Helpsheets ... continued 47 from homepage

In these difficult economic times, tenants may struggle to pay their rent, leaving landlords out of pocket. In the absence of insurance that makes good the cost of unpaid rent, the way in which the landlord is able to secure relief for the bad debt depends on whether the landlord uses the cash basis or the accruals basis to prepare their accounts.

Cash basis

The cash basis is a simple way of preparing accounts that is based on money in and money out. It is the default basis of accounts preparation for most unincorporated landlords with annual rental income of £150,000 or less.

Under the cash basis, income is only taken into account when it is received, and relief is only given for expenses when they are paid. This methodology provides automatic relief for bad debts as if the rent is not received, it is not taken into account in calculating the rental profit.

If the rent is received at a later date or the landlord is able to recover some or all of the unpaid rent through an insurance policy, it is simply brought into account as a receipt of the property rental business on the date that it is received.

Accruals basis

Landlords may use the accruals basis if they are not eligible for the cash basis, as may be the case if their annual rental income exceeds £150,000 or they operate their property business through a limited company. A landlord who is eligible to use the cash basis may elect to use the accruals basis instead.

Under the accruals basis, income and expenditure are matched to the period to which they relate, regardless of whether it has received or paid out. This is done by taking account of debtors, creditors, prepayments and accruals.

Where the accruals basis is used and the rent is unpaid, the rent for the period would be taken into account in calculating the profit for that period, and the balance sheet would show a debtor for the unpaid rent.

However, the tax legislation provides relief for bad and doubtful debts. Relief is given as a deduction when it becomes clear that the debt is bad or doubtful. Where a tenant is slow to pay but eventually pays, no relief is available – the rent is still taken into account for the period to which it relates regardless of when it is actually received.

Many employers have a social event for employees around the Christmas period. This may take the form of a Christmas party or dinner or another social event, such as wreath-making and cocktails. When planning the event, it is important to consider the tax and National Insurance implications up front. Although there is a specific tax exemption for annual parties and other functions, there are conditions that must be met for the exemption to apply. Ensuring that your Christmas event meets these conditions at the planning stage will prevent employees being hit with a tax charge on the associated benefit.

Conditions

To qualify for the exemption, the party or function must be:

• an annual party or function; and
• available to the employer’s employees generally or to those at a particular location.

Where there is a single annual party or function in the tax year, the cost per head must not exceed £150. Where there is more than one annual party or function in the tax year, the combined cost must not exceed £150 for all events to fall within the scope of the exemption. The cost per head is found by dividing the total cost of the party or function plus the cost of any transport incidentally provided by the total number of attendees (employees plus guests).

Watchpoints

Only annual events qualify for the exemption. As the name suggests, these are events that are held every year, such as an annual staff Christmas party. If the event is a one-off event, the exemption will not apply. This is the case regardless of whether the event is open to all employees and the cost per head is not more than £150.

To fall within the exemption, the event must also be open to all employees or all those at a particular location. HMRC have confirmed that departmental events qualify. However, an event for senior staff only would not fall within the scope of the exemption.

When calculating the cost per head, VAT is included even if this is subsequently recovered. It is also important to include guests as well as employees when performing the calculation. However, if the cost per head is more than £150, the full amount is taxable, not just the excess over £150. Where an employee brings a guest and the cost per head exceeds £150, the employee will be taxed on their attendance and that of their guest.

If there is more than one annual function in the tax year, the functions will be exempt as long as the combined cost per head is not more than £150. Where this limit is exceeded, the employer can choose how best to use the exemption. When allocating the exemption, remember to consider the impact of guests – it is better to leave an event costing £100 per head attended only by employees in charge than one costing £80 per head which is attended by employees and their partners as here the taxable amount will be £160 (2 x £80).

Consider a PSA

If a tax charge does arise in respect of a Christmas event, as will be the case, for example, if the event is not an annual event, the employee will suffer a benefit in kind tax charge. The taxable amount will be the cost per head for the employee and any associated guests. The employer will also suffer a Class 1A National Insurance charge.

To maintain the goodwill element of the event, the employer may wish to include the benefit within a PAYE Settlement Agreement and meet the associated tax liability on the employee’s behalf.

Partner note: ITEPA 2003, s. 264.

