Helpsheets ... continued 23 from homepage

If you already own at least one property and you buy a residential property in England or Northern Ireland, you may have to pay the stamp duty land tax (SDLT) surcharge. This can significantly add to the cost of buying a property.

Higher rates of land and building transaction tax (LBTT) apply to the purchase of second and subsequent residential properties in Scotland, while higher rates of land transaction tax (LTT) apply in Wales.

Higher rates of SDLT

Higher rates of SDLT are payable on the purchase of a residential property where the consideration is at least £40,000 if all of the following apply:

The property will not be the only residential property worth at least £40,000. Overseas properties are also taken into account in applying this test.

You have not sold or otherwise disposed of your previous main residence.

No one else has a lease with at least 21 years to run on the property.

The higher rates only apply to residential property – they do not apply to property that comprises both residential and non-residential elements, or to commercial property. In addition, the higher rate does not apply where the main residence is exchanged, for example, if someone who has a buy-to-ley property sells their main home and buys a new home.

Where the higher rates apply, SDLT is payable at an additional 3% on the residential rates.

The higher rates will typically apply where a person purchases and investment property or a second home.

Scotland

Land and builds transaction tax (LBTT) is payable on property purchases in Scotland. An additional dwelling supplement is payable on the purchase of additional dwellings in Scotland, such as buy-to-let properties and second homes. The supplement adds an additional 4% to the standard residential LBTT rates.

As with SDLT, it is not payable where the main residence is exchanged.

Wales

Land transaction tax (LTT) applies in Wales. As with SDLT, the higher rate of LTT applies where a personal purchases a residential property worth at least £40,000 and they already own at least one residential property. The exception is on the exchange of a main residence. The higher rate adds 3% to the standard residential rates.

Where a property is let out, there are likely to be periods when the property is empty, either between tenants or, in the case of a holiday let, between guests. Properties need to be maintained, and it is easier to undertake any work that may need doing, such as redecoration, while the property is empty. However, if costs are incurred while the property is not let, can you deduct the costs for tax purposes?

General rule

Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and the expenses are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.

Empty periods

Where work is undertaken on a property while it is empty, the key question to ask is whether the business is on-going. HMRC will not regard the business as having ceased if there is simply a gap between tenants and the intention is to re-let the property once the work is complete.

If the landlord has other properties in the same property rental business, as profits are calculated for the business as a whole, any allowable costs relating to the empty property are taken into account when calculating the profits for the business as a whole. If there is only one property, the business will continue as long as the intention is to re-let and is available for letting once the work has been undertaken, the costs remain allowable. If there is a loss because allowable costs for the period exceed rental income, the loss can be carried forward and set against any profits of the same rental business.

If the rental business has ceased, depending on the nature of the work, relief may be available under the post-cessation rules.

If the property is used privately once the work has been undertaken, and the costs relate to the private use, for example, changing the décor for personal taste in preparation for use as a residence, a deduction is not available as the costs are not incurred for the purposes of the business.

Repairs v improvement

Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot.

Although married couples and civil partners are assessed individually for capital gains tax purposes and each has their own annual exempt amount, a special r allows them to transfer assets between them at a value that gives rise to neither a loss nor a gain. This can be very useful from a tax planning perspective. The special rule applies only where the spouses or civil partners are living together or, where they separate, until the end of the tax year of separation.

Operation of the rule

For the purposes of the rule, any actual consideration that may pass between the spouses or civil partners is ignored. Instead, the amount of the consideration is deemed to be the amount that gives rise to neither a gain nor a loss. This will be the:

• original cost of the asset; plus
• any subsequent allowable costs.

Example

Sue and Simon have been married for 27 years. Sue purchased a painting ten years ago for £10,000. She spends £500 having the painting re-framed.

She sells it to Simon for £3000.

However, as the no gain/no loss rule applies, the actual consideration is ignored, and Sue is deemed to have sold the painting to Simon for £10,500. Rather than making a loss of £7,500 had the actual consideration been used, she breaks even. The deemed proceeds are £10,500, and the original cost plus subsequent allowable expenditure is also £10,500.

Sue is, however, unable to utilise the actual loss. Likewise, had the actual consideration been in excess of the allowable cost, she would not have been taxed on the gain.

Simon takes on Sue’s base cost, standing in her shoes for any subsequent disposal.

Making use of the rule

The rule can be useful to change ownership of an asset prior to sale to make best use of available annual exempt amounts by transferring an asset, or a share of an asset, to a spouse or civil partner.

Example

Sue and Simon decide to sell the painting in October 2021, having secured a buyer who is willing to pay £20,000 for it. In May 2021, Sue sold an antique vase, realising a gain of £13,000. David has not made any disposals in 2021/22, and has no plans to do so.

As Sue has already used up her annual exempt amount for 2021/22 of £12,300, if she were to sell the painting, the gain of £9,500 would be liable to capital gains tax in full. If Sue is a higher rate taxpayer, she would pay capital gains tax of £1,900 on the gain on the painting (£9,500 @ 20%).

However, as Simon still has his annual exempt amount available, if they can make use of the no gain/no loss rule to transfer the painting to Simon prior to sale. If Simon subsequently sells the paining to the third party, the gain of £9,500 would be covered by Simon’s annual exempt amount and the whole gain would be tax-free.

All individuals are entitled to an annual exempt amount for capital gains tax purposes. Net gains (chargeable gains less allowable losses) for the tax year are free of capital gain tax to the extent that they are covered by the annual exempt amount. For 2021/22, the annual exempt amount is set at £12,300.

Use it or lose it

As with the personal allowance for income tax purposes, the capital gains tax annual exempt amount is lost if it is not fully used in the tax year – it is not possible to carry forward any unused part of the 2021/22 annual exempt amount to 2022/23.

As the end of the tax year approaches, now is the time to review gains and losses in the tax year, and planned disposals, to assess whether it is beneficial to make further disposals in 2021/22.

Losses

Losses realised in a tax year must be set against any gains for the same tax year to arrive at net chargeable gains, before applying the annual exempt amount. You cannot preserve the losses by using the exempt amount against the chargeable gains. However, there is no need to use losses brought forward from earlier tax years before utilising the annual exempt amount.

For example, if in a tax year you realise a gain of £14,000 and a loss of £6,000, the net gains for the year are £8,000. These are sheltered entirely by the annual exempt amount of £12,300. It is not possible to set the annual exempt amount against the chargeable gain to reduce it to £1,700, then use only £1,700 of the loss, carrying the remaining £4,300 forward.

Married couples and civil partners

Married couples and civil partners can take advantage of the rule that allows them to transfer assets between them at a value that gives rise to neither a gain nor a loss (i.e. the transferor’s base cost). This effectively allows them to shift some or all of a gain from one spouse or civil partner to the other. This is useful to ensure both partner’s annual exempt amounts are utilised.

Year-end planning

Case study 1

Mark is planning to sell some shares in Spring 2022 and expects to realise a gain of £10,000. He has not made any disposals so far in 2021/22.

If he sell his shares prior to 6 April 2022, the disposal will fall in the 2021/22 tax year. As his annual exempt amount has not been used, this is available to shelter the gain. Making the disposal prior to 6 April 2022 leaves his annual exempt amount for 2022/23 available to set against any disposal in the 2022/23 tax year.

Case study 2

Duncan and Anthony are civil partners. Antony sold a painting in May 2021 realising a gain of £15,000. This utilised his annual exempt amount in full. He plans to sell another painting and expects to realise a gain of £10,000.

