What Income Counts Towards The VAT Registration Threshold?
When the taxable turnover of a business reaches the VAT registration threshold (currently £83,000 per annum), it must register for VAT. Any income that you receive that is not counted as ‘taxable turnover’ is excluded from the £83,000 turnover figure when calculating VAT registration threshold.
This causes small businesses a surprising amount of problems, as they are often unsure what to include and what to leave out.
What is taxable turnover? - A business’s taxable turnover is its business income excluding any exempt or 'outside the scope’ (see below) supplies that it makes. This will include any supplies that would be:
if it were registered for VAT.
What is not included? - There are a number of income streams that can be ignored when deciding if your business needs to register for VAT.
You do not take into account any income that is exempt from VAT. This will include the following common sources:
There are other sources of exempt income, but most businesses are unlikely to have them.
You also do not include any income which is 'outside the scope of VAT’. This would include any sales of goods that take place outside the UK, for example buying goods in China and having them sent directly to a customer in the USA. The place of supply is outside the UK and the sale will not count towards your taxable turnover for VAT registration purposes.
Supplies of services to business customers in another EU member state or any customer outside the EU are treated as outside the scope of UK VAT and do not count towards your turnover for VAT registration purposes (e.g. supplying consultancy services to a business customer in France).
Other non-business income is also excluded, such as disbursements incurred on behalf of a client, grants, or any income from employment.
Businesses can also ignore one-off sales of capital assets.
Charities can also ignore any income from donations, one-off fund raising events and educational and training courses that they undertake.
When to register? - Businesses have to monitor their turnover on a rolling twelve-month basis, so at the end of each month you should check your turnover for the past twelve months to see if it has gone over the registration limit. You then have 30 days to inform HMRC and are registered from the first day of the following month.
If a business fails to register on time it will be subject to a penalty for late registration, so registering on time is important in order to avoid a penalty of up to 15% of the tax due.
Conclusion: Businesses need to monitor their turnover so that they register on time and avoid a penalty - but some turnover can be ignored for VAT registration purposes.
New Lifetime ISA – earn up to £1,000 a year
Plans to introduce a new Lifetime ISA were unveiled in the 2016 Budget. The Lifetime ISA will be available from April 2017. It can be used either to save for a deposit for a first home or to save for retirement.
Who can open one?
A Lifetime ISA can be opened by anyone between the ages of 18 and 40. The procedure for opening a Lifetime ISA will be similar to that for existing ISAs. Savings into a Lifetime ISA will count towards the overall ISA limit for the year.
Sums saved in the account before the saver’s 50th birthday will earn a Government bonus of 25% of the amount saved. The Government bonus will be paid on savings of up to £4,000 a year, making it possible to earn up to £1,000 a year by investing in a Lifetime ISA. The bonus will be paid at the end of each tax year.
Save for your first home
The Lifetime ISA can only be used to save for a deposit on a first home or to save for retirement. However, a person must hold the Lifetime ISA for at least 12 months before they can make withdrawals that include the Government bonus. The savings, together with the Government bonus, can be put towards the purchase of a house in the UK costing up to £450,000. Where a house is purchased jointly, each purchaser can use savings from a Lifetime ISA, together with the Government bonus.
Where a person already has a Help-to-Buy ISA, they can either keep it and use it to save for a first home or transfer it into a Lifetime ISA. It is possible to have both a Help-to-Buy ISA and a Lifetime ISA, but only the Government bonus from one of the accounts can be used to buy the first home.
The bonus is only available to first time buyers.
Save for retirement – and earn a bonus of up to £32,000
The other purpose of the Lifetime ISA is to save for retirement. A person who saves £4,000 a year from age 18 to age 50 will accrue savings of £128,000 (before interest) and earn a Government bonus of £32,000, giving them a savings pot of £160,000 (plus interest). The savings and the Government bonus can be withdrawn from age 60.
Beware other withdrawals
The aim of the Lifetime ISA is to encourage long-term saving for specified purposes. Although individuals will not be prohibited from making withdrawals for other purposes, they will lose the Government bonus on any withdrawals that they make for other purposes. In addition, they will suffer a 5% charge. So, if you save £100 either towards a first home or retirement, that £100 will be worth £125 (plus interest). However, if you use the savings for other purposes, be warned, you will only get £95 of your initial £100 back (plus any interest earned).
Use a Help to Buy ISA for your first home and the Lifetime ISA to save for retirement. For other savings, choose a different account.
The tax benefits associated with individual savings accounts (lSAs) have always made them attractive to those wishing to save, but for many years there were only two types of ISA available to investors - cash lSAs, and stocks and shares lSAs. Broadly, cash ISAs are available to investors aged 16 and over, who are resident in the UK; to hold a stocks and shares ISA, the investor must be aged 18 or over and resident in the UK. The maximum annual investment limit is £15,240 for 2016/17. Interest received is tax-free and there is no income tax or capital gains tax payable on investments.
The popularity of these accounts has led the government to expand the range of lSAs on offer, with the objective of encouraging more people to save for their future requirements.
Junior ISAs - Junior ISAs have been available since 1 November 2011 for UK-resident children (under-185). Junior ISAs are tax- relieved and have many features in common with existing ISA products. They are available as a cash or 'stocks and shares’ product. The maximum investment limit for 2016/17 is £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren.
Until April 2015 it was only possible for children who did not hold child trust funds to invest in Junior ISAs, which meant that many young savers were trapped in accounts yielding poor interest rates. However, since April 2015 all children who are UK resident should be able to hold a Junior ISA & transfers from CTF accounts to Junior lSAs are allowed.
Help-to-buy ISAS - Help-to-buy ISA were introduced from 1 December 2015 and are specifically designed to help first time buyers aged 16 and over) save a deposit to purchase their first home. Broadly, investors can save up to £200 a month towards their new home and the government will boost their savings by 25%. Key features include:
The maximum that can be saved in a help-to-buy ISA is £12,000. The government bonus is added to this amount, so total savings towards the property purchase can be up to £15,000. Since accounts are limited to one per person rather than one per home, a couple buying together will be able to save up to £30,000 towards the purchase of their first home. It will take around four and a half years to achieve this level of savings under the scheme.
Innovative finance ISAS (IFISAs) - Launched in April 2016, innovative finance lSAs can hold peer-to-peer (P2P) loans, which often pay significantly higher returns than cash accounts.
Help-to-save - Details of a new help-to-save cash account, designed to help people on low incomes save have recently been published. The accounts, which will be provided by National Savings and Investments (NS&l) and administered by HMRC, are expected to be available by April 2018. Investors will be entitled to a 50% bonus on savings of up to £50 a month - people will be able to save up to £2,400 over four years, and benefit from total government bonuses worth up to £1,200.
Conclusion: In most cases the personal allowance and the new personal savings allowance will cover any tax liability arising on interest earned. Therefore, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment, rather than the tax-free status of the account.
Overdrawn Directors' Loan Accounts
Overdrawn Directors' Loan Accounts – Traps to Avoid
The loans to participators provisions are relatively well-known among affected taxpayers. The legislation imposes a 25% tax charge in respect of loans or advances to participators.
The tax charge can be prevented on an overdrawn directors loan account to the extent that the 'Ioan' is repaid up to nine months after the end of the company's accounting period in which it is made. There is also relief if the loan is repaid or written off after that period.
'Bed and breakfasting’
There are anti-avoidance rules to rules to block 'bed and breakfasting’.
This practice involves the shareholder repaying the overdrawn loan account balance either just before the end of the accounting period or within the following nine months, so that the 25% tax charge is not due. The shareholder might then withdraw a similar (or greater) amount from the company shortly thereafter.
lf the anti-avoidance provisions apply, relief from the above tax charge is broadly denied (or withdrawn, if already given). The provisions can apply in the following circumstances:
If 'caught' by either of the above rules, the effect is broadly that the repayment is treated as repaying the 'new' loan(s), rather than the earlier ('old') one(s). Relief from the 25% charge is therefore wholly or partly denied (or withdrawn) in respect of the 'old' loan(s) (i.e. relief will only be potentially available to the extent that the repayment exceeds the 'new' loan(s)).
Repayments not 'caught'
However, the above anti-avoidance rules do not apply if the directors' loan account repayment gives rise to an income tax charge on the director shareholder (see below).
HMRC accepts that repayments can be made via 'book entries' in the company's accounting records, at the date when the book entries are made.
...Or are they?
The most common ways to repay an overdrawn directors' loan account balance in a 'taxable' form is by crediting the loan account with their salary or a bonus from the company. Similarly, a dividend from the company may be credited to the loan account.