The normal filing deadline for the 2024/25 Self Assessment tax return is 31 January 2026. However, if you have some tax to pay under Self Assessment and you also pay tax under PAYE, if you file your return by 30 December 2025, you may be able to pay what you owe through an adjustment to your tax code rather than through the Self Assessment system. This may be the case if, for example, you are employed or receive a pension and also have some income from self-employment or property or you have taxable investment income.

Conditions

Tax due under Self Assessment can only be collected through your tax code if the following conditions are met:

• the total amount that you owe through Self Assessment is £3,000 or less;
• you already pay tax through PAYE (for example, because you are employed or receive a company pension); and
• you filed a paper return by 31 October 2025 or an online return by 30 December 2025.

It should be noted that if the amount you owe is more than £3,000, you cannot make a part payment to reduce the outstanding amount to £3,000 or less and pay the balance through your tax code.

However, even if these conditions are met, you will not be able to pay your Self Assessment tax bill through your tax code if any of the following apply:

you do not have sufficient PAYE income to collect the amount that is due;

you would end up paying more than 50% of your income in tax; or

you would end up paying over twice as much tax as you normally do.

How it works

If you have filed your return by the deadline and you are eligible to pay your tax bill through your tax code, HMRC will automatically adjust your tax code to collect the amount of tax that you owe, unless you indicate that you do not wish to pay your tax in this way. The adjustment will take the form of a deduction from your allowances. The amount of the deduction will depend on how much you owe and your marginal rate of tax. For example, if you pay tax at 40% and owe tax under Self Assessment of £1,000, your allowances will be reduced by £2,500 (40% of £2,500 = £1,000).

The adjustment will be made to your 2026/27 tax code. As a result of the adjustment, you will pay what you owe for 2024/25 in equal instalments throughout 2026/27 each time that you are paid. If you are paid monthly, you will effectively pay your bill in 12 monthly instalments.

Advantages and disadvantages

Paying tax through your tax code allows you to pay it later – instead of having to settle the bill by 31 January 2026, you pay it in equal instalments over the 2026/27 tax year. This provides a cashflow benefit and removes the need to find the funds to pay the bill in one hit.

Paying your bill through your tax code also provides an automatic interest-free instalment plan. Unlike a Time to Pay arrangement, you do not need to set it up, and there is no interest to pay either.

However, having your tax deducted from your pay will reduce your take-home pay, so it may not be for everyone.

In her tax-raising Budget on 26 November 2025, the Chancellor announced that the dividend ordinary rate and the dividend upper rate are to rise by two percentage points from 6 April 2026. This will affect director/shareholders in personal and family companies who extract profits in the form of dividends.

How dividends are taxed

Dividends have their own tax rates, which are lower than the standard income tax rates. Dividend income which is not sheltered by the personal allowance or the dividend allowance is treated as the top slice of income. It is taxed at the dividend ordinary rate where it falls in the basic rate band, at the dividend upper rate where it falls in the higher rate band and at the dividend additional rate where it falls in the additional rate band.

For 2025/26, the dividend ordinary rate is 8.75%, the dividend upper rate is 33.75% and the dividend additional rate is 39.35%.

From 6 April 2026, the dividend ordinary rate rises to 10.75% and the dividend upper rate rises to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

All individuals are entitled to a dividend allowance, which is £500 for 2025/26 and remains at this level for 2026/27. The dividend allowance acts as a nil rate band; dividends sheltered by the allowance are tax-free. However, it uses up part of the band in which it falls.

Impact of the rise

Where profits are extracted as dividends and the shareholder is a basic or higher rate taxpayer, they will pay an additional £20 in tax on every £1,000 of dividends paid in 2026/27 as compared to 2025/26. A shareholder taking £50,000 of dividends a year will pay an additional £1,000 in tax.

Additional rate taxpayers are unaffected by the change.

Beating the rise

Where a personal or family company has retained profits, consideration should be given to paying dividends before 6 April 2026 if the tax hit will be lower than if the dividend is paid on or after that date. However, if dividends have already been paid to use up the basic rate band, there is no point paying a dividend if it would be taxed at the dividend upper rate if paid before 6 April 2026 and at the dividend ordinary rate if paid on or after that date; 10.75% is lower than 33.75%.

In a family company scenario with an alphabet share structure, to minimise the total tax paid on profits extracted as dividends, make sure shareholders’ dividend allowances and basic rate bands are used up before paying dividends taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as employer pension contributions or tax-free benefits in kind.

Unincorporated landlords pay income tax on the profits of their property rental business. This is currently at the normal income tax rates. However, this is set to change from 6 April 2027 when property income will have its own tax rates. The bad news is that the new property tax rates will be two percentage points higher than the current income tax rates.