If Anthony sells the painting in 2021/22, he will pay capital gains tax on the gain. However, if he transfers the painting to Duncan prior to sale and Duncan sells the painting, the gain will be Duncan’s rather than Anthony’s and will be sheltered by his annual exempt amount, saving the couple capital gains tax.

During the covid pandemic HMRC suspended many of their debt collecting activities. However, as the UK emerges and economic activity resumes, HMRC has restarted their debt collection work intending to contact taxpayers who have fallen behind with their tax payments. From September 2021, they restarted the process of collecting debts using their enforcement powers. These powers include taking control of goods, summary warrants and court action including insolvency proceedings.

How unpaid tax is collected depends upon the type of tax outstanding e.g. for underpayment of PAYE tax, the taxpayer is not self-assessed, and the liability is for £2,999.99 or less, collection will normally be via reduction in the tax code; any figure above that and HMRC will ask for payment direct. If payment is still not forthcoming, a tax return is issued resulting in the taxpayer becoming subject to the self-assessment system and potentially HMRC’s Debt Management and Banking (DMB) department. A late payer within the self-assessment system will receive a series of paper reminders and telephone calls from DMB demanding payment, the actual number being dependent upon the size of debt. When HMRC’s ‘digital strategy’ system is fully in place it is intended that email reminders will also be issued.

It is a costly process to make someone bankrupt and HMRC would therefore prefer other methods of collection, such as the 'Time to Pay' (TTP) payment plan. Under such agreements taxpayers pay what they owe in instalments in return for the cancellation of penalties (although interest is still charged). In some circumstances HMRC offer a short-term deferral.

Another favoured method is the ‘direct recovery of debts’ (DRD) provisions which gives HMRC the power to recover established debts directly from debtors’ bank and building society accounts. The intervention targets those debtors who can and should pay, but have repeatedly refused to do so. A debtor will only be considered appropriate for DRD action where they owe more than £1,000 leaving a minimum of £5,000 left in their bank account after any payment is deducted.

If the tax debt includes estimated amounts of tax, and it is too late to submit a tax return, then 'Special Relief' may be possible where HMRC agree not to pursue its legal right if acceptable evidence of income is produced and HMRC believes that it would be  ‘unconscionable’ to pursue recovery of the full amount. This is a difficult test to pass with specific conditions needing to be fulfilled. The taxpayer's tax affairs need to be to date, or an acceptable arrangement has been agreed to bring them up to date. The relief must not have been claimed before; even if rejected.

If, after whichever method is used, the debt still remains unpaid or the 'TTP' arrangements have not been adhered to, the DMB may issue a 'notice of enforcement' giving the debtor 14 days to pay. Importantly, once this notice is issued it is not possible to go back and agree to a TTP arrangement. 'Face to face' visits are made not least to confirm the identity of the taxpayer and the amount of debt outstanding. 'TTP' arrangements will still be offered at this stage. If the debtor still refuses to pay, then they have up to 30 days to appeal to a County Court on specified grounds (including hardship) although their bank accounts will be frozen.

HMRC do not have any bailiffs as staff but use independent companies. They are not advised of the actual details of any case -- they are just told that there is a debt owed and the amount. As in any other debt collection situation if payment is not made on the bailiff's visit they will look for assets to confiscate and ask the taxpayer to sign a 'Controlled goods agreement' whereby if the debt remains unpaid within a further seven days the bailiffs will return, confiscate the assets and auction them to settle the debt.

As a final alternative to enforcement and in circumstances where all options have been tried but still the debt remains unpaid, HMRC can petition for bankruptcy (or liquidation is a company) if the debt exceeds £5,000. HMRC is no different from any other creditor and is strictly bound by the requirements of Insolvency Law.

Transactions between a director and his or her personal or family company are common and a director’s loan account is simply an account for recording the transactions that occur between the two.

However, there are tax consequences for the company if the director owes money to the company and the loan remains outstanding nine months and one day after the end of the accounting period in which it was made. This is the date that the corporation tax for the period is due. Where this is the case, the company must pay tax (Section 455 tax) of 32.5% of the overdrawn balance.

Avoiding a Section 455 tax charge

A Section 455 charge can be avoided if the outstanding loan balance is cleared before the corporation tax due date. However, anti-avoidance rules apply, and care should be taken not to fall foul of these rules. The rules seek to ensure that any repayments are genuine repayments, rather than transactions designed to avoid the Section 455 charge.

Rule 1: The 30-day rule

The 30-day rule comes into play where, within a period of 30 days of a repayment of more than £5,000, the participator borrows again from the company.

Section 455 tax is payable on the lesser of the amount of the loan repaid and the amount re-borrowed. This rule renders the repayment ineffective to the extent that the funds are re-borrowed within 30 days.

It doesn’t matter which comes first, the loan repayment or the further borrowing, the 30-day period applies equally. This prevents a participator from taking out a new loan and using it to repay all or part of the original one.

Rule 2: The intentions and arrangements rule

The intentions and arrangements rule gives the taxman a second bite of the cherry where the 30-day rule does not apply because the period between the repayment and the new loan is more than 30 days. This rule applies a motive test and can catch repayments and further borrowing more than 30 days apart where the intention is to avoid tax.

The intention and arrangements rule comes into play where the balance of the loan outstanding immediately before the repayment is at least £15,000 and, at the time a loan repayment is made, there are arrangements, or an intention, to subsequently borrow £5,000 or more.

This rule applies even where the new borrowing is outside 30 days. The rule bites if the repayment is made with the intention of redrawing at least £5,000 of the payment, irrespective of when this is done. This means waiting 31 days before re-borrowing the funds will not necessarily work.

Again, the rule does not apply to funds extracted by way of a dividend, salary or bonus, as these are within the charge to income tax.

Genuine repayment

Clearing an outstanding loan balance to avoid a Section 455 charge will only be tax-effective if this is done either by means of dividend, bonus or salary payment, which attract tax charges in their own right, or by using funds from outside the company to make a genuine repayment.

When a customer purchases an item or service from a business an invoice confirming the amount to pay should be raised either at the time of ordering or after delivery. If the seller is VAT registered a specific type of invoice is required to charge VAT on sales or reclaim the VAT charged for goods and services.

There are three types of VAT invoice recognised by HMRC:

 • full VAT invoices -- used for most transactions;

 • simplified invoices for supplies under £250; and

 • receipts

In most cases full VAT invoices are required but a modified invoice or a simplified invoice is used for some retail transactions.

Full VAT invoice

A full VAT invoice needs to show:

 • the trader's name and address

 • the VAT registration number

 • the customer's name and address

 • a sequential number that uniquely identifies the document. Separate invoice sequences can be used per customer so long as each sequence is separate and unique. Customer prefixes can be used but no two customers can have the same prefix.

 • the date of issue

 • the time of supply of the goods or services (this may be the same as the date of issue)

 • a description of the goods or services supplied, including the quantity of each type of item

 • the total amount, excluding VAT

 • the total amount of VAT

 • the price per item, excluding VAT

 • the rate of VAT charged per item (if an item is exempt from VAT or is zero-rated, this should be clearly stated)

 • the rate of discount per item

 • where a margin scheme is applied the reference 'margin scheme' must be shown

 • where the invoice relates to a supply where the person supplied is liable to pay the tax the words 'reverse charge' must be shown.

Modified invoice - Such invoices are used for retail supplies that total over £250. The same information as for a full VAT invoice needs to be shown plus the product prices and total amounts inclusive of VAT.

