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61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
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01332 202660

Blog

What’s new with company cars in 2020

Adrian Mooy - Thursday, March 05, 2020
 
If you have use of a company car for private travel you’ll have to pay tax for the privilege. Plus, there’s a further tax bill if the business pays for your fuel for private journeys. What’s changing with these tax charges in April 2020?

 

Cars and car fuel

 

Company cars are still popular despite sometimes being expensive in terms of tax. Conversely, employer-paid-for fuel has become less popular because of the reputation it gained for the high tax bills. However, because the environment is back in the headlines there are changes to the tax regime ahead which favour greener cars.

 

Back to zero

 

After a few years’ absence a zero tax charge makes a comeback in April 2020. It will apply to company cars registered:

 

 •  before or after 6 April 2020, powered wholly by electricity and therefore producing zero emissions

 

 •  on or after 6 April 2020 which have emissions up to 50g/km and can be driven solely on electrical power for 130 miles or more.

 

It was originally proposed that the rate for the latter group would be 2% of list price. That’s low, but the proposed 0% is better.

 

Almost zero

 

Also from 6 April 2020 there will be lower rates for cars with up to 50g/km emissions, but which don’t meet the 130 miles by electrical power only benchmark that’s needed to qualify for the 0% tax. Interestingly, there will be low but different rates for these hybrid cars depending on whether they were registered before or after 6 April 2020. For example, a hybrid car registered before the April date which can travel between 40 and 69 miles on electricity alone will result in a taxable charge of 8% of list price, while cars registered later will be chargeable at 6%

 

Levelling up

 

The disparity between pre and post 6 April registered cars continues throughout most of the new company car tax regime. Broadly, cars registered on or after 6 April will for 2020/21 be taxed on 2% less of list price than a comparable car registered earlier. For example, a driver of a company car registered pre 6 April 2020 which has emissions of between 100g/km and 104g/km will be taxed on 25% of its list price, whereas the rate for a driver of a later registered vehicle will be taxed on 23%. However, the difference will be eroded over the next two tax years as the lower rate will rise to match the higher.

 

On balance

 

Overall the new company car tax rates will be welcome news for anyone driving zero or very low emission cars. Further, because the decreased taxable amounts also mean lower Class 1A NI charges, employers which provide the cars should also be pleased.

 

The separate tax charge where an employer pays for fuel for private journeys made in a company car usually makes it tax inefficient and should be avoided. However, where the new lower or 0% rates apply to a car from April 2020 they will also cover the provision of fuel. This could make providing fuel a low tax perk worth considering.

 

The main change will be the reintroduction of a zero tax on wholly electric cars and hybrids which have a long electric only range. There will also be lower rates for some hybrid cars. The new rates also apply to car fuel benefit which could make it a more worthwhile perk for 2020/21 and later years.

 

Deferring your state pension

Adrian Mooy - Thursday, March 05, 2020
 
If your contributions record is sufficient, you will be entitled to the state pension on reaching state pension age. The age at which you reach state pension age depends on when you were born.

 

To qualify for a full single tier state pension (set at £168.60 per week for 2019/20, rising to £175.70 per week for 2020/21), a person needs 35 qualifying years. A reduced pension is payable to someone who has at least 10 qualifying years, but less than 35. The single tier state pension is payable those reaching state pension age on or after 6 April 2016.

 

When you reach state pension age, you do not need to take your state pension immediately. You can instead choose to defer it, receiving a higher pension in return. The rules on deferred state pensions differ depending on whether state pension age was reached before 6 April 2016 or on or after that date.

 

The state pension is taxable.

 

State pension age reached on or after 6 April 2016

 

If you reach state pension age on or after 6 April 2016 and opt to defer your state pension, the amount that you receive when you start taking your pension will be increased, as long as you defer your pension by at least nine weeks.

 

The state pension is increased by 1% for every nine weeks by which the pension is deferred. Deferring the state pension for 52 weeks will increase it by just under 5.8%.

 

At the 2019/20 rate of £168.60 per week, deferring the state pension for 52 weeks will increase it by £9.74 per week. This will increase as the state pension increases.

 

Any deferred state pension is paid with the regular state pension and is taxable in the same way.

 

It is not possible to take a deferred pension as a lump sum where state pension age is reached on or after 6 April 2016.