Furnished Holiday Lettings
Individual taxpayers who are residential property landlords will be aware that a profit on disposal of a property will normally be subject to capital gains tax (CGT). For disposals in 2016/17, the basic and standard rates of CGT are 10% and 20% respectively (previously18% and 28%). However, gains on the disposal of interests in residential properties (that do no qualify for private residence relief) are subject to higher CGT rates of 18% and/or 28% instead.
Does it qualify? - However, the commercial letting of furnished holiday accommodation is subject to special tax treatment, if certain conditions are satisfied. Broadly there are three basic conditions:
For CGT purposes, if the property satisfies the conditions for the commercial letting of furnished holiday lettings, the special tax treatment available for individual landlords (compared with the general treatment of rental property) includes certain CGT reliefs, such as business asset rollover relief and gift relief.
Entrepreneurs’ relief - A further CGT relief available to individual landlords of commercial furnished holiday lettings is entrepreneurs' relief (ER). A CGT rate of 10% broadly applies to qualifying gains, up to a lifetime limit of £10 million.
Certain conditions must be satisfied to be eligible to claim ER. The relief applies (among other things) to the disposal of the whole or part of a business carried on by a sole trader or partnership. The business must be owned for at least one year ending with the date of disposal. The disposal of an asset used (in a sole trader or partnership business) upon cessation is also a material disposal if the one-year ownership requirement is met and the disposal takes place within three years after the business has ceased.
ER is not generally available on the disposal of a buy-to-let property rental business. For ER purposes, ‘a business' is defined as anything which is a trade, profession or vocation, and is conducted on a commercial basis and with a view to the realisation of profits. A buy-to-let property rental activity is capable of amounting to a business, but will not normally be a trade.
However, a qualifying furnished holiday lettings business is treated as a trade for certain tax purposes, including ER. This potentially provides individual furnished holiday lettings business owners with the opportunity to sell the business and claim ER, if the relevant conditions are satisfied.
Conclusion: By ensuring that the furnished holiday lettings and ER conditions are both satisfied, the CGT rate on disposal can be reduced from 28% to 10%. If the qualifying furnished holiday lettings business consists of a single property that is sold, the business has clearly ceased as there has been a disposal of the whole business. However, if the furnished holiday lettings business contains several let properties and there is a disposal of only some of the properties, a claim for ER may be challenged by HMRC on the basis that there has been no disposal of part of the business.
UK Resident Landlords
This overview relates to a schedule A business, which is applicable to most individual landlords. Special rules apply to the rent a room scheme and to holiday lets. Hotels and guest houses are also excluded from these general rules.
Rents & allowable expenses
Rents less allowable expenses are taxable as part of the taxpayers total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.
The two biggest items allowable as a deduction in calculating taxable net rental income will often be mortgage interest and travel where the cost is attributable to the rental income. The lettings agent will incur other costs and as long as these represent routine maintenance these too will be allowable. From 6 April 2017 individuals receiving rental income on residential property in the UK will receive relief on mortgage interest at the basic rate of income tax (to be introduced progressively over four years from 6 April 2017)
Basis of determining ‘rent’
The rental income for small lettings (under £15k p.a.) is normally calculated as the cash received. Taxable rent from all other lettings are taxable on an earned or receivable basis though relief is normally given for unrecovered rental.
Special rules apply to the treatment of losses. While profits are added to a taxpayer’s income and taxed at the taxpayers highest rates, losses generally may not be set off income from other sources other than some types of other property income. Losses may be carried forward to offset future profits, with some restrictions on the type of profits they may offset.
All UK residents with un-taxed income or profits are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. Landlords must also notify HMRC when gross rental income exceeds £10,000. Unless the taxable amount is under £2,500 and HMRC can collect the tax due through the PAYE scheme, HMRC will require submission of a Tax Return. The landlord’s Tax Return must include the additional property pages. All Income Tax Returns must be filed by 31st January following the end of the Tax Year (the previous 5th April) if filed online, otherwise the deadline is the previous 31st October. The calculation of the tax liability takes into account all the landlord’s other income and allowances, and for this reason is necessarily complicated.
Sale of property
On disposal of the property any increase in value is potentially subject to capital gains tax. The gain is calculated by comparing the sales proceeds with all the acquisition costs. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property at any time as his only and principal private residence.
You are resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. If you believe you may be non-resident then you must pass several precise tests.
This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. We will be pleased to advise on any individual situation.
NIC and Company Directors
Unlike tax, National Insurance is generally worked out separately by reference to the earnings for the relevant earnings period, without any regard to other payments in the tax year. The earnings period generally corresponds to the pay interval, so, for example, NICs for weekly paid employees is worked out solely by reference to their earnings for that particular week; likewise for monthly paid employees, their NIC for the month depends only on their earnings for that month.
However, this rule does not apply to directors, who are deemed to have an annual earnings period for National Insurance purposes, regardless of their actual pay frequency. The effect of this is that NIC for the year is worked out (like tax) on their total earnings for the year, using the annual thresholds, rather than the weekly or monthly thresholds appropriate to the pay interval.
Annual earnings period
Directors can either apply the annual limits from the start of the year, paying no primary Class 1 contributions until their earnings for the year to date exceed the primary threshold (£8,060 for 2016/17), then paying contributions at the rate of 12% until their earnings for the year reach the upper earnings limit of £43,000, and thereafter paying contributions at the rate of 2%. The downside of this is that the NIC bill is not spread very evenly throughout the year.
Alternatively, directors can choose to work out their NICs using the alternative assessment method under which NICs are computed by reference to the normal pay interval initially (as for other employees) and recalculating the liability at the year-end on an annual basis.
Paul is a company director. He is paid a salary of £3,000 a month. In addition, he is paid a bonus of £50,000 in December 2016.
Under the alternative assessment method, his NIC is worked out each month initially using the monthly thresholds (primary threshold of £672, secondary threshold £676 and upper earnings limit of £3,583).
With the exception of December 2016, Paul pays NIC of £279.36 a month (12% (£3,000 - £672)). His employer pays NIC of £320.71
In December, with his bonus, Paul’s earnings are £53,000 and he pays NIC of £1,337.66((12% (£3,583 - £672) + (2% (£53,000 - £3,583)). His employer pays secondary NICs of £7,220.71.
To work out the NIC payable for month 12 (March 2017) it is necessary to recalculate the bill on an annual basis. Paul’s earnings for the year are £86,000 (salary of £36,000 and a bonus of £50,000). Primary contributions on these earnings are £5,052.80 ((12% (£43,000 - £8,060) + (2% (£86,000 - £43,000)) and secondary contributions are £10,748.54 (13.8% (£86,000 - £8,112)).
Paul has paid contributions of £4,131.26 ((10 x £279.36) + £1,337.66) so far, so owes £921.51 for March 2017. His employer has paid NIC of £10,427.81 and owes £320.73 for March 2017.
Paul pays more on his March salary of £3,000 as some of the bonus on which contributions were paid at 2% was liable at 12% when the computation is performed on an annual basis.
The annual earnings basis prevents directors making inconsistent payments to save NICs.
Getting the Formalities Right - Share Issues
The formalities of operating and administering a company can easily be overlooked. However, aside from any adverse company law implications, this can have unfortunate tax consequences.
For example, if a small owner-managed trading company proves to be unsuccessful, the value of its shares may become negligible. The company's individual shareholders may be able to claim income tax relief for an allowable loss in value of the shares against their net income if certain conditions are satisfied.
One condition for share loss relief in such circumstances is that the individual must have subscribed for the shares. This condition might appear straightforward to prove. However, two recent cases suggest otherwise.
Were shares issued? - In Alberq v Revenue and Customs , the appellant entered into a trading venture with a business partner and paid £250,000 into a company in February 2008. The venture proved unsuccessful. The company went into administration in February 2009, and was dissolved in September 2011. HM Revenue and Customs (HMRC) refused the appellant's share loss relief claim (under s 131) for 2008/09 of £250,000. The key question was whether the company issued shares to the appellant in consideration of the £250,000 he put into the company.
Unfortunately for the appellant, he was unable to demonstrate the issuance of additional shares. The First-tier Tribunal noted that important forms of evidence of his shareholding in the company were not produced (e.g. the company's register of members, or share certificates for the appellant's shares). A draft shareholder’s agreement had been prepared by solicitors in February 2008, indicating a further allotment of shares to the appellant. However, the tribunal concluded that the shareholder’s agreement was never finalised and executed, and additional shares were never issued.
Share subscription - By contrast, in Murray-Hessian v Revenue and Customs  a company (GT Ltd) was incorporated in May 2011 by its initial shareholder (AG). Subsequently, the company's annual return to 13 May 2012 filed at Companies House included a list of shareholders showing that the appellant held 225 ordinary shares (22.5%). However, a further annual return to 14 May 2012 (i.e. one day after the date shown on the previous return) was filed showing AG as owning 100% of the ordinary shares, and the appellant holding none. Subsequently, the company entered administration. HMRC refused the appellant's claim for share loss relief against his other income. HMRC argued (among other things) that the appellant lent £272,372 to GT Ltd, and that the 225 shares had not been subscribed for.