Simplified invoice - Such invoices are used for retail supplies with a total value under £250. As the name suggests - it is a 'simplified' version of a full VAT invoice. The difference is in the declaration of VAT where only the VAT rate is charged per item (if an item is exempt from VAT or is zero-rated, then this is stated) and the total amount including VAT is shown. The parties must be agreeable to this type of invoice being issued.

Self-billing - Self-billing is an arrangement between a supplier and a customer where the customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment. Both customer and supplier must be VAT registered.

Proforma invoices - Such documents are not official invoices and therefore do not fall under the VAT regulations. Therefore VAT details are not required to be shown but usually such information is declared.

Transactions in foreign currencies - For invoices showing transactions in foreign currencies, the total VAT payable in sterling must be shown (if the supply takes place within the UK). The calculation uses the UK market selling rate at the time of supply or HMRC’s period rates of exchange schedules or another method of calculation as agreed with HMRC. An English translation of any invoice written in a foreign language must be retained and available to produce within 30 days if asked to do so.

Copies of all VAT invoices issued must be retained even issued in error and/or subsequently cancelled. In addition, all VAT records must be digitally for at least six years.

When it comes to let properties, furnished holiday lettings (FHL) are a special case and benefit from a number of concessions not available to standard lets. The concessions are only available if the property meets the tax tests to qualify it as a furnished holiday letting – the fact that it may be let out for holiday use in itself is not sufficient.

One of the benefits of being classed as a furnished holiday let for tax purposes is that plant and machinery capital allowances can be claimed. This is something which is not available to a landlord of a residential long-term let.

What is a FHL?

To be classed as a FHL for tax purposes, the property must be let furnished on a commercial basis and:

it must be available for letting for at least 210 days in the tax year;

it must actually be let for 105 days in the tax year;

it is not let for lets of 31 days or more for more than 155 days in the tax year.

Where the tests are not met in a particular tax year, it may be possible for the let to qualify by making an averaging election (possible if the landlord has more than one holiday let) or a period of grace election (possible where the tests have been met previously).

Availability of capital allowances

A FHL business is a qualifying activity for plant and machinery capital allowances. This means that capital allowances can be claimed for items of plant and machinery, such as furniture, equipment and fixtures.

Where the business is run as an unincorporated property business, the landlord can claim either the annual investment allowance (AIA) or writing down allowances. The AIA provides relief for 100% of the qualifying expenditure in calculating taxable profits for the tax year in which the expenditure was incurred. Claims for the AIA can be made up to the AIA limit, which is set at £1 million a year until 31 March 2023. Where the AIA is not available (for example, because the limit has been used up), or the landlord does not want to claim it, writing down allowances can be claimed instead.

Claims for capital allowances can be tailored. This is useful to prevent personal allowances from being wasted.

If the business is run as a company, there is also the option to claim the super-deduction for expenditure that would otherwise qualify for main rate capital allowances of 18% where the expenditure was incurred in the period from 1April 2021 to 31 March 2023. The super-deduction allows 130% of the expenditure to be deducted in computing profits, and is very worthwhile.

Companies can also benefit from a 50% first year allowance for expenditure incurred in the same period which would otherwise qualify for writing down allowances at the special rate of 6%. This may be useful if the AIA is not available.

A First-tier Tribunal (FTT) recently ruled on a case involving voluntary (Class 3) NI contributions. The individual who paid them wanted them to be refunded but HMRC refused. Was it right to do so?

Earnings record

The facts of this case, namely the taxpayer’s employment and NI record, were key to the outcome. Christine Bradley (CB) was an employee until 2015. She was 46 and through the PAYE system had paid Class 1 NI contributions. She knew that following changes to the state pension rules in 2016 she needed 35 years of contributions to qualify for a full pension. In 2015 she ceased employment, was unable to find other employment and had no other earnings.

NI top-up

In 2017 CB topped up her NI record by paying £733.20 in voluntary (Class 3) contributions for 2016/17. She had not obtained any advice before doing so. In April 2018 CB commenced self-employment. Her profits were below the small profits threshold which meant she was entitled to pay voluntary Class 2 contributions. She therefore asked HMRC for her Class 3 contributions to be refunded or reallocated as Class 2 contributions from the date she became self-employed.

Where you have a choice of paying voluntary NI contributions of either Class 3 or Class 2, go with the latter as they are considerably cheaper. For 2021/22 the Class 3 rate payable is £15.40 per week while Class 2 is just £3.05.

HMRC’s response

HMRC refused CB’s request arguing that s.13 Social Security Contributions and Benefits Act 1992 allowed payment of Class 3 contributions where they add to the payer’s entitlement to benefit (the State Pension). This was the case when CB paid them. It said that social security regulations only allowed it to repay contributions that were made in error, which was not so in CB’s case.

The FTT’s view

The First-tier Tribunal (FTT’s) agreed with HMRC’s analysis of the rules; that is, CB was entitled to make the Class 3 contributions because they improved her NI record and therefore entitlement to a State Pension. They were not automatically repayable because they were not paid in error, but that wasn’t the end of the matter.

The FTT considered that after CB’s employment ended she was extraordinarily worried about her work prospects and this clouded her thinking. Had she considered her situation rationally she would have realised that she needed to find work (employed or self-employed) for six years before she reached state pension age which gave her nearly 20 years to play with. Consequently, there was no need for her to pay the Class 3 contributions anywhere near as soon as she did. The FTT therefore ruled that CB had made an error in paying the contributions when she did. This meant she was entitled to a refund of all the Class 3 contributions paid.

The FTT’s interpretation of the regulations was rather generous to CB and it’s not a conclusion you could rely on another tribunal reaching. The lesson therefore is that you shouldn’t rush into paying Class 3 contributions if you still have plenty of time in which to reach the required NI record for a maximum pension.

HMRC argued that unless the contributions were paid in error, which was not the case, there was no right to a refund. However, the FTT said that the individual had many years in which she could have added to her NI record without resorting to Class 3 contributions. Her decision to pay them was therefore an error and she was entitled to a refund.

Your new bookkeeper has pointed out that you’ve been charging some customers standard-rate VAT for goods that ought to have been zero-rated and accounted for the excess on your VAT returns. Are you entitled to a refund?

VAT refunds - You might think that if you’ve paid too much VAT to HMRC it’s entirely fair for you to demand the excess back as a refund. However, where the overpayment results from you overcharging your customers VAT, the refund could leave you pocketing the money at their expense. HMRC calls this “unjust enrichment” and it can refuse to refund you.

Unjustly enriched

Unjust enrichment can occur in different situations, some less obvious than others. It can occur whenever you reclaim VAT that you have collected from your customers and paid on to HMRC. It’s most common with retail and entertainment businesses as it’s very difficult or impossible to trace all the customers overcharged. Where from your records you’re able to identify the customers affected and have their details, you should pass any VAT refund on to them to avoid HMRC arguing that you’ve been unjustly enriched.

Challenging unjust enrichment

Not every situation where you have overcharged VAT and reclaimed it without passing on the refund is unjust enrichment .

To prove that you’ve been unjustly enriched HMRC must show that it’s your customers and not you who have borne the ”economic burden” of the excess VAT.

Example. You run a domestic window cleaning business. The competition in your area is tough. You take on two staff and increase your sales to the point you must register for VAT. This reduces your profitability because you can’t increase the price you charge without losing business. Three years later you realise that you’ve been working out the VAT element incorrectly. On a charge of, say, £25 you’ve accounted for VAT of £5 (£20 x 20%) when actually the VAT element should have been £4.16 (£25 x 20/120).