Current rates and new rates

For 2025/26 and 2026/27, unincorporated landlords pay income tax on their rental profits at 20% where it falls in the basic rate band, at 40% where it falls in the higher rate band and at 45% where it falls in the additional rate band.

For 2027/28onwards, rental profits will be taxed at the new property tax rates which are, respectively 22%, 42% and 47%.

The new property tax rates only apply to landlords running an unincorporated property business; corporate landlords will continue to pay corporation tax on their profits.

Interest and finance costs

Where unincorporated landlords incur interest and finance costs, for example, mortgage interest, relief is given as a basic rate tax reduction.

When the new property tax rates come into effect from 6 April 2027, the rate used to calculate the tax reduction will be the property basic rate of 22%.

Allocation of personal allowance

The rules which determine the order in which income is taxed are also changing from 6 April 2027. Currently, allowances and reliefs are allocated so as to give the best result for the tax year.

For 2027/28 onwards, this will no longer be the case. The personal allowance will first be set against employment income, trading income and pension income (taxable at 20%, 40% and 45%) rather than property or savings income (taxable at 22%, 42% and 47%).

Mitigating the effects

Provisions contained in the Renters’ Rights Act 2025 will limit a landlord’s ability to increase rent to compensate for the tax rise. Where the landlord is increasing rents before these provisions bite, they may wish to factor in the forthcoming tax rises.

The cash basis is the default basis of accounts preparation for unincorporated landlords with rental income of less than £150,000. Under the cash basis, income is taxed when received and expenses relieved when paid.

Where possible, landlords should advance income, so it is received before 6 April 2027 to save 2% in tax. In contrast, they could consider delaying expenses until on or after 6 April 2027 so that relief is given at the new (higher) property rates.

All things being equal, receiving a pay rise which takes your income over £100,000 would be seen as a cause for celebration. However, all things are not equal, and as press reports attest, some people would rather turn down a promotion or cut their hours than take their earnings over £100,000.

We explain why this is.

Reason 1 – loss of the personal allowance

Individuals have a personal allowance of £12,570, allowing them to earn £12,570 before they pay tax. However, once their income exceeds the personal allowance income limit, their personal allowance starts to reduce. The personal allowance income limit is £100,000, unchanged since its introduction.

Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. A person with adjusted net income of £110,000 will only receive a personal allowance of £7,570 (£12,570 – ((£110,000 – £100,000)/2)).

Once a person’s adjusted net income reaches £125,140, their personal allowance is lost entirely so that they pay tax from the first pound that they earn.

The combined effect of the loss of the personal allowance and paying tax at the higher rate of 40% means that the marginal rate of tax between £100,000 and £125,140 is 60%. Add to that National Insurance of 2% and possibly student loan deductions of 9% or 15% and maybe pension contributions, the taxpayer does not actually keep much of the money that they earn between £100,000 and £125,140. Easy to see why some may deem the extra hours or workload as not being worthwhile.

Once income reaches £125,140, the marginal tax rate drops to 45% (the additional rate).

Reason 2 – loss of free childcare and tax-free top-up

Working parents may be able to receive free childcare for children from the age of nine months to four years for 30 hours a week for 38 weeks of the year. This is valuable. However, it is only available as long as neither partner has adjusted net income of more than t£100,000. Thus, once income reaches £100,000, free childcare is lost.

Working parents may also be able to benefit from the Government’s tax-free childcare scheme which provides up to £2,000 a year towards childcare costs (and up to £4,000 a year if the child is disabled). Under the scheme, the Government provides a £2 tax-free top-up for every £8 that the parents deposit in a dedicated account, up to the £2,000/£4,000 maximum top-up. However, as with free childcare, tax-free childcare is not available where either partner earns £100,000 or more.

For parents with young children, earning £100,000 or more will significantly increase their childcare costs.

Beating the system

There is a way to have the benefit of earning more than £100,000 a year and keeping your personal allowance, free childcare and the tax-free top-up. This is by making personal pension contributions to reduce your adjusted net income to below £100,000. You will still get the benefit of the money eventually, while retaining the personal allowance and childcare benefits.

The more altruistic can make charitable donations to reduce adjusted net income to below £100,000, which works in the same way.