However, the First-tier Tribunal found: the appellant had an agreement with AG that he would invest £272,000 in GT Ltd by way of subscription for shares; consequently, AG was from the outset holding a percentage of the shares as nominee, agent, etc., on behalf of the appellant until the shares could be registered in the appellant's name; and that AG subsequently transferred the legal title to the appellant. The tribunal concluded that the appellant had subscribed for 225 shares in GT Ltd for share loss relief purposes.
Tip: The First-tier Tribunal in Alberg considered that the issuance of shares required the appellant to be written up in the register of members of the company as the owner of the shares (following National Westminster Bank Plc v Inland Revenue Commissioners .
However, in Murray-Hession, the tribunal considered that Hl\/lRC’s reliance on the NatWest case was misplaced for various reasons, including that it concerned the offering of shares to the public and the more rigorous requirements applicable to a plc. Furthermore, company law had changed since NatWest. Even if the shares had been allotted to the appellant in Murray-Hessian without being registered, the tribunal was not sure that NatWest would have affected the issue for other reasons.
Benefits in Kind and Making Good
Most benefits in kind are taxable and the employee is taxed on the cash equivalent of the value of that benefit. Where the employee is required to make a payment to the employer in return for the provision of the benefit and actually does so, the cash equivalent of the benefit is reduced by the amount `made good’ by the employee. Making good allows the employee to reduce or eliminate the tax charge.
Harry’s employer provides private medical insurance for Harry and his family. The cost to the employer is £500 a year. Harry is required to make a contribution of £200, which he does. By `making good’ £200 of the cost, the cash equivalent of the benefit on which tax is charged is reduced from £500 to £300.
Where the benefit in question is fuel for a company car, the amount made good by the employee can be computed using the advisory fuel rates.
Helen has a company car. The car is a petrol car, which for 2016/17 has an appropriate percentage of 22%. Helen’s employer pays for all fuel for the car, but Helen is required to make good the cost of fuel for private motoring.
In the year, Helen drives 10,000 private miles. Assuming the advisory fuel rate for her 1600 cc car is 14p per mile and Helen pays her employer £1,400 in respect of her private mileage, she will be regarded as having made good the cost of her private fuel. Consequently, the tax charge is reduced to nil.
Time for making good
Earlier in the year the Government consulted on the deadline by which the employee must make good in order to reduce or eliminate the tax charge that would arise on the benefit in kind. At the time of the 2016 Autumn Statement, it was announced that from 2017/18 the making good deadline for all benefits will be set at 6 July after the end of the tax year in which the benefit was provided. Previously, different dates applied to different benefits, with a deadline of the end of the tax year in which the benefit was provided applying to many.
Better to pay the tax
When thinking about whether to `make good’ to reduce the tax, remember that as the tax rate is less than 100%, you will always be better off paying the tax than making good. A higher rate taxpayer will only save £40 in tax for every £100 `made good’ – better to pay the £40 tax and keep the remaining £60.
Salary sacrifice - Restructure salary packages
From April 2017 the tax exemptions for most benefits will be lost if provided under a salary sacrifice or flexible benefits arrangement.
Nature of salary sacrifice - Under a salary sacrifice arrangement an employee gives up cash salary in return for a non-cash benefit. Where the benefit is exempt from tax and NI, everyone wins (except HMRC). The employee saves the tax and employees’ Class 1 NI on the foregone salary and the employer saves the associated employers' NI.
HMRC clampdown - HMRC has been increasingly unhappy about the cost to the Exchequer of salary sacrifice schemes and plans to change the tax legislation from April 2017. Unless a benefit is of a type approved by HMRC for use in a salary sacrifice arrangement the tax exemption will be lost. Instead, the benefit will be taxed and liable to Class 1A NI on the higher of the: salary given up in exchange; and the cash equivalent of the benefit (if any) calculated under normal rules.
Following the Autumn Statement - HMRC says that the new rules will affect types of salary sacrifice schemes differently:
pensions, pensions advice, childcare, bicycles in the cycle-to-work scheme and ultra-low emission cars will be exempt
all arrangements in place before April 2017 will be protected for up to a year, and arrangements in place before April 2017 for cars, accommodation and school fees for up to four years.
Advice - The announcement is good news because it allows time for you to phase out or negotiate with your employees the terms of salary sacrifice schemes.
Salary plus - Note also that the tax exemptions will continue to be available where a benefit is provided in addition to salary - under a so-called salary plus arrangement.
Advice - Think about terminating arrangements from 5 April 2Ol7 where the benefit of the tax exemption will be lost. When looking to provide tax-exempt benefits to employees other than those on the above list, it’s better to provide them in addition to salary (salary plus), rather than under a salary sacrifice arrangement (salary minus) to preserve the availability of the exemption.
Cars and Benefits-in-Kind
Cars and leasing arrangements
The rules for car benefits have been problematic for employers. The days when a company car was a 'perk' are long gone for most employees except for the most fuel-efficient cars the benefit-in-kind charge is based on an amount far higher than the real benefit that the employee gets from it. It has become more common for employees to buy their own cars and claim back a mileage allowance from the employer. But employees then miss out on the buying power and freedom from hassle given by employer fleet management, and employers fear that the employees will not buy cars that project the right image when they visit clients.
So an alternative approach has been for the employer to be responsible for a fleet of cars that are leased to the employees. The employee has a commercially calculated, all-inclusive, lease payment to include servicing, repairs, etc., deducted directly from net pay, and pays for fuel. The employer reimburses the employee at the HMRC approved rates for the business mileage the employee reports. The net result will normally be much less expensive for the employee than having a company car and the accompanying benefit-in-kind charge.
Unfortunately, HMRC did not like this approach, and challenged it in a case, Apollo Fuels v HMRC . The history of this case is unusual, in that the taxpayer won all the way through the courts, but for different reasons at each stage. HMRC’s argument was that the benefit-in-kind legislation only required the employer to have provided the car by reason of the employment without a transfer of the property in it for the company car rules to bite. The First-tier Tribunal held that the lease gave the employee some ownership rights, so there was a transfer of the property in the car, and hence no benefit-in-kind charge. The Upper Tribunal disagreed, but said the company car rules were displaced by a
charge under s 62 on zero. The Court of Appeal, which is where the case has recently been decided, held that the arrangements were commercial and did not, on a purposive construction, give rise to a benefit-in-kind at all.
While the taxpayer has therefore succeeded three times, the victory won't hold in the longer term. Finance Bill 2016 includes provisions to prevent such arguments from succeeding in 2016/17 and subsequent years.
The legislation affects living accommodation, company cars or vans, and loans. In all three areas wording about 'fair bargain’ is introduced in similar terms. For cars and vans it says: 'In determining for the purposes of this Chapter whether this Chapter applies by virtue of subsection (1) to a car or van made available to an individual it is immaterial whether or not the terms on which the car or van is made available constitute a fair bargain’. For cars and vans there is an additional provision to deal with any argument that the vehicle is provided for reasons other than employment. This provision deems any car or van that an employer provides to an employee (or member of their family) to have been made available by reason of the employment except in two situations. The first is where the employer is an individual and the vehicle is provided in the normal course of domestic, personal or family relationships, and the second is where the employer runs a vehicle hire business and the vehicle is provided to the employee as a normal member of the public.
So any future Apollo Fuels type of scheme will be caught because the employer is 'providing' the car, and cannot argue that this is not because of the employment relationship. The first of the only two exceptions will be when, for example, a father employs his daughter in the business, and separately lets her have a car that she can use because she is his daughter. If the daughter is in a job where all the employees get cars, the exception will not apply. The other exception will require the employer to be running a car hire business, but it will not be possible to argue that the company fleet of lease cars is such a business. In order to meet the rules for the exception, not only would the vehicles have to be made available to the public for hire, they would also have to be hired by the employee acting as an ordinary member of the public. In other words, an employee of a genuine car hire company does not have to go to a competitor to hire a car when he needs one for a few months for fear of triggering a benefit-in-kind charge if he hires one from his employer, but a car hire company cannot use the exception to set up an Apollo Fuels type scheme for its employees.
Rental Losses and the New Restriction on Finance Costs
From 6 April 2017 the tax relief for loan interest and other finance expenses relating to let residential property will be restricted. How will this affect current and future losses from your buy-to-let property?
Controversial new rules
Since the new rules which will limit tax relief on interest and finance costs for landlords of residential properties were announced in 2015, they’ve been a source of controversy, largely because they are tricky to understand. One point which seems to cause a lot of confusion is how property rental losses will be affected.