It’s you and not your customers that met the economic burden of the extra VAT because you imputed it within the £25 (or whatever the rate was for cleaning the windows). The customer‘s fee wasn’t affected by the amount of VAT, you simply accounted for more out of this amount than you needed to. It’s you that’s out of pocket and therefore HMRC can’t refuse your claim for a refund on the grounds of unjust enrichment.

Not unjust - There’s one more argument you can use to fight a claim of unjust enrichment by HMRC. For example, if you had to put up prices to cover the VAT but overcharged it, you might have lost customers as a result. If you can show that your sales reduced because of the overcharge then you have suffered the economic burden and any VAT refund is simply compensating you for this.

If challenged by HMRC you must have viable evidence that the economic burden of overcharging VAT was met by you. However, the onus is then entirely on HMRC to disprove that evidence. It can challenge but can’t refuse a claim for a refund without demonstrating that on the balance of probability you would be unjustly enriched if it made the refund.

Whether you’re entitled to a refund depends on who suffered the “economic burden” of the excess VAT, you or your customer. If it was you then HMRC must refund the VAT unless it has sufficient evidence to prove that on the balance of probabilities you would be “unjustly enriched” by it.

You’ve accepted an offer to buy your business from one of your fellow directors. The trouble is they can’t afford to pay all at once. You’ve therefore agreed to accept instalment payments. Might this cause you tax problems?

When is the date of sale? - A important factor when considering capital gains tax (CGT) is that a transaction is treated as taking place when a deal is agreed and not when payment is made. It’s therefore possible to be liable to pay CGT on the sale of an asset for which you haven’t yet been paid. This cash-flow problem commonly crops up when selling an asset, typically a business, in exchange for instalment payments .

Example. In February 2022 Sarah signs an unconditional contract for the sale of her business. The only asset potentially liable to CGT is the goodwill, which is valued at £800,000. Because she started her business from scratch the whole £800,000 is a capital gain. The buyer can’t raise the cash for the business all at once and so Sarah allows it to pay in four equal annual instalments. For CGT purposes the sale occurred in 2021/22 and so Sarah must pay tax on the gain by 31 January 2023. Because Sarah is entitled to CGT business asset disposal relief her tax bill will be £80,000 (£800,000 x 10%), assuming she had already used her CGT annual exemption for 2021/22.

If selling an asset near the end of a tax year, consider delaying the contract until the start of the next one. Unless the asset is a residential property, the CGT payable on any gain will be due a full year later than it would be had the sale occurred on the date originally planned.

The uncertainty factor - Whenever payment for an asset is wholly or partly deferred over a long period you run the risk that the buyer’s financial circumstances will change for the worse and they won’t be able meet all the payments. Regardless of this risk you’ll be lumbered with a CGT bill on the gain as if you had received the whole amount stated in the contract, at least in the medium term. Therefore, in our example, assuming that the buyer was unable to pay the final instalment, instead of a netting £720,000 (after tax) from the sale of her business, Sarah’s cash position would be:

Transaction                                               Amount

First instalment payment Feb 2022.         £200,000

Tax payment                                              (£80,000)

Second and third instalments                   £400,000

Sarah’s net proceeds                               £520,000

If Sarah can prove to HMRC that the unpaid £200,000 owed to her would be permanently irrecoverable from the buyer, she can claim a corresponding tax reduction, i.e. £20,000, by submitting a special tax claim.

Reducing your risk - The sale of a business can be structured to prevent having to pay tax on the full proceeds before you receive them, e.g. a staggered sale, i.e. by selling a portion of the business in each of a series of sales. Or, if you’re selling shares in your company, arranging for it to purchase all or some of them. These methods usually involve tricky tax rules and prior approval of the tax treatment from HMRC.

If a buyer is late or defaults on an instalment payment you remain liable to capital gains tax as if they had paid in full. To reverse this it’s necessary to submit a special claim to HMRC. Consider other options to prevent this being necessary, for example, if you’re selling shares in a company get it to buy some or all of them.

Owners of successful businesses frequently use companies as a trading medium not least because of the tax benefits that can be achieved. When the time comes for the owner to retire or reduce their involvement there are two options - sell or pass to the next generation. If the latter, then there are ways to do so tax efficiently.

 • Gift of Shares

Gifting (or transferring) of shares within the owner's lifetime fall within the same CGT rules as for the transfer of any asset and as such could fall within the 'settlement rules' (which prevent someone from taking tax advantages by diverting income to another) if not undertaken correctly. However, gifts to family members are not caught by these rules so long as the right to all of the dividend income is not restricted.

The gift will transfer value out of the owner's estate for IHT purposes and as it will be of unquoted shares then the transfer will attract 100% Business Property Relief (so long as the owner had a controlling share).

Problems may be found should the family member(s) receiving the shares be an employee of the company at the time of transfer. This is because HMRC have been known to argue that the receipt would not have been received if the donee had not been in employment and as such the gift is really employment income.

 • Purchase of shares by the company

The shares are most likely to be the most valuable assets held by the owner who may need cash to fund their retirement but want the company to remain in the family. The family could purchase the shares but may not have the cash to do so. If the company has accumulated a large bank balance over the years, the company can 'buy back’ the owners shares using the company's reserves to fund the purchase. This will not only mean that the cash can be withdrawn as a capital repayment rather than an income tax distribution but the family will not have to raise the money by other means. The seller is treated as having received a capital payment for capital gains tax purposes attracting more beneficial tax rates and possibly ‘Business Asset Disposal Relief' (BADR). The main requirements for this relief are that the shareholder must have usually owned the shares for at least five years and either dispose of the entire holding or the shareholding 'substantially reduced'.

 • Use of Family trust

Should the intended family members be minors and/or the controlling shareholder wishes to keep voting control of the shares but keep the shares out of IHT, then the transfer of shares into a family trust may need to be considered. The gift itself can attract 100% Business Property Relief (BPR) of the transfer value so long as the shares have been owned for at least two years. If BPR is not available, then the gift falls out of account under the Potential Exemption Transfer (PET) relief rules should the owner survive the gift by the usual seven years and the trust continues to hold the property as a qualifying investment. The BPR rules permit the donor to retain 51% of the shares personally and then gift the remainder into the discretionary trust ready for when the family members become of age.

It would be advisable to take out a reducing seven-year term policy on the settlor's life in case they die and the seven-year PET fails.

If you have income from land and property, you may be able to take advantage of the property allowance. The allowance can be used in various ways.

Tax exemption

If your income from property is less than £1,000, the property allowance allows you to receive that income free from tax. Where the income is covered by the allowance, you do not need to tell HMRC about it.

However, claiming the allowance may not be beneficial if your property income is less than £1,000, but your expenses are more than £1,000 so that you make a loss. Claiming the exemption will mean that the loss is lost. To preserve the lost, you must provide HMRC of details of your income and expenses on your tax return.

However, as the loss can only be set against future profits from the same property income business, if you do not expect future receipts to exceed £1,000, there may be little benefit claiming the loss. You may prefer instead to take advantage of the exemption, saving the work associated with establishing the loss.

Expenses less than £1,000

The property allowance can also be beneficial if your income from property is more than £1,000, but your expenses are less than £1,000. Where this is the case, you will not benefit from the exemption, but you can instead deduct the property allowance of £1,000 to arrive at your taxable profit. This will give a favourable result.

Example

Wendy has income of £3,000 from letting a flat. Her associated expenses are £600. Under the normal rules, her taxable profit is £2,400.

However, she can claim the property allowance and deduct £1,000 rather than her actual expenses of £600. This reduces her taxable profit to £2,400.