 

State pension age reached before 6 April 2016

 

Different rules applied where state pension age was reached before 6 April 2016. Under the rules that applied at that time, the extra state pension could be used to increase the weekly pension payments or taken as a lump sum. Those reaching state pension age before 6 April 2016 receive, depending if the eligibility conditions are met, the basic state pension. This may be supplemented by the earnings-related second state pension.

 

The deferral rate was better under these rules too – the state pension was increased by 1% for every five weeks by which it was deferred. This is equivalent to an increase of 10.4% for every 52 weeks that the pension was deferred.

 

For 2019/20 the basic state pension was £129.20 per week. It will increase to £134.25 per week for 2020/21. At the 2019/20 rate, deferring the pension for 52 weeks increases it by £13.44 per week.

 

Under the pre-April 2016 rules applying to those who reached state pension age before 6 April 2016, it is possible to take the deferred pension as a lump sum if it has been deferred for at least 12 months in a row. Interest is also paid at 2% above the Bank of England base rate. This can be taken in the year in which the state pension is claimed or the following year.

 

A deferred pension lump sum is taxed at the taxpayer’s highest marginal rate on their other income when the lump sum is taken. So, if the taxpayer’s other income in that year is covered by the personal allowance, the deferred pension sum will be tax-free, but if the taxpayer has other income and is taxable at the basic rate, they deferred pension lump sum will be taxed at the basic rate, even if this takes the taxpayer’s total income into the higher rate band. It is taxed in the year in which it is taken

 

Deferring the state pension can be a useful way to increase your weekly pension if you do not need it immediately on reaching state pension age.

 

Giving money to charity to save inheritance tax

Adrian Mooy - Thursday, March 05, 2020
 
One way to reduce the amount that the taxman takes from an estate in inheritance tax is to make a donation to charity. This is can be particularly tax effective. The donation is taken off your estate before inheritance tax is calculated, and if the donation is large enough – at least 10% of your net estate – the rate at which inheritance tax is levied on the remainder of the estate is reduced.

 

Making smaller donations

 

Even if the donation is less than 10% of the estate, it will be effective in reducing the amount of inheritance tax paid. This is because the donation is deducted from the net estate before working out the inheritance tax payable.

 

Example 1

 

An individual dies leaving a net estate (after allowing for the nil rate band and residence nil rate band) of £400,000. The estate is left to his children. Inheritance tax of 40% of the net estate is payable – an inheritance tax bill of £160,000. After inheritance tax, the children receive £240,000 in total.

 

Assume instead that the individual had left £20,000 to charity and the remaining £380,000 to his children. The inheritance tax bill will now be 40% of (£400,000 - £20,000), i.e. £152,000.

 

Leaving £20,000 to charity saves £8,000 in inheritance tax. After inheritance tax, the children receive £228,000 and the charity £20,000 – a total of £248,000. The £20,000 gift to charity effectively costs the children £12,000.

 

Donations of at least 10% of the net estate

 

To encourage charitable giving on death, the rate of inheritance tax is reduced by 10% -- from 40% to 36% -- where at least 10% of the net estate is left to charity. The effect of this can be illustrated by the following example.

 

Example 2

 

An individual dies leaving a net estate of £1 million, split equally between his four children. Inheritance tax payable on the estate is £400,000 (40% of £1 million), leaving £600,000 after tax (£150,000 per child).

 

If instead the individual had left 10% of his estate to charity – equal to £100,000, the amount on which inheritance tax is payable is reduced to £900,000 and the rate of inheritance tax is reduced to 36%. The inheritance tax payable on the estate is now £324,000 – a reduction of £76,000. The children receive £576,000 (£144,000 each) and the charity receives £100,000 – a total of £676,000.

 

The gift of £100,000 to the charity effectively costs the children £24,000 as a result of the inheritance tax savings.

 

Is it worth it?

 

It depends on your outlook. If the aim is to reduce the amount that the taxman gets or make a tax-efficient gift to charity, the answer is yes. However, if the beneficiaries want to maximise the amount that they get from the estate, the answer is no. In each case, they are worse off by making the charitable donation than by taking the inheritance tax hit. While it may be preferable for money to go to charity rather than to HMRC, some of the charitable gift is coming out of their pocket.

 

Charitable giving can reduce the inheritance tax payable, but at a cost.