Interest - old rules v new rules
Under the rules which apply until 6 April 2017 interest etc. counts as a deductible expense in the same way as any other. If your total expenses exceed your rental income it creates a loss, which is carried forward and used to reduce taxable rental profit (or increase a loss) for later years. From 6 April 2017 25% of interest etc. won’t count as an expense and so can’t be taken into account when working out a loss, but it can be carried forward and used in a different way. Note. The portion of interest not allowed for 2018/19 increases to 50%, for 2019/20 to 75%, and for 2020/21 and later years, it’s 100%.
Example 1. In 2017/18 Amy receives £9,600 rent from a flat she bought in April 2017. Her expenses are £4,000, plus mortgage interest of £8,000. To arrive at her taxable profit she can deduct the £4,000 and 75% of the mortgage interest (£6,000). The result is a loss of £400 which can be carried forward. The disallowed interest of £2,000 can also be carried forward, but not as a loss; it is instead added to the interest paid in the next year.
Example 2. ln 2018/19 Amy received rent of £10,000. Her expenses are £3,800, plus mortgage interest of £7,800. In 2018/19 the proportion of interest which can’t be claimed as an expense is 50%. This means Amy’s rental income profit is £1,900, i.e. income £10,000 less: expenses of £3,800, mortgage interest of £3,900 (being 50% of £7 ,800) and the loss brought forward of £400. She also has brought forward interest of £2,000 This is added to the disallowed interest for 2018/19 of £3,900. It’s here that things start to get tricky.
Tax credit for interest etc. payments
Amy’s disallowed interest of £5,900 (which is the total of the amounts brought forward from 2017/18 and the amount disallowed for 2018/19) is used to create a tax credit, which is knocked off her general tax liability. The maximum credit is the basic tax rate (20%) multiplied by the interest, i.e. £1,180 (£5,900 X 20%), but further restrictions can apply. These limit the tax credit to the lower of 20% of the:
Any part of the disallowed interest that isn’t used to create a credit can be carried forward and used the next year.
Tip. While you should already be keeping a record of losses carried forward because they must be declared on your tax return, for 2017/18 and later years you’ll also need to report the amount of carried forward interest (if any), so it’s important to understand how the new rules work.
Company Owners Beware of unpaid PAYE & NI Liabilities
Imagine a situation where an owner-managed company owed HM Revenue and Customs (HMRC) substantial amounts of PAYE income tax and National Insurance contributions (NIC) when it ceased trading and was liquidated. Those company liabilities may relate to remuneration paid to its owners. HMRC can pursue the individuals for the unpaid tax, broadly if there has been a failure to deduct PAYE, and HMRC considers that the company wilfully failed to make the deductions from relevant payments to them. A similar provision applies for NIC purposes in respect of the individual's primary contributions, if there is a wilful failure to pay by the company.
Whether the company owner(s) are liable for the unpaid PAYE and NIC of the business under the above rules will depend on the particular facts and circumstances, as two contrasting tribunal cases illustrate.
Personally liable: In Marsh & Anor v Revenue and Customs  , two individuals were directors and equal shareholders of a trading company. The company eventually experienced cashflow problems. Historically, the individuals received small amounts by way of salary from the company. Most of their income was received in dividends. However, for the tax year 2010/11, the director shareholders increased their salaries. The company had outstanding income tax and NIC, most of which related to the director shareholders. In April 2011, the company went into administration. HMRC sought to transfer the liabilities to the individuals.
The First-tier Tribunal noted that the individuals drew substantial salaries when the company’s profits could not support them. It was clear to the tribunal that the company was already in financial difficulties when the director shareholders decided to take salaries instead of dividends. The failure to make deductions from their salaries was held to be wilful, and the tribunal concluded that the director shareholders were personally liable to pay the relevant tax and NIC.
Not Iiable: By contrast, in West v Revenue and Customs , the appellant was the sole director and shareholder of a trading company. For a number of years, the appellant drew money from the company as director’s loans. However, the director’s loans remained outstanding and increased over a number of years. Following advice from an insolvency practitioner, the appellant's accountant was instructed to prepare accounts showing an amount of director’s remuneration which, after deducting PAYE and NIC, would be sufficient to offset the drawings on the director’s loan account. Subsequently, a resolution was passed for the winding up of the company. PAYE and NIC liabilities were still outstanding. HMRC sought to formally transfer the liabilities from the company to the appellant, on the basis that he received payments from the company knowing that it had wilfully failed to deduct sufficient tax.
The tribunal judge noted that the PAYE obligations fell on the employer, and this basic rule was set aside only in limited circumstances: (1) The employer did not deduct PAYE; (2) The failure was wilful and deliberate; and (3) The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax. HMRC had to show that all three circumstances were present. On the first condition, the tribunal judge found that tax was deducted from the remuneration provided by the company to the appellant; the total amount of PAYE and NIC liabilities was shown in the company's records. Thus the first condition was not satisfied. As all three conditions must be fulfilled, there was no basis for transferring the company's PAYE liability to the appellant. Furthermore, the tribunal judge found, on the facts and evidence, that the company's failure to pay the NIC liability was not wilful or deliberate. The appellant's appeal was allowed.
The decision in West begs the question whether it leaves the door open for company owners to pay themselves large amounts of remuneration, and allow the company to be liquidated owing substantial PAYE and NIC liabilities. In West, the tribunal panel reached different decisions (but the tribunal judge had the casting vote). The other tribunal member expressed concerns on this point. The tribunal judge commented: 'Although I have concerns as to the consequences of allowing Mr West’s appeal, I do not consider that the legislation in its current state is sufficient to deal with the problems to which [the disagreeing tribunal member] refers.’ A change in the law therefore seems a possibility.
Travel Expenses - Intermediaries: The New Rules
The Finance Bill 2016 introduces new rules which restrict the ability of workers providing their services through an intermediary to claim a deduction for the cost of travelling between home and work.
Employees are not allowed a deduction for home to work travel costs (ordinary commuting) and the new rules deny relief in certain situations to workers working through an intermediary for travel. However it should be noted that the rules do not affect all workers providing their services through an intermediary - a deduction for home-to-work travel is only denied if certain conditions are met.
Who is affected? - The new rules apply where a worker:
Employment intermediary - The rules apply where the worker does not provide his or her services direct to the client, but those services are provided through an intermediary. Thus, the intermediary provides an additional layer between the worker and the client. The intermediary may be a psc, an umbrella company, an employment agency or similar.
Supervision, direction and control - The 'supervision direction and control' test is critical in determining whether a worker who provides services through an intermediary is able to claim a deduction for the cost of travel between home and work. The new rules only bite where the worker is subject to, or is subject to the right of 'supervision, direction and control' of any person as to the manner in which the worker provides his or her services.
The 'supervision, direction and control' test is met if there is a right to supervise, direct or control, even if there is no actual supervision, direction or control. The supervision, direction or control can be provided by 'any person'. It does not have to be provided by the client - the test is met if it is provided by an agency, a project manager, a consultant, a manager, etc.
The worker only needs to meet one part of the test for it to apply.
Supervision - The 'supervision' element of the test is met if someone watches or oversees how the worker provides his or her services or checks the work that the worker is doing to make sure that it is done correctly or to the right standard.
Direction - Direction over the manner in which a worker provides his or her services means providing a worker with instructions, guidance or advice so that they do their work in a particular way.
Control - A person is subject to control as to how they do their work if another person tells or instructs them how to do the work. It is the right of a person to say to the worker 'don’t do it like that' or 'do it like this'.
A worker who provides personal services through an intermediary is still able to claim a deduction for home to work travel if they are not subject to supervision, direction & control.
HMRC Offers Simpler Tax Method For Buy-To-Let Landlords
One of the potential implications for buy-to-let landlords of ‘making tax digital' is to make income tax payers send in quarterly returns rather than annual returns.
This will multiply paperwork and aggravation for individuals and businesses, without actually making the process of tax collection any more eflicient. On 15 August 2016, HMRC published a consultation document called 'simplified cash basis for unincorporated property businesses’. This cash basis of working out your tax is something which has already been proposed for unincorporated trading businesses, and so what we are talking about here is extending the availability of the cash basis to buy~to-let landlords as well.
MTD s still in consultation and not becoming fully operational until 2020. There will be a requirement to provide information every quarter to HMRC instead of doing an annual tax return. In conjunction with this there will be a requirement for everyone to keep their records on computer.
Is there any advantage for landlords? One advantage is that, as a buy-to-let landlord, you don’t have to take into account rent receipts until you actually receive them.