Corporate landlords will not be hit by the property tax rises that will apply to unincorporated landlords from 6 April 2027; they will continue to pay corporation tax on their rental profits, the rates of which are unchanged. However, this does not mean that their shareholders are immune from the Budget tax rises. Where profits are extracted from a property company in the form of dividends, the recipient shareholders will be affected by the increases in the dividend tax rates applying from 6 April 2026.

Profit extraction

Although the profits of a property company are liable to corporation tax, the rates of which are lower than the income tax rates and the new property tax rates applying from 6 April 2027, if the shareholders want to use those profits personally, they will need to extract them. There are various ways in which this can be done, but a popular strategy where the personal allowance is available is to pay a salary equal to the personal allowance and to extract further profits as dividends.

All taxpayers have a dividend allowance, which is to remain at its current level of £500 for 2026/27. Dividends sheltered by the dividend allowance are taxed at 0%, although it should be remembered that the allowance uses up part of the tax band in which it falls.

Thereafter, dividends, which are treated as the top slice of income, are taxed at the dividend ordinary rate where they fall within the basic rate band, at the dividend upper rate where they fall within the higher rate band and at the dividend additional rate where they fall in the additional rate band.

Currently, the ordinary rate is 8.75%, the upper rate is 33.75% and the additional rate is 39.35%. From 6 April 2026, the ordinary rate rises to 10.75% and the upper rate to 35.75%. There is no change in the dividend additional rate which remains at 39.35%l

The rise will mean that basic and higher rate taxpayers will pay an extra £20 in tax on each £1,000 of dividends that they receive. A shareholder taking £50,000 in dividends will pay an additional £1,000 in tax.

Beating the rise

Where a property company has retained profits, consideration could be given to paying a dividend before 6 April 2026 where this will mean that the tax payable on that dividend will be at a lower rate than if the dividend is paid on or after 6 April 2026.

Going forward, where the company has several shareholders and an alphabet share structure is in place, the overall tax hit on profits extracted as dividends will be minimised by ensuring that all shareholders’ dividend allowances and basic rate bands are used before declaring dividends that will be taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as tax-free benefits and employer pension contributions.

A new council tax charge, the High Value Council Tax Surcharge (HVCTS), is to be introduced in April 2028. The charge, dubbed ‘the mansion tax’, will be a recurring annual charge. It will apply to owners of residential properties worth more than £2 million in 2026 and will be levied on the homeowner rather than on the occupier. Social housing will be outside the scope of the charge.

Council tax, which was introduced in 1993, taxes domestic property to provide money to fund local services. Properties are grouped into eight valuation bands, based on property values in 1991. Local authorities set the charge for each band.

Under the HVCS, properties worth at least £2 million will be placed in bands based on their property values. The amount of the annual charge will depend on the band into which the property falls. The initial rates are set out below. The charges will increase each year from 2029/30 in line with increases in the CPI.

The charge will be administered by local authorities alongside council tax.

The Valuation Office are to undertake a targeted valuation exercise to identify properties valued at £2 million and above. It is expected that less than 1% of properties in the UK will fall within the scope of the HVCS.

It is interesting that it is the value of the property that determines the contribution to public services rather than the number of people using those services. Two people in a £2 million house are unlikely to use more local services than five people in an £800,000 house.

The charge takes no account of average property values, the amount of equity in a property and the original purchase cost, or the income of the occupants. Many fairly normal family homes in London are worth at least £2 million – it is questionable whether anyone would regard a three-bed semi as a mansion.

Where a property was purchased many years ago and is now worth more than £2 million, the owners will not necessarily have the income level now which would support the purchase of a £2 million property. This may be the case for elderly people who have lived in their home for a long time. However, the factsheet published on the HVCTS states that the Government will ensure that a support scheme is in place for those who may struggle to pay the charge but note that ‘it is important this scheme is targeted at those who need it most’.

The Government are to consult on the details of the charge in early 2026. Support for those struggling to pay and a full set of reliefs and exemptions will form a key part of the consultation. Consideration will also be given to properties with more complex ownership structures, such as those owned by companies, trusts, partnerships and funds. The consultation will also address the treatment of those required to live in a property as a condition of their job.

The 2025/26 tax year comes to an end on 5 April 2026. If you are thinking of selling assets that may realise a gain and have yet to use your 2025/26 capital gains tax annual exempt amount, it may be worth making the disposal before the end of the current tax year.