 

Changing a will after death

Adrian Mooy - Thursday, March 05, 2020
 
As long as certain conditions are met, it is possible to change a will after death. This is known as a post-death variation, and it can be a useful tax planning tool.
A post-death variation can be made to:

 

 • reduce the amount of tax payable
 • to change who benefits under the will
 • place the assets of the deceased into trust
 • to provide for someone who was left out of the will

 

Conditions that must be met
In order to vary a will after the deceased has died, the following conditions must be met:

 

 • it must be made within two years of the deceased’s death
 • all beneficiaries adversely affected by the variation must agree to it and be party to it
 • it must be made in writing
 • it must contain a statement of intent for tax purposes, specifying that the beneficiary/beneficiaries elect for the relevant statutory provisions to apply
 • if the amount of tax payable as a result of the variation increases, the personal representative must be party to it and agree to it
 • it must not be made in consideration for money or money’s worth

 

Although there is no requirement for new beneficiaries to sign the deed of variation, this is often done as good practice.

 

Effect

 

Where a deed of variation is made, the will is treated as if applied, as so varied, at the date of the deceased’s death.

 

Two-year window

 

There is a two-year window in which a deed of variation must be made. It is possible that in the period between the date of death and the making of the deed of variation, changes have occurred. For example, the asset that is subject to the variation may have been sold. In this situation, the proceeds, rather than the actual asset, would be redirected as a result of the deed of variation.

 

Once made cannot be undone

 

Once a deed of variation has been made, it cannot be undone. It is therefore advisable to take advice prior to varying a will.

 

Example

 

Bill dies in October 2019 leaving an estate of £1.5 million split equally between his wife, Barbara, and his sons Simon and Philip.
The family agree to vary the will so as to leave everything to Barbara to benefit from the inter-spouse exemption. Bill’s unused nil rate band will be available on Barbara’s death. Her will provides for everything to be left equally between her sons.
Simon and Philip must be agree to be party to the deed of variation as they are adversely affected by the redirection.
The deed of variation is made in February 2020. The changes are deemed to be effective from the date of Bill’s death as if they represented his will at that time.

 

Winding up your personal service company

Adrian Mooy - Wednesday, March 04, 2020
 
Come April, many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because they fall within the off-payroll working rules, with the result that because tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies on the payroll.

 

Where the personal service company is not needed, the question arises as how best to wind it up and extract any remaining cash.

 

Striking off

 

Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.

 

The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.

 

If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.

 

Members’ voluntary liquidation (MVL)

 

Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.
 
An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.

 

CEST employment status determinations

Adrian Mooy - Wednesday, March 04, 2020
 
Under the off-payroll working rules as extended from 6 April 2020, medium and large public sector organisations that engage workers who provide their services through an intermediary, such as a personal service company, must determine the status of the worker as if the services were provided directly rather than through an intermediary. If the worker is within the off-payroll working rules, the end client (or fee payer where different) must deduct tax and National Insurance from payments made to the worker’s intermediary, and also pay employer’s National Insurance.

 

Where the end client is a small private sector organisation, it is the worker’s intermediary that must undertake the status determination in order to ascertain whether IR35 applies.

 

HMRC’s CEST tool

 

HMRC’s Check Employment Status for Tax (CEST) tool can be used to find out whether a worker is employed or self-employed or whether the off-payroll working rules apply. The CEST tool was updated and enhanced at the end of 2019 in preparation for the extension of the off-payroll working rules.

 

The tool asks a series of questions about the contractual relationship between the worker and the engager. The following information is required:

 

 • details of the contract
 • the responsibilities of the worker
 • who decides what work needs doing and when and where
 • how the worker is paid
 • whether the engagement includes any corporate benefits or reimbursement of expenses

 

In order to reach a decision on the worker’s status, the user works through the questions selecting the answer most appropriate to their circumstances from those available. The answers given are used to provide a result.

 

The tool can be used anonymously – there is no requirement to provide personal details.

 

It is not possible to save information entered into CEST so that the user can return to it later – it must be completed in one session.

 

Possible outcomes

 

The CEST tool will provide a result determined from the answers provided. These can be reviewed before obtaining the result.
The possible outcomes are:

 

 • off-payroll working rules (IR35) do not apply
 • off-payroll working rules (IR35) apply
 • unable to make a determination (for whether the off-payroll working rules apply)
 • self-employed for tax purposes for this work
 • employed for tax purposes for this work
 • unable to make a determination (for employed or self-employed for tax purposes).
 
The tool will provide a reason as to why CEST reached the determination it reached.

 

Reliance on decision

 

HMRC have confirmed that they ‘will stand by the result produced by the service provided that the information is accurate, and is used in accordance with [their] guidance’.