Jointly-owned property

Where a property is jointly-owned, each owner can benefit from the property allowance in respect of their share of the income. Where this is less than £1,000, the income is exempt and does not need to be reported to HMRC; where this is more than £1,000, the allowance can be deducted instead of actual expenses where this is beneficial.

The VAT is a simplified scheme that can save work. Instead of working out the VAT that you need to pay over to HMRC by deducting input VAT from output VAT, you pay a fixed percentage of your VAT-inclusive turnover. The percentage depends on the nature of your business.

Who can join?

To be eligible to join the VAT flat rate scheme you must be a VAT-registered business and expect your VAT taxable turnover to be £150,000 or less. This is the total of everything that you sell that is not exempt from VAT, exclusive of VAT. You cannot re-join the scheme if you have left it in the last 12 months.

Once in the scheme, you must leave if your turnover in the last 12 months was more than £230,000 including VAT, or you expect your turnover in the next 30 days alone to be more than £230,000 (including VAT).

Working out your VAT

The flat rate percentage depends on the nature of your business. The percentages applying to different business sectors can be found on the Gov.uk website. The percentages allow for input VAT recovery and are less than the rate of VAT charged.

You receive a discount of 1% from your flat-rate percentage for the first year that you are in the scheme.

The VAT that your need to pay to HMRC for a quarter is simply the fixed rate percentage as applied to your VAT-inclusive turnover.

Example

Molly runs a beauty business. Her annual turnover (excluding VAT) is £90,000. In a particular VAT quarter, her VAT inclusive turnover is £32,400. The flat rate percentage for her sector – hairdressing and other beauty treatments – is 13%. Consequently, she must pay HMRC VAT of £4,212 for the quarter. She does not need to keep records of her input VAT or work out the difference between VAT charged and VAT suffered in the quarter.

Limited cost businesses

Special rules apply to business that do not buy many goods – known as limited cost businesses. These are business where goods are less than either 2% of turnover or £1,000 a year.

Limited cost businesses must use a higher rate of 16.5% to work out the VAT that they pay over to HMRC, regardless of the sector in which they operate.

Is the scheme worthwhile?

The scheme will save work, but this may come at a cost if the amount that you would pay using the normal rules is less than the amount determined using the fixed rate percentage. There is no substitute to doing the sums.

The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. This may be problematic for a business that spends little on goods but incurs VAT on services and items such as fuel and promotional items, which are excluded from the calculation. Again, to assess whether the scheme is worthwhile, there is no substitute for doing the sums.

If you are self-employed and you received Covid-19 support payments during the pandemic, you may need to report these on your self-assessment tax return.

If you are an employee and you were furloughed and received furlough grants under the Coronavirus Job Retention Scheme, these were liable to tax under PAYE and liable to National Insurance as for normal salary and wages payments and are included in the figure on your P60.

Grants under the Self-Employment Income Support Scheme

If you received a grant from HMRC under the Self-Employment Income Support Scheme (SEISS), you will need to report this in the dedicated Self-Employment Income Support Grant box on the self-assessment return. The exact reporting mechanism will depend on whether you complete the full self-employment pages (SA103S) or the short pages (SA103S). If you are a member of a partnership, you will need to report the grants on the relevant partnership pages.

SEISS grants are taxable in the tax year in which they are received. This rule applies regardless of the period to which you prepare your accounts. Consequently, grants received between 6 April 2020 and 5 April 2021 (Grants 1, 2 and 3) will need to go on the 2020/21 self-assessment tax return.

If you complete the short self-employment pages, your SEISS grants should be entered in box 27.1. If you complete the full self-employment pages, your SEISS grants should be entered in box 70.1.

Other taxable support payments

If you received other taxable Covid-19 support payments, these too will need to be reported on your 2020/21 self-assessment tax return. This may include Coronavirus Business Support Grants from your local authority or devolved Administration, such as those payable under the Small Business Grant Fund, the Retail, Hospitality and Leisure Grant Fund and the Local Authority Discretionary Grant Fund, or payments under the Eat Out To Help Out Scheme. Test and trace self-isolation payments are also taxable, and need to be reported too.

If you complete the short self-employment pages, taxable Covid-19 payments other than SEISS grants, are reported in box 10, while on the full self-employment pages, the relevant box is box 16.

Payments that do not need to be reported

Money received from loans, such as loans made under the Bounce Back Loan Scheme or other Coronavirus loan schemes does not need to be reported on your tax return. Likewise, you do not need to report any welfare payments received from the council, such as council tax payments or housing benefit.

The taxation of profit from furnished holiday lets (FHL) could be termed a 'hybrid' of taxes. The operation of a FHL is deemed to be a business and not a property income investment, and as such the usual business income and expenditure accounts are prepared.

Benefits of treatment as a holiday let

This treatment creates several benefits for the personal landlord:

Allowable expenditure is computed as for a trade and pre-trading expenditure is  allowable

Pension contributions can be deducted from profit

Capital gains tax reliefs are available - Rollover relief, Gift relief, Business Asset  Disposal Relief

Capital Allowances can be claimed on expenditure on furniture and fittings

Losses can only be set against the profits from the same FHL trade or carried forward

Loan including mortgage interest relief or overdraft interest can be claimed as an  expense incurred without any restrictions

As ever there are qualifying conditions including that the letting must be in the UK where all lettings of the same individual, partnership or company are treated as a single trade. The letting must be on a commercial basis with a view to making a profit but there is no requirement for a profit to be made. The main conditions centre on the number of days being let such that accommodation must be 'available' for short-term letting for 210 days in any one tax year and be let for 105 days of the year. Accommodation should not normally be let to the same tenant for a continuous period of 31 days in a period of 155 days in any one tax year and long-term letting should not exceed 155 days ('occupation' condition). The usual tax on rented properties rules apply should these conditions not be complied with.

Expenditure

FHL's are treated as a trade for certain purposes being taxed under property tax rules which have rules similar to being taxed as a trade. As such expenses that can be deducted from profit made on rental income are the same as for a 'real' trade including capital allowances in specific circumstances. Taxpayers owing a FHL can claim capital allowances on furniture etc whereas residential landlords cannot. One point to mention is that under the 'pre trading expenditure' rules, expenditure incurred in the seven years prior to commencement is treated as being a loss sustained in the year of commencement.

 Losses

Losses on FHL are kept separate and cannot be offset against either other UK or non UK rental profits. Such losses can only be carried forward and set against profits made on other UK FHL properties. This is particularly relevant should a property cease to be an FHL as any unclaimed loss is lost.

Capital gains tax planning

Tax planning regarding FHL's comes into its own when considering the sale of any business. For example, a taxpayer disposing of their business at an age when they do not wish to set up or invest in another can 'roll over'(defer) the charge to CGT. Provided all the 'roll over' conditions are met, the proceeds can be invested in a property being an asset with possible capital appreciation. Such planning can also be possible if the taxpayer does not qualify for Business Asset Disposal Relief (BADR) e.g. because the business has not been owned for two years.

There is a caveat to such planning in that the whole business must be disposed of rather than just an asset. If the property owner ceases to let as FHL before disposal of the property then BATR relief is possible providing that the disposal takes place within one year. This one year period can be extended to three providing that the property is not used as a private residence for those two extended years. The use of the property during the one statutory year is immaterial.

There is a lot of preparation involved in setting up a business, and costs will be incurred, which may be substantial. Before it is able to start trading, a business may incur expenditure on items such as:

• acquiring premises;
• recruiting staff;
• buying stock;
• setting up website;
• IT costs;
• advertising and marketing; and
• travel and subsistence.

These costs relate to a business, albeit one which has yet to start.