More interestingly, there is a proposal to give immediate 100% relief for capital expenditure. The example which HMRC give is of a tenant who requires expensive specialist furniture to be installed, costing £15,000. A little while later, that tenant moves out and the specialist furniture is sold for £6,000. Under cash accounting as proposed, the £15,000 would be an immediate deduction against the rents, when it was paid. On the flipside, the £6,000 you would get for selling the furniture is then a taxable receipt. The example HMRC give here is of a commercial letting, and that’s significant. Landlords of residential property are likely to be covered by the new 'replacement' rules which are replacing the wear and tear allowance (10% of rents) from this year.
Who will be able to use this 'simpler' method of tax accounting? Basically, individuals and partnerships consisting only of individuals will be eligible. As the proposals are drafted, there’s no upper limit, although the consultation paper does ask the question as to whether there should be an upper limit, for example based on rental turnover.
There are possible complications with applying the cash basis ln its simplest and most rigorous form. For example, what do you do about tenant deposits which are paid at the outset and held by the landlord under very stringent rules, which basically prevent him spending the deposit on anything? If you take cash accounting in its simplest form, this deposit would be taxable when received, and you would only get tax relief in the period including the end of the tenancy, when the deposit was paid back. Does it make a difference whether this deposit has to be handed over to a government approved agency to hold, or whether the landlord, in the case of a particular tenancy, is enabled to hang on to the deposit? All of these and more are issues which taxpayers and landlords may need to address in the future. Hl\/lRC's consultation closed on 7 November 2016, and its outcome is awaited.
New Tax Allowances For Property and Trading Income
New tax allowances for property and trading income - £1,000 each coming into effect for 2017/18 onwards.
At Budget 2016, the government announced two new allowances of £1,000 each for property and trading income, to take effect from 6 April 2017. The details were expanded in the Autumn Statement 2016, confirming that the trading allowance will also apply to certain miscellaneous income from providing assets or services.
How will the allowances work? - Broadly, where the allowances cover all of an individual’s relevant income (before expenses), they will no longer have to declare or pay tax on this income. Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.
There are two important exceptions worth noting:
When do the allowances take effect? - For those individuals who choose for simplicity to report their income and expenses of a trade according to the tax year, the trading allowance will take effect for trading income in the period 6 April 2017 to 5 April 2018. Otherwise, it will take effect for periods ending on either an accounting date or on such other date, on or after 6 April 2017, which forms the basis period for the 2017/18 tax year.
The allowance for property income and certain miscellaneous income takes effect for such income arising from 6 April 2017 onwards.
Trading allowance - The legislation provides for full relief to be given where the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year are up to £1,000. The effect of the relief will be that the profits from the trade are treated as nil.
There will be an equivalent rule for certain miscellaneous income, and this will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.
There will be an optional alternative method for calculating profits where the receipts from a trade or miscellaneous income are more than £1,000. This will take the form of an election, which will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought in to account in calculating the profits of the trade for the tax year, less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000 where the individual has both sources of income.
Property allowance - As with the trading allowance, new legislation will provide for full relief where property income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses are not brought into account when calculating profits of a property business.
There will be an optional alternative method for calculating profits where the relievable receipts of a property business are more than £1,000. This will take the form of an election, which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought into account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought into account. In calculating the profit, a deduction is allowed for the £1,000 property allowance.
Recent changes to the tax treatment of dividends may lead people to question whether it may be better to run their business as an unincorporated entity, such as a sole trader or partnership, rather than as a company.
For those thinking of disincorporating, an element of relief is available for a limited period.
Nature of the relief
Disincorporation relief is available when a company transfers certain assets to its shareholders who then continue to run the business in an unincorporated form. In the absence of the relief, transfers between the company and its shareholders would normally be treated as transfers between connected persons so that tax is calculated by reference to the market value regardless of the amount actually paid. The relief allows qualifying assets to be transferred at the lower of the cost and market value (other than goodwill amortised under the intangibles regime, which is transferred at the lower of the tax written down value and the market value). The transfer value becomes the acquirer’s base cost for CGT purposes.
The relief saves corporation tax on chargeable gains on disincorporation.
The relief defers rather than saves cost, as it lowers the recipient’s base cost.
The relief only applies in relation to qualifying assets, which are land and goodwill. Other assets, such as stock, debtors, etc. are outside the scope of the relief.
Availability of the relief is contingent on the following conditions being met:
Relief is only available if the transfer takes place in the transfer window, which runs from 1 April 2013 to 31 March 2018.
The relief must be claimed jointly by the company and all the shareholders who are receiving assets.
Partner note: FA 2013, ss. 58 – 61; www.gov.uk/guidance/corporation-tax-disincorporation-relief.
Entrepreneur's Relief: Timing matters
A valuable capital gains tax relief can easily be lost through unfortunate timing.
Entrepreneurs’ relief (ER) is among the most popular and well-known of tax reliefs. ER offers a capital gains tax (CGT) rate of 10% on net chargeable gains of up to £10 million. A claim for ER is available on a material disposal of business assets, such as an individual’s company shares, where certain conditions are satisfied.
A disposal of shares will typically involve a sale (or possibly a gift). However, for ER purposes the disposal of an interest in shares can also include a company purchase of its own shares from the individual shareholder. Such payments are normally treated as income distributions. However, if certain requirements are met, the shareholder is normally treated as receiving a capital payment instead.
Share disposals require certain alternative conditions to be met for ER purposes, depending on the circumstances. The most common of those conditions requires that the following criteria are met throughout the period of one year ending with the date of disposal: firstly, the company is the individual’s personal company and is either a trading company or the holding company of a trading group; and secondly, the individual is an officer or employee of the company (or, if the company is a trading group member, of one or more companies which are members of the trading group).
Thus ER can be inadvertently lost if the individual resigns as an officer and employee before the date of disposal of the shares.
ln Moore v Revenue v Customs  UKFTT 115 (TC), the taxpayer was a director shareholder of a trading company, and was also employed with the company under a contract of employment. Following a dispute between the taxpayer and the other director shareholders, it was agreed that the taxpayer would leave the business.
There were unsigned and undated Heads of Terms prepared in February 2009, in which it was agreed that the company would purchase 2,700 of the taxpayer's 3,000 shares. It was also agreed that the taxpayer's employment would be terminated, and that he would resign as a director.
Subsequently, at a general meeting of the company on 29 May 2009, it was resolved that the company would purchase the 2,700 shares from the taxpayer. On the same day, the taxpayer signed a compromise agreement for the termination of his employment, and also Companies House papers concerning his resignation as a director. However, that documentation stated the effective date of the taxpayer's resignation as 28 February 2009.
HMRC refused an ER claim on the share disposal, because the taxpayer was not an officer or employee of the company throughout the period of one year ending with the disposal of his shares on 29 May 2009. The taxpayer appealed.
A company purchase of own shares must comply with company law requirements to be valid. The First-tier Tribunal noted that a contract for the purchase must be approved in advance by resolution. That resolution was not passed until 29 May 2009. The taxpayer ceased to be a director or employee on 28 February 2009. Therefore, the 'officer or employee' condition for ER purposes was not satisfied for the one-year period up to the date of disposal on 29 May 2009. The taxpayer’s appeal was dismissed.
(The taxpayer in Moore continued to provide services to the company after his employment had ended. Even though he ceased to be a director and employee of the company in February 2009, it might have been possible to argue that he effectively continued to be an employee, based on ER case law. Unfortunately, in Moore the taxpayer’s services were provided through a personal service company, and not directly.)
Age 55 plus - unlock your pension
Changes were introduced with effect from April 2015, which provide those aged 55 plus with greater access to their pension savings. Where an individual has a defined contribution (money purchase) scheme, it is no longer necessary to purchase an annuity with the pension pot. Further, withdrawals in excess of the tax-free lump sum are taxed at the individual’s marginal rate of tax rather than at the punitive rate of 55% that applied prior to 6 April 2015.
Options - Once you reach age 55, there are various options available for your defined contribution pension pot:
Take it later - Although it is now possible to access pension savings at age 55, this is not the best option for everyone. It may suit you better, particularly if you are still working, to leave it where it is and to continue to invest so that you have a larger pot available to take later.
Tax-free lump sum - Once you have reached age 55 you can take 25% of your pension pot as a tax-free lump sum. Amounts in excess of the tax-free lump sum are taxed at the individual’s marginal rate of tax.
Annuity - It is no longer compulsory to use pension savings to buy an annuity, but those looking to secure an income in retirement may wish to invest some or all of the pension pot in an annuity. Financial advice should be sought to ensure that you purchase the right annuity for your personal circumstances.