 

A copy of the output should be retained.

 

However, HMRC warn that they will not stand by results achieved using contrived arrangements.

 

Use by end clients

 

Medium and large private sector organisations and public sector bodies that use workers providing their services through an intermediary can use CEST to fulfil their obligation to make a determination under the off-payroll working rules.
They should print off the determination and give a copy of it with the reasons for it to the worker and other parties in the chain. They should also keep a copy.

 

Use by workers

 

Workers supplying their services to small end clients can use the CEST tool to check whether they need to apply the IR35 rules. Where they receive a determination under the off-payroll working rules, they can use CEST to check that they agree with it, and to challenge it if they do not.

 

Look out for Employment Allowances changes

Adrian Mooy - Wednesday, March 04, 2020
 
The employment allowance (EA) is a welcome and valuable benefit for many businesses as it allows them to offset up to £3,000 a year against their employer PAYE NIC liabilities.

 

Who can claim?

 

Most employers with a liability to pay employer (secondary) NIC are eligible to claim the EA, including sole traders, partnerships and companies, charities and those with charitable status such as schools, academies and universities, community amateur sports clubs (CASCs), and employers of care or support workers.

 

Who cannot claim?

 

Certain types of business are ineligible to claim the EA deduction, including:

 

 • personal service companies (PSCs) and managed service companies (MSCs) which are subject to the intermediaries’ legislation (IR35). Where there is a deemed payment of employment income, the EA is not available against any employer NICs that arise on the deemed payment. However, the allowance is still available where the company has employees in its own right.

 

 • single director companies. A restriction was introduced from 6 April 2016 providing that where the only employee paid above the secondary NIC threshold is also a director of the company, the allowance is not available. The restriction can apply in a company which has two or more directors but where only one of those directors is on the payroll and there are no other employees.

 

The EA is delivered through standard payroll software and HMRC’s real time information (RTI) system. It is not, however, given automatically and must be claimed. Claiming is very straight forward – the employer simply signifies his intention to claim by completing the ‘yes/no’ indicator just once. Although, ideally, the claim should be made at the start of the tax year, it can be made at any time in the year. The employer then offsets the allowance against each monthly Class 1 secondary NICs payment that is due to be made to HMRC until the allowance is fully claimed or the tax year ends.
 
The EA applies per employer, regardless of how many PAYE schemes that employer chooses to operate, so each employer can only claim for one allowance. It is up to the employer which PAYE scheme to claim it against.
 
Two changes apply to the Employment Allowance from 6 April 2020.

 

Class 1 NIC bill exceeding £100,000

 

From 6 April 2020, access to the EA is limited to businesses and charities with an employer National Insurance contributions (NICs) bill below £100,000.

 

In assessing whether the £100,000 limit has been reached, the total liability of all connected employers must be added together. If the total exceeds £100,000 then none of the connected employers will be eligible to claim.
 
Where employers become connected during the tax year causing the total collective secondary Class 1 liability to exceed £100,000 in that year, they will be eligible to continue claiming for the remainder of the tax year but will cease to be eligible from the start of the following tax year.
 
Where an employer becomes connected to a group of connected employers whose collective secondary Class 1 liability was in excess of £100,000 in the preceding year, the employer joining the group will no longer be eligible for Employment Allowance in the year in which they join.

 

State Aid

 

From 6 April 2020, the EA is operated as de minimis state aid. This means that employers already in receipt of State aid will need to check that they have sufficient headroom to include the EA within their relevant de minimis limit, which will be dependent upon the particular economic trade sector within which the employer operates.

 

If there is insufficient headroom to claim the full allowance (even if the employer may not have used the full amount) they will not be eligible to claim.
Employers will be required to make a declaration as part of the annual RTI return, confirming that this condition is met.

 

Calculating taxable profits using the cash basis

Adrian Mooy - Tuesday, March 03, 2020
 
Under the cash basis, small businesses are taxed on the basis of the cash that passes through their books, rather than being asked to spend their time doing calculations designed for big businesses. For 2018/19 onwards the annual turnover limit below which a business can use the cash basis is £150,000. The exit threshold above which the cash basis may not be used is set at double the entry threshold (i.e. £300,000).
 
Certain types of businesses are not currently permitted to use the cash basis including limited companies.
 