All individuals have an annual exempt amount for capital gains tax purposes. Net gains for the year (after the deduction of allowable losses for the tax year) are free of capital gains tax where they are sheltered by the annual exempt amount. For 2025/26, it is set at £3,000 and is worth £540 to a basic rate taxpayer and £720 to a higher rate taxpayer.

If the annual exempt amount is not used in the tax year, it is lost.

Example

Ben is thinking of selling two lots of shares, one that will realise an expected gain of £4,000 and one that will realise an expected gain of £5,000. He is having a new kitchen in June 2026 and needs to sell the shares to finance the project.

Ben is a higher rate taxpayer. He has not used his annual exempt amount for 2025/26.

If Ben waits until May to sell the shares, he will realise a gain of £9,000 in the 2026/27 tax year. Setting his 2026/27 annual exempt amount of £3,000 against the gain reduces the chargeable gain to £6,000 on which he will pay capital gains tax at 24%, giving rise to a tax bill of £1,440.

However, if Ben sells one lot of shares before 6 April 2026 realising a gain of £4,000 against which he can set his annual exempt amount for 2025/26 of £3,000, this will reduce the chargeable gain to £1,000 on which he will pay capital gains tax of £240.

If he sells the remaining shares after 5 April 2026, he will be able to set his 2026/27 annual exempt amount of £3,000 against the gain of £5,000, reducing his chargeable gain to £2,000 on which he pays tax of £480.

By selling some of the shares in 2025/26 rather than in 2026/27 and using his annual exempt amount for 2025/26 which would otherwise have been wasted, Ben is able to reduce the capital gains tax payable on the disposal of his shares by £720 from £1,440 to £720.

Spouses and civil partners

Spouses and civil partners can take advantage of the special rules that allow them to transfer assets or a share in an asset between them at a value that gives rise to neither a gain nor a loss. This can prevent wasting one spouse or civil partner’s annual exempt amount.

Example

Julie is planning on selling some shares in March 2026 which would give rise to a gain of £7,000. She has not used her annual exempt amount for 2025/26, nor has her wife Jane. Jane is not planning on making any disposals in 2025/26.

If Julie simply sells her shares, she will realise a gain of £7,000, of which £3,000 will be sheltered by her annual exempt amount. If Julie is a basic rate taxpayer, she will pay tax of £720 on the chargeable gain of £4,000 (£4,000 @ 18%).

However, if she transfers 3/7th of her shares to Jane which Jane then sells in March 2026 the resulting gain of £3,000 will be covered by her annual exempt amount and no capital gains tax will be payable. Following the transfer, Julie will realise a gain of £4,000 of which £3,000 is covered by her annual exempt amount, reducing her chargeable gain to £180. By making use of Jane’s annual exempt amount, the couple save tax of £540.

In difficult trading conditions, a sole trader may realise a loss rather than a profit. Where this is the case, it is important that the trader realises that they may be able to claim tax relief for that loss. There is more than one way in which this can be done, and the best route will depend on the trader’s other income and personal circumstances.

The relief must be claimed.

Option 1: against other income of the same or previous tax year

Where the trader has other income, such as income from employment, property or investments, they can claim to set the loss against their income of the same tax year and/or the previous tax year. The trader can make a claim for one or both of these years, depending on the amount of the loss, and the claims can be made in any order.

It is important to note that it is not possible to make a partial claim, for example to prevent the loss of personal allowances. A claim is not mandatory, and where it is not beneficial, for example, because personal allowances may be lost, the trader can take a different route.

Example

Joe is a self-employed decorator. In 2024/25 he made a loss of £12,300. He has a part-time job, from which he earns £14,000. In 2023/24 Joe had total income of £42,000.

If Joe opts to set the loss against his other income of 2024/25, he will waste all but £1,700 of his personal allowance. It is not possible to use only £1,430 of the loss to reduce his income to £12,570 which would be covered by his personal allowance.

However, if he sets the loss against his income of 2023/24, he will reduce his income to £29,700, saving £2,460 in tax.

Option 2: extension to capital gains

Where the taxpayer has claimed relief against other income and is unable to use all the loss, the taxpayer may be able to use the balance against capital gains of that year. Depending on the numbers, this route may result in the loss of the capital gains tax annual exempt amount, although despite this, it may still be worthwhile.

Option 3: Carry forward against future trading profits

Although conventional wisdom is to secure relief for a loss as early as possible, if a claim against other income would waste the personal allowance, it may be preferable to carry the loss forward and set it against future profits of the same trade. Where this route is taken, the loss must be set against the first available trading profits.

