miscellaneous activity. Organised frequent mining with the intention and likelihood of making a profit is probably a trade while ad hoc and infrequent mining is likely to be taxable as miscellaneous income.


New reporting procedure for cars

Adrian Mooy - Sunday, March 08, 2020
New tax rates for zero and low emission company cars mean that from 6 April 2020 employers must provide more information to HMRC.


Lower tax bills.


There is a significant reduction in tax bills for drivers of electric and hybrid company cars which will apply for 2020/21. The changes will also benefit employers by reducing the amount of car benefit on which you have to pay Class 1A NI. As a result, HMRC is making changes to its reporting procedures for employers.


New Forms P46 car.


If after 5 April 2020 an employee’s company car is changed or they have use of one for the first time, and it’s a zero or low emissions car, you’ll need to notify HMRC in the new box that will be added to the P46 car. If it’s a hybrid with CO2 emissions of between 1g/km and 50g/km you must enter the vehicle’s zero emission mileage, i.e. the maximum distance it can be driven in electric mode without recharging. If you payroll your company car benefits, there will be a new field on the PAYE full payment submission in which to enter the mileage details.


If you use a paper P46 car rather than the online version, make sure that you download and use the new-style form. Destroy any old-style forms. The new forms will be available to download from 6 April 2020.


Hybrid information.


If you’re leasing a hybrid vehicle, the leasing firm is required to provide you with the mileage information. If you own the vehicle, the zero emission mileage figure can be found on its “certificate of conformity”. If this isn’t available you can obtain the figure from the manufacturer.


Existing company car users.


You aren’t required to notify HMRC about employees who currently use electric or hybrid cars and continue with the same vehicle after 5 April 2020. However, it would be helpful if you notified the employees that their tax bills might reduce and that they should contact HMRC as soon as possible to check if their code number needs to be amended.


There will be a new P46 car (online and paper versions) from 6 April 2020. Destroy any old paper versions. For hybrid cars you must provide details of the vehicle’s electric only range as shown on the certificate of conformity.


What is the small company exemption?

Adrian Mooy - Saturday, March 07, 2020
When the Government confirmed the April 2020 private sector extension of the off-payroll rules in October 2018, the Budget documentation contained a notable exclusion for small companies.


Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.


Although there was initially some confusion over the definition of the term ‘small’, the Government has since confirmed that it will use the same criteria contained in the Companies Act 2006.


During a 12-month period, a business is deemed to be a ‘small’ company if it meets 2 or more of the following criteria:


Turnover – not more than £10.2 million


Balance sheet total – not more than 5.1 million


Number of employees – no more than 50


Any contractors engaged by small companies will continue to operate the IR35 rules as they do currently – and the responsibility for determining their employment status will not pass to their clients.