The cash basis operates by reference to the tax year. This means that small businesses can calculate their taxable income for the tax year by adding or subtracting:

 

 • receipts in connection with the business received in the tax year

 

 • payments made in the tax year to cover allowable expenses

 

 • amounts allowed for simplified expenses

 

The cash basis operates on a VAT-inclusive basis. This means that full amount of receipts and payments will be counted including any VAT element. If a business is registered for VAT, any VAT paid to HMRC will be an allowable expense, and any VAT refund received from HMRC will be taxable as a receipt in connection with the business.

 

Receipts in the form of ‘money’s worth’ will be included, for example the value of goods or services received from customers. In addition, a reasonable amount would need to be added to income to reflect any deficiency arising from a transaction being made other than on a commercial basis. An example would be if, after expensing the cost of purchasing stock, an item of the stock was taken for personal use without any actual payment being made.

 

Sale proceeds for capital assets (such as plant or machinery) whose purchase costs have previously been relieved will be taken into account as a receipt.

 

Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500.

 

If the business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated.

 

Businesses should consider their annual business interest costs and if it is anticipated that these costs will be more than £500 it may be more appropriate for the business to use the accruals basis and obtain tax relief for all the business-related financing costs.

 

Hire Purchase interest is not included in the annual amount of £500 and can be treated as a separate expense.

 

The following items are not treated as income under the cash basis:

 

 • capital introduced by the owner of the business for purposes of financing the business

 

 • changes in the form of money, e.g. cash withdrawals from bank accounts

 

 • loan capital borrowed by the business from third parties for financing purposes

 

 • proceeds from disposals of durable assets, e.g. land and property, intellectual property, shares

 

 • refunds of income tax, capital gains tax, or tax credits

 

With regard to expenses, the ‘wholly and exclusively’ rules continue to apply.

 

From 6 April 2017, the general disallowance of capital expenditure rule was replaced with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period. This means that from 2017/18 onwards relief will be prohibited only in relation to costs incurred in relation to the provision, alteration or disposal of:

 

 • any asset that is not a ‘depreciating asset’ (to be defined as having a useful life of up to 20 years)

 

 • any asset not acquired or created for use on a continuing basis in the trade

 

 • a car (but of course business mileage-based relief is available)

 

 • land (as defined)

 

 • a non-qualifying intangible asset, (as per Financial Reporting Standard 105) including education or training

 

 • a financial asset

 

Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.

 

Structures and buildings capital allowances

Adrian Mooy - Tuesday, March 03, 2020
 
A new tax relief for capital expenditure on construction works applies to qualifying expenditure incurred on or after 29 October 2018. Broadly, the structures and buildings allowance (SBA) provides tax relief on the structural elements of a building, where previously there was no relief available. SBA expenditure does not, however, qualify for the capital allowances annual investment allowance (AIA).

 

The main features of the SBA are summarised as follows:

 

 • The allowance is given at a 2% flat rate over a 50-year period, pro-rated for short tax periods.

 

 • Relief is available for new commercial structures and buildings only, but this can include costs for new conversions or renovations. It may be claimed where all the contracts for the physical construction works were entered into after 28 October 2018.

 

 • Relief is not available for land costs or rights over land.

 

 • The building or structure can be located in the UK or overseas, but the business must be within the charge to UK tax.

 

 • Tax relief is limited to the costs of physically constructing the structure or building, including costs of demolition or land alterations necessary for construction, and direct costs required to bring the asset into existence.

 

 • Relief cannot be claimed for costs incurred in applying for and obtaining planning permission.

 

 • The claimant must have an interest (‘the relevant interest’) in the land on which the structure or building is constructed.

 

 • Relief is not available for dwelling-houses, nor any part of a building used as a dwelling where the remainder of the building is commercial.

 

 • Business expenditure on integral features and fittings of a structure or building that are allowable as expenditure on plant and machinery, continue to qualify for writing-down allowances for plant and machinery including the AIA, up to its annual limit (£1,000,000 until 31 December 2020).

 

 • Where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure qualifies for a separate 2% relief over the next 50 years.

 

The structure must be used for a qualifying activity, which is taxable in the UK. Qualifying activities are:

 

 • any trades, professions and vocations

 

 • a UK or overseas property business (except for residential and furnished holiday lettings)

 

 • managing the investments of a company

 

 • mining, quarrying, fishing and other land-based trades such as running railways and toll roads

 

The sale of the asset does not result in a balancing adjustment (the purchaser takes over the remainder of the allowances written down over the remainder of the 50-year period).