Opening and closing years

Additional claims are available for losses made in the opening and closing years of a trade.

A loss made in the first four years of a trade may be set against an individual’s income for the previous three tax years, setting the loss against the earliest of those years first.

Where a loss is made in the final 12 months of a trade (a terminal loss), it may be set against profits from the same trade in the same tax year as the loss and in the previous three tax years. The loss is relieved against the profits of a later year first.

Loss relief cap

The amount of loss relief that a person can claim in any one tax year is in certain cases capped at the higher of £50,000 and 25% of their adjusted net income for that tax year.

For UK unincorporated businesses, the cash basis is now the default method for calculating taxable profits. Under this basis, income is taxed when received and expenses are deducted when paid, therefore there is no need to take into account debtors and creditors, prepayments or accruals. A further advantage is that, as income is only taken into account when received, relief for bad debts is given automatically. Capital expenditure is deducted as an expense, unless the capital expenditure is of a type for which relief by deduction is specifically disallowed under the cash basis (e.g. cars). Most sole traders and partnerships comprising entirely of individuals automatically fall within the cash basis, unless they opt out.

However, not every business can use the cash basis and, even where it is available, some may deliberately choose to remain on the accrual basis.

Excluded businesses

Under the accrual basis of accounting, income and expenses are recorded when earned or incurred, regardless of when the money is received or paid. The accrual basis must be used where a business is excluded from being allowed to use the cash basis. In practice, this applies where a business falls into one of HMRC’s excluded categories. If a trader is excluded, the accrual basis is not a choice – it is compulsory. Common examples of excluded traders include limited companies and LLPs. Certain farming and creative businesses using specific tax reliefs (e.g. profit averaging or herd basis) are also not eligible, neither are partnerships that include a corporate partner. Businesses where the structure or circumstances mean that cash accounting is not appropriate are also required to use the accrual basis, e.g. where financial statements are prepared in accordance with International Financial Reporting Standards.

Opting out

However, a business does not have to follow the cash basis. For some businesses, preparing accounts on the accrual basis may be beneficial.

A business may wish to opt out if the business:

Works on long-term projects or has significant work in progress. The accrual method helps in tracking costs and revenues throughout the project lifecycle, ensuring better financial management and planning.

Holds a large volume of stock. Such high stock businesses often have significant fluctuations in the level and amount of stock. The accrual basis enables the business to calculate profit margins and stock turnover ratios more accurately.

Gives customers credit. Accounting on the cash basis will not show any bad debts whereas the accrual basis does.

Buys assets or stock on credit. Under cash accounting, such assets are not eligible to claim tax relief until payment is made which could significantly delay tax relief on large purchases.

Plans to incorporate. Accounts prepared using the cash basis will need to align with company accounting using the accrual basis from the first year of incorporation. Accounts prior to incorporation will need to be carefully prepared to ensure no overlap in figures.

Needs financial statements for loans or grants. Lenders and investors usually require financial reports prepared on an accrual basis because this basis shows the financial health of the business more clearly. The cash basis does not show debtors or creditors. If there are outstanding invoices at the year-end, then the cash flow may not be adequate and investors will want to know whether their money is secure.

Practical point

The cash basis for income tax is separate from the VAT cash accounting scheme. Therefore, a business can use the cash basis for income tax but still use the standard accrual method for VAT submission, or vice versa.

It used to be possible to report errors in a VAT return to HMRC on form VAT652. This is no longer the case; form VAT652 was withdrawn from 5 September 2025. This means that now, where an error has been made in a VAT return, the error must be corrected in one of the following ways:

• updating the next VAT return;
• making the correction online; or
• writing to HMRC to notify them of the correction.

Updating the next VAT return

An error can be corrected by making an adjustment in the next VAT return if the value of the error is £10,000 or less or if the error is between £10,000 and £50,000 and does not exceed 1% of the box 6 figure (net outputs) in the VAT return for the period in which the error was discovered.

A correction can only be made by updating the next VAT return if the error was made carelessly.

The net value of the error is the difference between the additional amount owed to HMRC as a result of the error and the additional refund due from HMRC as a result of the error.

Correcting the error online

If the value of the error is more than £50,000, is between £10,000 and £50,000 and more than 1% of the box 6 figure in the VAT return  for the period in which the error was discovered or was made deliberately, it must be notified to HMRC rather than being corrected in the next VAT return. The default route for doing this is to make the correction online. The trader will need to sign into their Government Gateway account.