Drawdown - If you want a flexible income in retirement you can opt for one of the drawdown options. This option allows you to take cash from your pension pot as you need it and can be achieved in one of two ways. The first option is to take the 25% tax-free lump sum in one chunk and then take the remainder of the pension pot as regular or irregular cash sums or as a one-off payment. Once the lump sum has been taken, the further withdrawals are taxed at the individual’s marginal rate of tax. The annual allowance drops to £10,000 once the first payment in excess of the tax-free lump sum is taken. If only the tax-free lump sum is withdrawn, the allowance remains at £40,000.
The alternative is to take smaller sums (uncrystallised fund pension lump sum). Under this approach, the first 25% of each withdrawal is tax-free and the balance is taxed at the individual’s marginal rate of tax. The annual allowance drops to £10,000 as soon as a withdrawal is made.
The annual allowance where a pension has been drawn down is to drop to £4,000 from April 2017.
Taking it all out - There is nothing to stop you withdrawing you pension pot at age 55 and splurging the lot. The first 25% is tax-free and the remainder taxed at your marginal rate. But remember, you may need an income to fund your life into your eighties and beyond.
Mix and match - Depending on the scheme rules, you could take some for a holiday of a lifetime, invest some in an annuity and leave the rest where it is.
Beware scams - Schemes that offer to unlock your pension before age 55 should be avoided at all cost. You will trigger punitive tax charges which will drastically reduce your pension pot.
Owe Tax to HMRC - Take Advantage of a Campaign
Taxpayers who have not told HMRC about all their income and gains can make a disclosure online. It is always better to tell HMRC rather than waiting for HMRC to come to you. Even with the best of intentions, it is easy to make mistakes.
HMRC run various campaigns which encourage people to get their tax affairs up to date in return for more favourable terms.
Let property campaign
The let property campaign is open to all residential landlords with undisclosed taxes. This may include:
• landlords with multiple properties;
• landlords with single rentals;
• specialist landlords letting property to a particular type of tenant, such as student lets;
• holiday lettings;
• individuals renting out a room in their home under the rent-a-room scheme.
Those who rent out their home while abroad may also be able to use the scheme.
Credit card sales campaign
The credit card sales campaign is a settlement opportunity for individuals and companies who accept credit and debit cards and who have not reported credit and debit card transactions on a tax return. Reduced penalties are offered for making a disclosure
Second incomes campaign
The second incomes campaign is aimed at employed individuals who have additional income which is not taxed through PAYE and which has not been declared to HMRC. Taxpayers making a disclosure under the scheme benefit from reduced penalties.
Making a disclosure
An individual who wishes to take advantage of a campaign to tell HMRC about undeclared income and gains, must follow the following procedure:
The first step is notify HMRC of the intention to make a disclosure under the campaign. This can be done either by filling in the notification form or by calling the relevant campaign helpline. The taxpayer will be given a disclosure reference number (DRN).
Once HMRC have been notified of the intention to make a disclosure under the campaign, the next stage is to make the disclosure. The disclosure must be made within 90 days of the date on which the notification acknowledgement is received. The DRN must be quoted.
Once the disclosure is complete, the taxpayer must then complete the declaration. This is an important part of the disclosure and should be taken seriously.
The taxpayer must make an offer for the full amount owed. The offer, together with HMRC’s acceptance letter, creates a legally binding contract between the taxpayer and HMRC. Letters of offer are included in the disclosure forms, which the landlord or his or her agent must complete.
HMRC will review the disclosure and if they decide to accept it, an acceptance letter will be sent. In some cases they will undertake further enquiries. It is advisable to co-operate as this will ensure the best possible outcome in terms of penalties.
Unless HMRC have granted additional time to pay, payment should be made within 90 days of the deadline given on the notification acknowledgement letter. The Payment Reference Number (PRN) should be quoted when making the payment.
Student Loan Repayments
Changes to student loan collection from April 2016.
Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HM Revenue and Customs (HMRC). Employers have an obligation to deduct student loan repayments in certain circumstances, and to account for such payments 'in like manner as income tax payable under the Taxes Acts'.
With effect from 6 April 2016, there are two plan types for student loan repayments:
Plan 1 loans are pre-September 2012 income contingent student loans, and repayments will start when the £17,495 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £21,000 is reached. Previously, these have been repaid outside of the payroll directly to the SLC. From April 2016, they are to be calculated and repaid via deduction from an employer's payroll. So, employers and payrolls must now be capable of coping with both types of plans.
Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:
Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.
Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee's pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).
Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.
High-income Child Benefit Charge
The high-income child benefit charge claws back child benefit that has been paid where either the recipient or his or her partner has individual income in excess of £50,000. The person paying the charge may not be the recipient - or even a parent of the child.
You can still be liable for the high-income child benefit charge even if you do not receive child benefit and the child in respect of whom it is paid is not your child - the charge will bite if you live with the child and you contribute at least an equal amount to the child's upkeep.
The income threshold at which the high-income child benefit charge starts is £S0,000. The measure of income is known as adjusted net income. Adjusted net income is total taxable income before personal allowance and less certain tax reliefs, such as trading losses, donations to charity made through gift aid and pension contributions. (Link: www.gov.uk/guidance/adjusted-net-income )
The charge is set at 1% of the child benefit received in the tax year for every £100 by which adjusted net income exceeds £50,000. Once income reaches £60,000, the charge is equal to 100% of the child benefit for the tax year.
The charge is paid via the self-assessment system and is due by 31 January after the end of the tax year to which it relates.
If the prospect of being paid child benefit only to have to pay it back to HMRC does not appeal, you can opt to have your child benefit payments stopped instead. This can be done by contacting the child benefit helpline on 0300 200 3600. Once stopped, payment can be restarted by contacting the child benefit helpline or completing the online form.
Consider whether you are likely to be affected by the high-income child benefit charge and if so whether you would prefer not to receive the benefit in the first place. Where possible, couples should equalise income to retain as much child benefit as possible. Live in partners who are not a parent of the child will not be hit by the charge if they can show that they do not contribute equally to the costs. Parents who do not live with the child are unaffected by the charge, regardless of their income.
Tax Return Enquiries - Check The Small Print
The UK's tax system might seem harsh to taxpayers who make a mistake, such as where a tax return error results in a penalty. Taxpayers (and their advisers) could be forgiven for thinking that in contrast, when HM Revenue and Customs (HMRC) makes a mistake such as a procedural or clerical error when opening an enquiry into a tax return, it suffers no significant repercussions. Whilst this will often be the case, the tax legislation does not always save HMRC from a fall when they slip up.
For example, in Mabbutt v Revenue and Customs , HMRC issued by letter a notice of its intention to enquire into the appellant's tax return 'for the year ending 6 April 2009’.
The appellant's agent pointed out to HMRC that the notice of enquiry did not refer to the tax year ended 5 April 2009. HMRC’s response was that the letter was a valid notice of its intention to enquire into the appellant's tax return for the year ended 5 April 2009. HMRC argued that the notice was 'saved' by legislation dealing with errors in assessments, etc. (see below).
HMRC later closed the enquiry. The difference between the calculations of HMRC and the appellant in respect of his tax liability for the year ended 5 April 2009 was around £653,000. The appellant appealed against HMRC's conclusions in the closure notice, and contended that an enquiry was not opened because no valid notice of enquiry was given.
An escape route for HMRC?
HMRC sought protection from its error by relying on TMA 1970, s 114(1), which broadly provides that assessments etc., are not invalidated by errors in certain circumstances. The First-tier Tribunal in Mabbutt considered that there are four requirements in s 114(1):
1. the provision only applies to certain documents, and an HMRC notice of enquiry must be one of them;
2. HMRC’s notice of enquiry must purport to be made pursuant to a provision of the Taxes Acts;
3. the notice of enquiry must be 'in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts’; and
4. the person or property charged or affected by the notice of enquiry must be 'designated therein according to common intent and understanding.'
The tribunal held that the requirements in 1, 2 and 4 were all satisfied. Howeven the tribunal concluded that requirement 3 above was not satisfied, as the return described in HMRC’s letter giving notice of the enquiry was for a tax year which did not exist.
ln order to rely on s 114 to cure the error in the notice of enquiry sent to the appellant, HMRC needed to satisfy the tribunal that all four requirements in s 114(1) were met. Although satisfied that three of them were met, the tribunal held that the error in HMRC’s letter resulted in a stated intention to enquire into a tax return for a year which did not exist, and that 'the substance and effect did not conform to the intent and meaning of the Taxes Acts.'
The tribunal concluded that HMRC’s enquiry notice did not constitute a valid notice of enquiry into the appellant’s return for the tax year ended 5 April 2009, and s 114 did not apply to save the disputed notice. Without a valid enquiry notice, there was no enquiry. HMRC’s purported closure notice therefore had no standing. The appellant’s appeal was allowed.