 

Claiming SBAs

 

It is only possible to make a claim from when a structure or building first comes into use.
Broadly, the claimant will need an allowance statement for the structure. Where the claimant is the first person to use the structure, a written allowance statement must be created before making the claim. The allowance statement must include:

 

 • information to identify the structure, such as address and description

 

 • the date of the earliest written contract for construction

 

 • the total qualifying costs

 

 • the date the structure was first used for a non-residential activity

 

Where a used structure is being purchased, the claimant can only claim SBA if they obtain a copy of the allowance statement from a previous owner.
For any extensions or renovations that were completed after the structure was first used, the claimant can record separate construction costs on the allowance statement or create a new allowance statement.

 

Claims are generally made via the self-assessment tax return.

 

Record-keeping

 

A key message is that record keeping and cost segregation will be of paramount importance. In order to claim the allowance, evidence of qualifying expenditure must be produced in the form of an allowance statement, submitted to HMRC. Records can include things like formal contracts, emails or board meeting notes.

 

A Property Business - Am I Trading?

Adrian Mooy - Monday, March 02, 2020
 
The so-called ‘badges’ of trade are what the courts tend to focus on when evaluating whether or not an activity amounts to a trade. No one badge is necessarily determinative, nor are all badges required to be present and correct in order for a trade to exist. Both taxpayers and HMRC will go back to these ‘badges’ when trying to decide whether a business is actually trading.

 

Generally, an individual taxpayer will want there to be a trading activity. This is because trades access:

 

- A wider range of loss reliefs - most importantly, against total income. Losses arising in a property letting business may normally be set only against future property profits, whereas trading losses can be set against other incomes.

 

- More reliefs for capital gains - when a fixed asset is sold for a capital gain, the trading individual or partner will tend to be able to access a wider range of reliefs, to postpone the gain (or to claim Entrepreneurs’ Relief).

 

However, this is not always the case - and particularly not with property businesses, as we have noted above. The tax case Terrace Hill (Berkeley) Ltd v HMRC [2015] UKFTT 75 (TC) is interesting because it illustrates a rather unusual situation where HMRC tried to argue that a property development business was trading, so that it was ineligible to use substantial capital losses on the disposal of a property. (The taxpayer won, by demonstrating to the tribunal that the property had been developed for long-term investment purposes).
Set out below is a summary of the nine badges of trade recognised by HMRC from the perspective of a property business.

 

Profit Motive
If there were a clear intention to sell property at a profit when acquired, that is a strong indication of trading.

 

Method of Acquisition
Where a property has been inherited or received by way of gift then it is unlikely to be considered an asset held for trading purposes.

 

Source of Finance
The usual tests are whether or not one had to borrow to acquire the asset, or if borrowings could be repaid only when the asset was sold. These are less relevant in terms of property since property letting businesses (not trading) might equally answer ‘yes’ to both.
Perhaps more telling would be the agreed terms or duration of any finance, and whether or not its interest cost might be sustainable under a letting model.

 

Number of Transactions
Even a single property development project might be a trade, while a large-scale property investor might sell one or two properties every year but still not be trading. Nevertheless, a greater frequency of similar transactions might well indicate a trading pattern.

 

Existence of Similar Trading Transactions or Interests
If someone is already a recognised trading property developer, a tax tribunal might require stronger evidence to rebut an assumption that property acquired and then sold on at a profit was also trading. This and the previous badge are commonly used by HMRC in cases where builders and other property developers repeatedly acquire property, enhance it, live in it and then sell it on at a profit, basically because if it’s a trading activity then it is removed from the CGT regime and cannot be eligible for PPR / main residence relief.

 

The Way the Sale was Carried Out
Properties marketed for sale as part of a development, off-plan or while being developed, would be indicative of a trading activity.

 

Interval of Time Between Purchase and Sale
Most property transactions are relatively long-term: relatively modest developments can take more than a year to complete. While holding property for relatively short periods of time might be indicative of trading, many developers had to take property off the market and rent out on a short-term basis, when the recession started to bite in 2008/09. This did not change their fundamental trading status.

 

Changes to the Asset
In many cases, properties will be enhanced whether held privately, for letting or for sale - and in similar ways. This badge arguably has little bearing on whether or not someone is trading in property.

 

Nature of the Asset
Again, residential property can be held privately, as part of an investment business or as part of a development trade. The asset itself is often ‘inconclusive’ - although one might rarely acquire a hotel as an asset for purely private purposes.

 


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