Relief for expenses - Once a business is up and running, relief is given for revenue expenses which are incurred wholly and exclusively for the purposes of the business.

Where the expenses are incurred in setting the business up, relief is available under the pre-trading expenses rules. These allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses are revenue expenses which are incurred wholly and exclusively for the purposes of the trade. In this way, the pre-trading expenses rules allow relief for expenses which would have been deductible had the expenditure been incurred once the business was up and running. Pre-trading expenses are treated as if they were incurred on the day on the first day of trading, and are deducted in computing the profits for the first period of account.

Example - Lucy opens a shop selling cards and gifts on 1 October 2021. Prior to opening the shop, she incurred expenses as follows in 2021:

rent -- £2,000; staff costs -- £4,000; stock -- £20,000; travel expenses -- £850; advertising -- £3,000 shop fittings -- £12,000 laptop -- £500.

Under the pre-trading rules, the rent, staff costs, travel expenses and advertising costs are treated as if they were incurred on 1 October 2021. They are deducted in calculating her profits for her first accounting period.

Stock - No deduction is given for the cost of stock under the pre-trading expenses rules. Stock purchased prior to commencement will form opening stock, and relief against profits will be given for stock sold in the first accounting period.

Capital expenditure - A similar rule to the pre-trading expenses rules applies for capital allowance purposes. Items purchased prior to the commencement of trade where the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances – the qualifying expenditure is treated as if it were incurred on the first day of trading.

Furnished holiday lettings have a number of tax advantages compared to standard residential lets, and one of the key ones is the availability of business asset rollover relief. This enables a landlord of a furnished holiday let to sell one property and invest in another without immediately crystallising any associated capital gain. This can be a big plus.

Nature of business asset rollover relief

Business asset rollover relief enables any capital gains tax arising on the disposal of an eligible asset to be deferred where another asset is acquired from the proceeds of the sale of the old asset. The capital gain is ‘rolled over’ and does not become chargeable until the new asset is sold.

Where the cost of the new asset is at least equal to the full amount received from the sale of the old asset, relief is available in full. Effect is given to the relief by reducing the base cost of the new asset by the amount of the rolled-over gain.

If the new asset costs less than the amount received from the sale of the old asset partial relief may be available.

The new asset must be acquired in the period that runs from 12 months before to three years after the date of the disposal of the old asset.

Example

Maria has a number of properties that she lets as furnished holiday lettings.

She sells a holiday cottage which she acquired for £140,000 for £270,000, realising a gain of £130,000. She reinvests the proceeds in a new holiday cottage, which costs £320,000.

She claims business asset rollover relief.

As a result, she defers paying capital gains tax on the gain of £130,000. Instead, the base cost of the new property is reduced by £130,000, from £320,000 to £190,000.

Had Maria not claimed the relief, assuming that she is a higher rate taxpayer, she would have had to pay capital gains tax of £36,400 within 30 days of completion of the sale of the cottage. Instead, she has this money available to reinvest in the new property.

If you realise a chargeable gain on a UK residential property, you now have 60 days rather than 30 days in which to tell HMRC about the gain and make a payment on account of the tax that is due.

A chargeable gain may arise on the sale of a residential property if that property has not been occupied as your only or main home throughout the period that you have owned it. This may be the case if you sell an investment property, such as a buy-to-let or a holiday let, or a second home.

Create an online account

In order to report the gain to HMRC, you will need to set up an online 'Capital Gains on UK property' account. You will need your Government Gateway user ID and password to do this (or will need to set one up if you do not already have one). You can also use the account to pay any tax that you owe, view, and change previous returns.

Report the gain

Following the sale of a UK residential property in respect of which there is a chargeable gain, you need to report the gain online within 60 days from the date of completion. For completions prior to 27 October 2021, the reporting window was 30 days. Penalties are charged if the reporting deadline is missed.

Pay the tax

You must also pay tax on account of the gain within 60 days of completion. Interest is charged if the tax is paid late.

The amount you must pay is the best estimate of the tax due at the date of sale. Losses realised previously in the tax year or brought forward can be taken into account, as can the annual exempt amount, if this has not been used already.

Example

Marjorie sells her holiday cottage. Completion is on 28 January 2022. She realises a gain of £60,000.

Previously in the 2021/22 tax year, she sold some shares, realising a loss of £4,000. She has made no other disposals in 2021/22

Marjorie is a higher rate taxpayer.

She can set the loss earlier in the year and her annual exempt amount for 2021/22 of £12,300 against the gain, reducing it to £43,700 (£60,000 - £4,000 - £12,300).

She must therefore report the gain and make a tax payment of £12,236 (£43,700 @ 28%) by 29 March 2022 – 60 days from the completion date.

As the end of the year there may be some adjustment after the tax return is filed, and it is possible that a repayment may arise if losses are realised on later disposals in the tax year.

The tax systems contains a number of allowances which enable individuals to enjoy income and gains tax-free. One of these allowances is the annual exempt amount that applies for capital gains tax purposes. For 2021/22, it is set at £12,300. It will remain at this level for 2022/23.

Nature of the annual exempt amount

The annual exempt amount allows each individual to realise net gains of up to £12,300 in the 2021/22 tax year before any capital gains tax is payable. Spouses and civil partners each have their own annual exempt amount.

The annual exempt amount is applied to net gains – that is chargeable gains less allowable losses – for the tax year. Thus, while losses for the tax year must be set against gains for the tax year before applying the annual exempt amount, there is no requirement to use up losses brought forward before utilising the annual exempt amount.

If the annual exempt amount is not used in the tax year to which it relates, it is lost – unused amounts cannot be carried forward.

Tax planning opportunities

The 2021/22 tax year comes to an end on 5 April 2022. The final months of the tax year are a time when it is prudent to review your tax position and consider whether any action should be taken before the tax year comes to an end.

From a capital gains tax perspective, it is advisable to review disposals made so far in the tax year and the resulting net gains/losses, and also any planned disposals.

If the annual exemption has not been used in full, and a disposal is on the cards which may yield a chargeable gain, consideration could be given to realising the gain in the 2021/22 tax year. This will enable you to take advantage of the annual exempt amount for 2021/22, leaving the 2022/23 annual exempt amount available to shelter the first £12,300 of gains realised in that year.

On the other hand, if a disposal is planned before the end of the tax year that will realise a loss and, when set against gains for the tax year, will result in some or all of the annual exempt amount being wasted, consideration could be given to delaying the disposal until 2022/23. This will prevent wasting the 2021/22 annual exempt amount, and also leave the loss available to reduce any 2022/23 gains.

Spouses and civil partners each have their own annual exempt amount, and the ability of spouses and civil partners to transfer assets between them at a value that gives rise to neither a gain nor a loss opens further tax planning opportunities when it comes to ensuring that the 2021/22 annual exempt amount is not wasted. If one spouse/civil partner has used all of their annual exempt amount, but their partner’s remains available, transferring the assets (or a sufficient share to use up the available annual exempt amount) prior to sale will ensure that use is made of the available annual exempt amount. Likewise, if neither partner has used their annual exempt amount and the likely gain exceeds £12,300, transferring a share in the asset to their partner prior to sale will enable both annual exempt amounts to be used.

Example

Tom and Lucy are married. In 2021/22, Lucy sold some shares realising a gain of £13,000. This has used her annual exempt amount in full. Tom has made no disposals in the year.

Lucy plans to sell some more shares which she expects will realise a gain of £11,000. She was planning on waiting until after 5 April 2022 to make the disposal.