Tip: Even though HMRC lost the above case, could they not have simply issued a new, correct tax return enquiry notice? In many cases, they can. However, in Mabbutt, HMRC were out of time to do so. ln addition, by the time this case reached the tribunal, HMRC were also out of time to raise a discovery assessment (under TMA 1970, s 29) outside the normal tax return enquiry window. HMRC’s error was therefore costly - to the tune of about £653,000.
Private Residence Relief
No capital gains tax liability arises where a person sells his or her home provided that the property has been his or her only or main residence throughout the period of ownership, except for all or any part of the last 18 months of ownership. If this condition is not met, principal private residence (PPR) relief generally applies to that fraction of the gain that related to the period for which the property was the taxpayer's only or main residence, including the last 18 months of ownership, divided by the length of ownership.
However, relief may be restricted where part of the property is used for the purposes of a trade, profession or vocation, or where there is a change in the part that is occupied as the individual's residence, or where the property was acquired wholly or partly for the purposes of realising a gain from its disposal.
Restriction 1 - use for purpose of a trade, business profession or vocation
Where a gain arises on all or part of a dwelling house, part of which is used exclusively for the purposes of a trade or business, or a profession or vocation, the gain must be apportioned between the part used as a main residence and the part used for the trade, business, profession or vocation. PPR is not available in respect of the portion of the gain that relates to the part of the dwelling house used exclusively for the purposes of the trade, profession or vocation.
It should be noted that the exclusion from PPR relief applies only to any part of the property which is used exclusively for the purposes of the trade, business, profession or vocation. Consequently, relief is not lost in relation to a room that is used for both business and private purposes.
In a case where a part of the property is used exclusively for the purposes of a trade, business, profession or vocation, the gain must be apportioned between the residential and non-residential parts. The legislation does not provide how the apportionment must be made, and this must be determined by reference to the facts of the particular case.
Some guidance as to HMRC’s approach to the apportionment calculation can be found in their Capital Gains manual. Their willingness to accept a simple apportionment based, for example, on the number of rooms used for each purposes, will depend on the tax at stake. HMRC note in their Capital Gains Tax manual (at CG64670) that in a mixed property, such as a pub with residential accommodation above, the business part would be expected to be of greater value than the residential value. Consequently, an apportionment based solely on the number of rooms or the floor area attributable to residential and non-residential use could produce an excessive amount of relief.
It should also be noted that HMRC do not accept computations based on taking the value of the residential accommodation in isolation and deducting it from the consideration to determine the proportion attracting relief, as this is likely to produce excessive relief.
Example: Apportioning the gain for PPR purposes
Holly runs a small guest house, in which she also lives as her main residence. The property comprises twelve rooms, of which four are used exclusively for the purposes of her business. In July 2016, she sells the property for £900,000. She originally purchased the property in 1990 for £300,000. On sale she realises a gain of £600,000.
On a simple apportionment by reference to the number of rooms, two-thirds (i.e. 8/12) of the gain would qualify for PPR relief, leaving one-third (£200,000) chargeable to capital gains tax. However, HMRC contend that a greater value attaches to the non-residential part and eventually it is agreed that the gain attributable to the part used for the business is £250,000. PPR is available in relation to the remaining gain of £350,000. continued ...
Private Residence Relief ... continued
Relief is only restricted where part of the property is used exclusively for business purposes. Where a small business is run from a room in the home, ensuring that the room is also used for private purposes will preserve relief. For example, a room used as an office in the day could be used in the evenings for the children to do their homework. However, there must be some actual private use - simply leaving private possessions in the room will not be sufficient.
Restriction 2 - change of use
A residence may be altered or extended over time and its use may change frequently. Provision is made (in TCGA 1992, s 224(2)) to ensure that where the use of the property changes, the amount of the gain qualifying for PPR is adjusted in a manner which is `just and reasonable'.
The provisions are wide ranging in their application; they bite where there is a change in what is occupied as a person's residence as a result of the reconstruction or conversion of a building or for another reason, and there is a change in the part that is used for a trade, business, profession or vocation or for any other purposes. The adjustment to the relief will again depend on the facts in each case. However, the adjustment should reflect the extent to which, and the length of time over which, each part of the dwelling house has been used as its owner's only or main residence. Relief is allowed for the final 18 months of ownership for any part which at some time has been the owner's only or main residence.
It should be noted that this adjustment is only needed for periods where there is some residential use, but there are changes to the parts used for residential and non- residential purposes. If a property is used entirely as a main residence and is then used entirely for business purposes, relief is determined on a time-apportioned basis, with PPR relief being given for the period for which the property was the main residence or fell within the last 18 months of ownership.
Restriction 3 - development gains
The final restriction imposed by TCGA 1992, s 224 is in relation to development gains. The aim of PPR relief is to enable a home owner to buy a property of a similar standard in a rising market. The relief is not intended to exempt speculative development gains from tax.
Relief is restricted (by s 224(3)) in circumstances in which a house is acquired wholly or partly for the purposes of realising a gain from disposal, or where there is subsequent expenditure on a property with a view to enhancing the property in order to make a gain. In the first case, no PPR relief is available. In the second case, no relief is given to the extent that the gain made relates to the enhancement expenditure incurred solely for the purposes of making such a gain.
It should be noted that the restriction is not imposed where a householder buys (say) a home in an up and coming area in the hope that it will increase in value. The legislation is intended to apply where a property is bought specifically to make a gain, for example where someone buys a rundown property, does it up in six months and sells it at a profit. In a situation such as this it is also necessary to consider whether the individual is trading. A person who is in business as a property developer will be trading and their profits on sale will be subject to income tax rather than the gain being charged to capital gains tax.
Practical Tip: PPR is a valuable relief, but it only applies where the property is used as a sole or main residence. Where this is not the case, relief may be restricted.
Lettings relief increases the amount of the gain that is sheltered from capital gains tax when you sell a property which has at some time been your only or main residence, and in respect of which some private residence relief is due.
Private residence relief (PPR) is available on the disposal of a property that has been used as the owner’s only or main residence at some point during the period of ownership. If the property has been the only or main residence throughout the whole period of ownership, there is no capital gains tax to pay – the full amount of the gain is eligible for the relief. However, if the property has been used for business or let out for some of the period of ownership, part of the gain will be taxable. However, if some PRR is due, the gain relating to the last 18 months of ownership is exempt.
Nature of lettings relief
Lettings relief provides an element of additional relief where part of the gain on the disposal of a residential property is taxable because the property has been let out during the period of ownership. The relief is only available if the property has at some point been the only or main residence and private residence relief is available in respect of part of the gain.
The amount of lettings relief is the lowest of:
• the amount of private residence relief;
• £40,000; and
• the amount of the gain that is chargeable by reason of the letting.
David bought a flat on 1 September 2006 for £200,000. He lives in it as his main home for three years. He then moved in with his girlfriend, letting out the flat for seven years until he sold it on 31 August 2016 for £305,000. Costs of acquisition and sale were £5,000.
Before taking account of any available reliefs, David realises a gain of £100,000 (£305,000 – (£200,000 + £5,000)).
The property was David’s only or main residence for 3 years and qualifies for private residence relief for this period. Further, the last 18 months of ownership are also exempt, bringing the total period qualifying for private residence relief to four and half years.
The gain eligible for PPR is therefore £45,000 (£100,000 x 4.5/10).
The remaining gain of £55,000 is attributable to the letting and does not qualify for private residence relief.
However, lettings relief is available. The amount of the relief is the lowest of:
• the gain qualifying for private residence relief, i.e. £45,000;
• £40,000; and
• the gain attributable to the letting, i.e. £55,000.
Letting relief is therefore £40,000.
Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.
Double the relief
Although married couples and civil partners can only have one main residence between them for PPR purposes, each individual is entitled to lettings relief in respect of their share of the gain – doubling the potential letting relief available for spouses or civil partners to £80,000.
Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.
Do You Need to Make Payments on Account?
The 2015/16 self-assessment tax return must have been filed online by 31 January 2017 to avoid a late filing penalty. This is also the deadline for paying any outstanding tax and self-employed National Insurance contributions for 2015/16, and also the date by which the first payment on account for the 2016/17 tax year must be made. A payment on account is simply a payment towards the final liability for the tax year to which the payments relate.
Who needs to pay on account? - Not everyone who files a self-assessment tax return will need to make a payment on account. Payments on account are not required if your self-assessment bill for the previous tax year was less than £1,000, or if more that 80% of your income was deducted at source (e.g. under PAYE). If the 80% test is met, payments on account are not required, even if your self-assessment bill is more than £1,000.
How much must be paid and when? - Each payment on account is 50% of the previous year’s liability. So, for 2016/17 each payment on account is 50% of the 2015/16 liability.