When reporting the error online, the following information must be provided:

• how each error arose;
• the VAT accounting period in which it occurred;
• whether it was an input tax error or an output tax error;
• the VAT underdeclared or overdeclared in each VAT period;
• how the VAT over or under declaration was calculated;
• whether any of the errors resulted in the payment of an amount to HMRC that was not due; and
• the total amount to be adjusted.

Refund claims can only be accepted where all the above information is provided.

Notifying in writing

If the trader is unable to use the online service, they will need to notify HMRC in writing of the errors if they are of a type that cannot be corrected in the next VAT return. The letter must include the trader’s VAT registration number and the information listed above. It should be sent by post to:

BT VAT

HMRC

BX9 1WR

Time limit

Errors should be corrected as soon as possible, but time limits do apply.

The time limit for correcting errors in a VAT return is four years from the end of the prescribed period in which the error occurred where the error related to output tax or over-claimed input tax, and four years from the due date of the return for the prescribed accounting period where the error related to under-claimed input tax.

The four-year time limit does not apply to deliberate errors.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is mandatory from 6 April 2026 for self-employed traders and landlords whose combined gross trading and business income in 2024/25 is £50,000 or more. Those within MTD for ITSA must maintain digital records and submit quarterly updates and a final declaration to HMRC electronically using software compatible with MTD for ITSA.

As the name suggests, MTD for ITSA relies on digital record-keeping and communication. HMRC recognise that not everyone is able to operate in a digital world and those who they accept as being ‘digitally excluded’ can apply for an exemption from MTD for ITSA.

Meaning of ‘digitally excluded’ - HMRC acknowledge that there are various reasons why a person may consider themselves digitally excluded. For example, a person may be digitally excluded because:

• their age, a health condition or a disability prevents them from using a tablet, computer or smartphone to keep digital records and to submit returns to HMRC;
• they are a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records and they do not use a computer, tablet or smartphone for business or personal use; or
• they cannot get internet access at their home or business because of their location, and they are unable to get access at a suitable alternative location.

However, HMRC will not accept an application for exemption from MTD for ITSA if the only reason for the application is one of the following:

• the person previously filed a paper tax return;
• the person is unfamiliar with accounting software;
• the person only has a small number of records to create each year; or
• the person will spend extra time or incur additional costs as a result of complying with MTD for ITSA.

Where a person has an existing exemption from MTD for VAT because they are digitally excluded, providing that the person’s circumstances have not changed, HMRC will accept that they are also exempt from MTD for ITSA.

Applying for an exemption - To apply for an exemption from MTD for ITSA on the grounds of digital exclusion, a person will need to write to HMRC ahead of their MTD for ITSA start date. They must provide the following information:

• their National Insurance number;
• their name and address;
• details of how they currently submit their returns (including the use of an agent or other person to submit them on their behalf);
• the reason that they think that they are digitally excluded, including information in support of their claim;
• whether they have an accountant or agent and what they do for them; and
• any additional needs that they have.

An application can be made by an agent on behalf of someone who is digitally excluded.

It should be noted that if a person is unable to use digital returns themselves, for example because of age or disability, but they have an agent or someone else who can keep digital records and file digital returns on their behalf, an exemption will not be forthcoming.

The application should be sent to: Self Assessment, HMRC, BX9 1AS

Where a person is already exempt from MTD for VAT because they are digitally excluded, they will also need to write to HMRC to apply for an exemption from MTD for ITSA, providing their National Insurance number, their VAT registration number and the reason that they are digitally excluded from submitting their VAT returns using software that is compatible with MTD for VAT. An agent can apply for an exemption on a client’s behalf.

Other exemptions

The following are automatically exempt from MTD for ITSA and are unable to sign up voluntarily:

those completing a tax return as a trustee, including a trustee of a charitable trust or a non-registered pension scheme;

a person who does not have a National Insurance number on 31 January before the start of the tax year;

a person completing a tax return as the personal representative of someone who has died;

a Lloyd’s underwriters in respect of their underwriting activity; and

a non-resident company.

Anyone in the above groups does not need to apply for an exemption as it is automatic.

HMRC publish fuel-only rates which are only of relevance where an employee has a company car. The rates, which are updated quarterly, can only be used in two situations:

• to make tax-free reimbursements to employees who meet the cost of business travel in their company car; and
• to repay the cost of fuel provided or paid for by their employer and used for private journeys in a company car.