However, if she transfers the shares to Tom prior to sale, and if Tom sells them before 6 April 2022, the gain will fall in the 2021/22 tax year. Consequently, it will be sheltered by Tom’s annual exempt amount for 2021/22, ensuring that this is not wasted, while leaving Lucy’s annual amount for 2022/23 available to set against any other gains in that tax year.

Tax policy is used to influence behaviour as well as to collect revenue. One example where this is the case is the company car tax rules which tax high emission cars heavily and reward drivers for choosing electric and low emission models.

Why emissions matter for tax?

Where an employee has a company car that is available for his or her private use, they are taxed on the benefit that this provide. The taxable amount is a percentage – the appropriate percentage – of the list price of the car and optional accessories. The charge is adjusted to reflect capital contributions made by the employee (capped at £5,000), certain periods when the car was unavailable and any payments for private use.

The appropriate percentage depends, in the main, on the CO2 emissions of the vehicle, with a lower charge applying to cars with lower emissions. For 2020/21 and 2021/22, it also depends on whether the car was registered before 6 April 2020 or on or after this date (the way in which emissions were measured changed for cars first registered on or after 6 April 2020). However, the rates are aligned from 6 April 2022.

Where the car’s emissions fall in 1—50g/km band, the electric range of the car also has a bearing on the emissions, with a lower percentage applying to cars with a greater electric range. The electric range is the distance that can be covered on a single charge.

A supplement of 4% applies to diesel cars which do not meet the RDE2 emissions standard. However, the percentage is capped at 37%.

Looking ahead – 2022/23 and beyond

For 2022/23 the appropriate percentages range from 2% for cars with zero emissions and those with CO2 emissions in the 1—50g/km band with an electric range of more than 130 miles to 37% for cars with CO2 emissions of 160g/km or more. For diesel cars not meeting the RDE standard, the maximum percentage of 37% applies to cars with emissions of 145g/km and above.

While it is no longer possible to enjoy a tax-free electric car (as was the case in 2020/21), the charge remains very low at 2% of the list price. This means that, for example, the taxable amount for an electric company car costing £30,000 is only £600, which will cost a basic rate taxpayer £120 in tax for the year and a higher rate taxpayer £240 in tax for the year. Even with a more expensive car costing £50,000, the taxable amount of £1,000 means that a higher rate taxpayer will only pay tax of £400 for the year. If a fully electric car is not viable, the same result is achieved with a hybrid with an electric range of 130 miles (and emission in the 1—50g/km band).

The appropriate percentages applying for 2022/23 remain unchanged for 2023/24 and 2024/25, meaning that electric and low efficient cars remain a tax efficient benefit for the next few years at least.

Your company is short of cash. The bank will lend the money but the interest rate is high, the repayment period short and it wants personal guarantees. Could you borrow from your pension fund instead?

Borrowing from pension savings - There are tough rules in the pension and tax legislation which prevent you from accessing your pension savings before you reach 55. There are exceptions but generally you can’t touch the money without getting hit with very tough tax charges. But, if you are 55 or older you might be able to use your personal pension savings to raise finance tax efficiently.

Acceptable recycling - Subject to tax anti-avoidance rules you can take a lump sum from your pension and use it for whatever you want, e.g. to help out your company’s cash flow problem. Your company can repay what it owes you by paying pension contributions into a different personal pension plan. This is called pension recycling. Care must be taken not to trigger the money purchase annual allowance (MPAA) as this would make the scheme less tax efficient.

Example - Bank loan. Bob’s company, Acom Ltd, needs £30,000 to buy new machinery. The bank is prepared to lend to the company at an APR of 12% over four years, if Bob agrees to secure the loan with a mortgage on his home. Acom’s repayments would be £790 per month, that’s roughly £37,920 in total. It can claim a tax deduction for the interest which will reduce the cost by between £1,500 and £1,900 approximately, depending on the rate of corporation tax (CT) applicable to its profits, making the net cost between £36,020 and £36,420.

Example - Pension recycling. Bob takes a tax-free lump sum of £30,000 from his pension savings (he reorganised his personal pension funds to accommodate this). Acom needs to pay just £690 per month into a new pension plan for Bob (assuming pension savings grow at 5% per annum, which is realistic even in these times of low returns on investments) for which it can claim CT relief. The total cost to Acom is therefore between £27,471 and £29,669 depending on the CT rate applicable. Therefore, Acom is better off by around £7,000 to £8,500 compared with taking a bank loan.

Flexible arrangement - If Acom can’t afford the pension contributions but must have the cash, using Bob’s pension fund as the source of capital is the ideal solution. Bob can instead take the £30,000 tax-free lump sum, lend it to Acom and leave it at that, or allow it to pay pension contributions for him as and when it can. This has the advantage of preventing or reducing the risk of the MPAA applying.

Tax-free payments - If Acom doesn’t pay pension contributions you might think that Bob has lost out by using the lump sum from his pension. That’s because you’re only allowed to take up to 25% of each pension fund’s value as a tax-free amount, and so what he takes from that fund in future will be taxable. The money from Bob’s pension fund counts as a credit to his director’s loan account with Acom. This means when it repays the money it will be tax free. Alternatively, if it doesn’t repay Bob and he sells the company or winds it up, £30,000 of what he receives for it will be tax free. So, one way or another, he hasn’t lost his tax-free lump sum.

If you’re 55 or over you can take a tax-free lump sum and lend or give it to your company. It can repay the loan by making contributions to your pension fund on which it can claim a tax deduction. On a £30,000 loan this could save your company up to £8,500.

Can your company claim tax relief for losses created by your company after paying into a pension for you.  If yes, would it be more tax efficient to claim relief against previous or future profits?

Company pension contributions - HMRC will only challenge CT relief for pension contributions if there is a non-business reason for paying them. It says that where a “controlling director is also the person whose work generates the company’s income, then the level of the remuneration package (including pension contributions) is a commercial decision and it is unlikely that there will be a non-business purpose”.  HMRC might take the view that if a pension contribution results in the company making a loss the remuneration package is not commercial and so will argue that CT relief is not due for some or all of the contributions.

Commercial or not commercial - HMRC’s approach isn’t unreasonable, but before rejecting a claim for CT relief for contributions because they create or increase a loss, it must consider whether the director’s remuneration as a whole (including the contributions) is fair for the work they perform for their company.  If the rate of remuneration is comparable with others doing a similar job, HMRC has no reasonable grounds to refuse a claim for CT relief whether or not the company makes a loss.

Claiming relief for the loss - Where CT relief is allowed for pension contributions, relief for any resulting loss is also allowed. There are different ways for a company to claim loss relief. It can use it to reduce its CT bills for:

• the previous financial year
• the previous three financial years under the temporary rules; or
• its future profits.

Which loss relief is most tax efficient? - There’s no one answer; the rates of tax on profits past and future must be considered. Example.  Acom Ltd’s financial year ends on 31 March. Its profits for 2019, 2020 and 2021 were £55,000, £60,000 and £3,000 respectively on which it paid CT at 19%. Its projected loss for 2022 is £40,000. As the loss was entirely caused by a large one-off pension contribution, the company expects to make profits in 2023 and later years. Depending on the level of profits the rate of CT will be between 19% and 25%. So, Acom can guarantee CT relief at 19% for losses under the current rules if they are used against past profits. This would generate a CT refund of £7,600 (£40,000 x 19%). It might be able to reduce its future CT bills by up to £10,000 (£40,000 at 25%), but only if its profits are £200,000 or more in 2023. If they return to 2019 levels, the CT relief would only be slightly greater than the £7,600 it could get if it claimed relief against past profits. Claiming CT relief for the 2022 loss now using the temporary rules is probably Acom’s best bet as it’s unlikely to obtain much more relief by using the loss against future profits. It has until 31 March 2024, but in doing so it delays when it can get its hands on the refund.