A person who is required to make payments on account must make one payment by 31 January in the tax year and another by 31 July following the end of the tax year. If the total amount paid on account for the year is less than the final liability for the year, any outstanding balance must be paid not later than 31 January after the end of the tax year. If the amount paid on account is more than the final tax liability, the excess if refunded Or, where applicable, set against the payments on account due for the following year.
This means that for 2016/17, an individual who is liable to make payments on account must make the first payment no later than 31 January 2017 and the second payment no later than 31 July 2017. Each payment is 50% of the self-assessment bill for 2015/16. Any balance owing for 2016/17 not covered by the payments on account must be paid no later than 31 January 2018.
When working out how much you need to pay and whether a 'sweep up’ payment is due, remember to deduct payments on account made for the year from the account shown on the tax calculation - the tax return calculation does not reflect any payments made. You can check what has been paid during the year by logging into your personal tax account and selecting `View statements’. This will show the payments on account that have already been made and the amount that needs to be paid.
Reducing payments on account - If you have a self-assessment liability of £1,000 or more for 2015/16, you will need to make a payment on account for 2016/17 unless at least 80% of your tax has been deducted at source, for example under PAYE. It may be that you know that your income will be less in the following year or that the source in respect of which the liability arose has ceased.
Where this is the case, it is not necessary to make the payments during the year and wait to claim a refund once the tax return for the year has been submitted. Instead, you can ask HMRC to reduce your payments on account to reflect the amount that you expect to be due. This can either be done online via your self- assessment return (select ‘Reduce payments on account’), or by completing form SA303 and sending it to your tax office.
Trap: Beware of reducing your payments on account below the correct amount of the payment, as interest will be charged where payments on account should have been made and were paid late.
Example: Payments on account - In 2015/16 George, a self-employed decorator, makes a profit of £38,000. He has no other income. His tax liability for the year is £5,480 (20% (£38,000 - £10,600)). He must also pay Class 4 National Insurance contributions of £2,694.60 (9% (£38,000 - £8,060)) and Class 2 contributions £145.60 (payable at a rate of £2.80 per week).
His total tax and Class 4 NIC liability is £8,174.60 This is the figure which determines whether payments on account are due. Payments on account are not made in respect of the Class 2 liability.
As this figure exceeds £1,000, he must make payments on account of £4,087.30 by midnight on 31 January 2017 and 31 July 2017. Any remaining tax/Class 4 National Insurance contributions for 2016/17, together with his Class 2 National Insurance contributions, must be paid by midnight on 31 January 2018.
Income Tax When You Rent Out A Property
HMRC have recently published a series of case studies which aim to help landlords avoid common mistakes when working out and reporting income and profit from renting out property. Some of the situations covered by the case studies are explored below. The case studies are taken from HMRC’s guidance.
Remortgaging - If you increase the mortgage on a buy-to-let property, the interest on the additional loan is deductible as a revenue expense, but only on total borrowings up to the capital value of the property when it was brought into the letting business. Interest on borrowings in excess of the value of the property when brought into the letting business is not deductible.
The loan does not have to be secured on the rented property for relief to be available.
The way in which relief for interest is given is changing from 6 April 2017, gradually moving from a tax deduction to a basic rate income tax reduction.
Wholly and exclusively rule - Expenses can be deducted from rental income if they are incurred 'wholly and exclusively’ for the property rental business. If an expense was not incurred for the purposes of the property rental business in any way, it cannot be set against the rental income.
Claiming part expenses - Sometimes a cost may be incurred which is not `wholly and exclusively’ for the purposes of the property rental business, although part of the cost is. Where a definite part or proportion of an expenses is incurred wholly and exclusively for the purposes of the property business, a deduction can be claimed for that part or proportion.
Typical maintenance and repair costs - There are typical maintenance and repair costs that a landlord is likely to incur, and these can be claimed against rental income. The list includes:
Don’t forget to deduct the cost of repairs to the property when working out the rental profit.
Replacing domestic items - A deduction is available where domestic items are replaced. The amount of the deduction is the cost of the replacement item (on a like-for-like basis) plus any cost of disposing of the old item, less any proceeds received from the sale of the old item.
More than one property - Where a landlord rents out more than one property, the income and expenditure from all of the properties are combined to determine the overall profit or loss. Losses can be carried forward and set against future profits from the same property rental business.
Uncommercial lets - Where a property is let on terms that are not commercial, for example at a reduced rent to a friend, expenses can only be deducted up to the value of the rent.
Landlords should take a look at HMRC’s guidance at www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-case-studies
Mariage Allowance - Can I Claim It?
The marriage allowance (not to be confused with the married couple’s allowance available where at least one partner was born before 6 April 1935) enables an individual to transfer 10 per cent of their personal allowance for the tax year to their spouse or civil partner. However, there are conditions attached and this transfer facility is not available to all couples.
Who can benefit - the option to transfer 10% of the personal allowance is available where an individual:
This means that for 2016/17 the option to claim the married couple’s allowance is available where one spouse or civil partner has income (excluding savings income of up to £1,000 and dividend income of up to £5,000) of less than £11,000 and the other spouse has income of less than £43,000.
Claiming the allowance - An application can be made online at www.gov.uk/apply-marriage-allowance
To make the claim, both the transferor and transferee’s National Insurance number is needed. It is also necessary to prove your identity. This can be done by providing one of the following:
A confirmation email will be sent once an application can be made. It is also possible to apply for the allowance via the self-assessment tax return. The claim be made by the person who is transferring their allowance. Once a claim has been made the allowance will apply automatically in future years, unless circumstances change or the claim is cancelled. The claim can be cancelled online.
Time limit - A person has four years from the end of the tax year to which the allowance relates to claim the marriage allowance and transfer 10% of their personal allowance to their spouse. The first year for which a claim could be made was 2015/16 – so if you haven’t claimed and it is beneficial to do so, you have until 5 April 2020 to make the claim.
What is it worth? - The claim is worth up to 2% of the annual allowance. An individual who has not used all of their personal allowance can transfer 10% of it to their spouse or civil partner as long as the recipient is a basic rate taxpayer. The recipient will save tax at 20% on the amount transferred.
For 2015/16, the personal allowance was £10,600. At 10%, the marriage allowance was £1,060 and the tax saved (at 20% of £1,060) was £212.
For 2016/17, the personal allowance is £11,000. At 10% the marriage allowance is £1,100 and the tax saved (at 20% of £1,100) is £220.
Tax code changes - Where the transferor and transferee are employees, their tax code will change to reflect the marriage allowance. The recipient will have an M suffix code and the transferor will have an N suffix code.
If the recipient is not an employee, the benefit of the allowance will be given via the self-assessment return.
VAT Flat rate scheme
The VAT flat rate scheme is an optional simplified accounting scheme for small businesses. The scheme is available to businesses that are eligible to be registered for VAT and whose taxable turnover (excluding VAT) in the next year will be £150,000 or less. Once in the scheme, a business can remain in it as long as its taxable turnover for the current year is not more than £230,000.
The flat rate scheme is designed to simplify the recording of sales and purchases. Under the scheme, a business works out the VAT that it is required to pay over to HMRC by applying a flat rate percentage to its gross (VAT-inclusive) turnover. The flat rate percentage depends on the type of business. The percentages for each business sector can be found on the gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay. The percentages are all less than the standard rate of VAT of 20%, reflecting the VAT that would be recovered on purchases.
Jack is registered for the flat rate scheme. In a particular accounting period his turnover is £12,000. The flat rate percentage for his sector is 14%. Jack must pay VAT of £1,680 (14% of £12,000) over to HMRC. He does not need to work out the VAT on purchases.
The main advantage is that it reduces the record keeping burden, as it is not necessary to keep records of the VAT incurred on purchases. As the VAT percentages are averages it is possible that the business may pay less VAT than accounting for VAT under the traditional rules, particularly if purchases are low. However, the business may also pay more if purchases are higher than average – you may need to do the maths to see if it is for you.
Businesses also enjoy a discount of 1% from their flat rate percentage during their first year in the scheme.
Limited cost businesses
From 1 April 2017, a new flat rate percentage of 16.5% applies to a `limited cost business’. This is one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive expenditure in a prescribed accounting period or greater than 2% but less than £1,000 if their prescribed accounting period is one year. The figure of £1,000 is adjusted accordingly for periods that are not one year. In determining whether this test is met, capital expenditure, food and drink for consumption by the flat rate business or its employees, and vehicle, vehicle parts and fuel (except where the business is one that carries out transport services) are excluded from the calculation.
However, a business with a VAT inclusive turnover of £20,000 in an accounting period would only need to incur expenditure of £400 or more to fall outside the definition of a limited cost business – for most businesses this will be doable, even taking account of the exclusions.