You’ve reached state pension age and so are no longer liable to NI on salary. To improve tax efficiency should you change how you take income from your company especially in view of the extra tax payable on dividends from 6 April 2022?

Profit extraction

If your company has profits, the most tax-efficient way to pay these to the owner managers is as dividends, with the exception of tax-exempt perks. However, these can’t be paid in cash and so have a limited usefulness. For cash income the choice is therefore between dividends and salary. The tax and NI rates which apply to these respectively will increase by 1.25% from 6 April 2022.

Salary tax and NI pros and cons

The main advantage of dividends over salary is that they aren’t liable to NI. However, when you reached state pension age (SPA) you no longer have to pay NI on your salary. This raises the question of whether it’s then more tax/NI efficient to take salary rather than dividends.

The bad news is that whilst you aren’t liable to NI on your earnings, once you reach SPA your company is. Nevertheless, avoiding 12% (13.25% from 6 April 2022) NI added to the corporation tax (CT) saving your company gets for paying salary instead of dividends will significantly change the dividends v salary picture.

Tax efficiency comparisons

We’ve looked at the dividends v salary tax for 2022/23 for basic and higher rate taxpayers who have reached SPA. For our first calculation we assumed the company pays £50,270 dividends for 2022/23 as a whole and compared this with a salary which after accounting for CT relief cost the company the same.

Dividends remain the most tax-efficient way to take income but the difference between the two, as a percentage of the cost to the company (£50,000), is just 3.34%, which equates to a £1,672 saving.

When we look at higher rate taxpayers, i.e. for income falling above the basic rate threshold (£50,270), the tax/NI advantage of dividends is still there but it’s even further reduced. The table below shows the figures for £10,000 taken in addition to the £50,270 per the previous table. The tax advantage is just 1.86%, i.e. £186 per £10,000.

The employment allowance may be available to reduce the employers’ NI liability by up to £4,000. Where it is, the advantage of dividends will be further eroded or completely lost thus making salary rather than dividends the more tax-efficient way to take income from your company.

The tax efficiency of dividends compared to salary is considerably lessened if you aren’t liable to NI on the latter. For higher rate taxpayers it’s just £186 per £10,000 of income. Salary can overtake dividends for tax efficiency where the employers’ NI payable by your company can be reduced by the employment allowance.

Business rates. If you let a furnished property in England as a holiday home you’ll know that it’s subject to business rates rather than council tax. While these can be more costly, most holiday homes qualify for small business rates relief (SBRR) which reduces the rates below the amount of council tax payable if it applied. It seems that some second home owners have been abusing this tax break.

What’s your intention? The current rules allow homeowners to register for business rates and then claim SBRR if they “intend” to let their property as a holiday home, whether or not it’s actually let as such. From April 2023 the rules will be tightened so that business rates will only apply where the property:

 - will be available for short-term lets as self-catering accommodation for at least 140 days per year in the previous year and the one ahead; and

 - in the previous year, the property was actually let as short-term self-catering accommodation for at least 70 days.

Local authorities will be able to ask for evidence to prove that the conditions above are met.

Even though the new rules don’t apply until April 2023, if you want your property to qualify for business rates and so SBRR , you’ll need to start keeping evidence of qualifying letting from April 2022 to meet the second condition above.

From April 2023 a property will only be liable to business rates and so potentially qualify for small business rates relief if it’s available and actually let as holiday accommodation for a minimum number of days. You’ll need to have evidence of this starting from April 2022.

Corporation tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now. While the changes do not come into effect for a year, applying from the financial year 2023 which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022.

Nature of the changes - From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have if any.

If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax.

If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023.

If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay. Marginal relief is calculated in accordance with the following formula:

F x (U-A) x N/A

Where:

F is the marginal relief fraction (set at 3/200 for the financial year 2023);

U is the upper limit;

A is the amount of augmented profits (profits plus dividends from non-group companies); and

N is the amount of total taxable profits.

Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate.

The lower limit is £50,000 and the upper limit is £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000.

The limits are time apportioned where the accounting period (or pro rata period) is less than 12 months.

Plan ahead - Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 will be taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits.

Where the company will from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%.

Example - ABC limit prepares accounts to 30 September each year. It has annual profits of £300,000.

Its profits for the year to 30 September 2022 will be taxed at 19%.

However, its profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% -- an effective rate of 22%.

The company accelerates a profitable contract so that it is completed before 30 September 2023 so that the profit is taxed at 19%.

Recent years have seen HMRC stepping up its efforts to reduce what is termed the ‘tax gap’ (defined as being the amount of tax that HMRC think should, in theory, be paid in comparison with the amount actually paid) which from statistics published in February for the 2019/20 tax year is believed to be £35 billion. Tax lost due to 'failure to take reasonable care’ accounts for the largest proportion at 19% (£6.7 billion), tax avoidance accounts for the smallest proportion at four per cent (£1.5 billion), while the cost of tax evasion was £5.5 billion.

Definition

Tax evasion is where someone acts against the law to escape paying tax that should be paid whereas tax avoidance is the exploitation of rules to reduce tax that would otherwise be payable. It is sometimes difficult to differentiate between the two and as Treasury Minister David Gauke admitted in 2010, "there will be occasions when the line is a little blurred.”. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the actual state of their affairs to the tax authorities to reduce their tax bill (illegal). Consequently, in practice, a good deal of uncertainty can often attach to the question as to whether a particular arrangement constitutes ‘tax avoidance’ and, if so, whether it is to be regarded as ‘acceptable’ (tax planning or tax mitigation) or ‘unacceptable’ (aggressive or abusive avoidance).

There is no specific offence relating to tax evasion to be found anywhere in the Taxes Acts so HMRC relies on common law when prosecuting. Very occasionally a taxpayer may be prosecuted under the Theft Act 1978 for false accounting (or possibly the Fraud Act 2006). The majority of tax evasion cases are brought under the common law criminal offence of ‘cheating the public revenue’. Such cases have established that for the offence to be committed there does not have to be a dishonest act. An omission such as the failure to account or register for VAT will suffice provided that the act or omission was intended to reduce the tax bill. There is no maximum penalty for such an offence if found guilty so a defendant could be sentenced to life imprisonment and have to repay the tax lost to HMRC as well.

Different counter methods

Over the years different governments have tried varying methods to counter tax evasion. Before 2004 the legislation was aimed at specific avoidance schemes as and when they came to light, but since that date the target has been on a more general basis. The ability of HMRC to issue 'follower' and 'Accelerated Payment Notices' ('APN') has built on this 'general' theme being aimed at marketed avoidance schemes. Under this rule a 'follower' notice is issued where a dispute arises from a taxpayer's use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has previously successfully challenged in court. They are designed to prevent other scheme users from delaying settlement of disputes that have no chance of success. HMRC may also issue an APN, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment is resolved.

Coming more up to date HMRC estimates that the level of fraud and error in Covid-19 support schemes amounts to approximately £5.8 billion against a spend of £81.2 billion. In the publication detailing HMRCs 'approach to error and fraud' in the covid schemes, it describes the lengths HMRC went to minimise fraud at the outset including the use of risk assessment and 'intelligence profiles' confirming that over 29,000 claims and registrations were blocked by use of these methods.

The majority of fraud or evasion practices are reported to HMRC by employees and by enabling employees to check whether they were included in their employer’s CJRS claim HMRC has received more than 30,000 reports of fraudulent claims.