The rate depends on the fuel type and, where relevant, the engine size. From 1 September 2025 onwards, the rate for electric cars also depends on whether the car was charged at the employee’s home or using a public charger, with a higher rate applying to miles on a public charge.

The rates, which are updated quarterly on 1 March, 1 June, 1 September and 1 December, are available on the Gov.uk website at www.gov.uk/guidance/advisory-fuel-rates.

Reimbursing the cost of business journeys

Where an employee meets the cost of fuel for a business journey in a company car, they will usually be able to reclaim this from their employer. The reimbursement is generally made in the form of a mileage allowance.

Where the employer reimburses the employee using the advisory fuel rates, the reimbursement can be made free of tax and National Insurance. HMRC will allow higher amounts to be paid tax-free where the actual cost exceeds the advisory rate, and the employer can substantiate this. In the absence of such evidence, if the amount paid exceeds the amount payable at the advisory rate, the excess is earnings for both tax and National Insurance.

From 1 September 2025 onwards, where the car is an electric car, the tax-free amount depends on whether the car was charged at home or using a public charger. Where a business journey involves both types of charge, an apportionment is necessary as shown in the example below.

Example

Laura has an electric company car. She visits a customer on 27 November 2025 undertaking a business journey of 154 miles. She charged her car at home the previous Sunday. En route to the customer, she stops at a service station 65 miles from home and charges her car. She completes the journey to the customer and home without needing a further charge.

Her employer uses the advisory fuel rates to reimburse Laura, paying her 8 pence per mile for the 65 miles on the home charger and 14 pence per mile for the remaining 89 miles on the public charger, a total reimbursement of £17.66.

Repaying fuel for private mileage

A fuel benefit charge applies if the employer meets the cost of fuel for private journeys in a company car unless the car in question is an electric car. The charge can be significant. However, the tax charge can be avoided if the employee makes good the cost of all fuel used for private journeys. The repayment can be made using the advisory fuel rates. To be effective at cancelling the charge, the employee must ‘make good’ before 1 June following the end of the tax year if car and fuel benefits are payrolled and by 6 July following the end of the tax year if the employer would report the benefit via the P11D process. It should be noted that the charge is only eradicated if the employee makes good the cost of all fuel for private journeys; there is no reduction in the charge for a partial reimbursement.

As far as benefits in kind are concerned, there were both winners and losers in the Budget.

Winner – easement for plug-in hybrid electric vehicles

Under the company car tax rules, the taxable amount depends predominantly on the list price of a car and its CO2 emissions.

From 1 January 2025, new European Union and United Nations emissions standards were introduced which found the CO2 emissions for plug-in hybrid electric vehicles (PHEVs) to be higher than previously thought. Normally, an increase in the CO2 emissions figure would mean an increase in the taxable amount.

However, an easement will mean that, for a limited period, the amount charged to tax under the benefit in kind rules will be determined by reference to a nominal CO2 emission figure of 1g/km. Where a car’s CO2 emissions are between 1 and 50g/km, the appropriate percentage depends on the car’s electric range.

To be eligible for the easement the following conditions must be met:

• the vehicle was first registered on or after 1 January 2025;
• its CO2 emissions figure is 51g/km or above;
• it was registered under an emissions standard other than Euro 6d-ISC-FCM or Euro 6e; and
• the car’s electric range is at least one mile.

The easement will apply retrospectively from 1 January 2025.

Anyone accessing an eligible PHEV company car before 6 April 2028 will be able to benefit from the easement until the arrangements are varied or renewed or, if earlier, 5 April 2031.

Winner 2 – expansion of workplace benefits relief

Currently, reimbursed expenses are only tax-free if the employee would be entitled to a tax deduction had they met the cost themselves.

However, from 6 April 2026, employers who reimburse the costs of eye tests, flu vaccines and home working equipment will be able to do so tax-free.

Winner 3 – delayed start to ECOS changes

Legislation to bring certain cars made available to employees under an employee car ownership scheme (ECOS) within the tax charge for company cars had been due to come into effect on 6 April 2026. The changes will not be introduced until 6 April 2030.

Losers – removal of relief for homeworking expenses

An administrative easement that allowed employees to claim a flat rate deduction of £6 per week for the additional costs of working from home is being removed from 6 April 2026. This is worth £124.80 to a higher rate taxpayer and £62.40 to a basic rate taxpayer.

Employers will still be able to make a tax-free payment of £6 per week for additional homeworking costs, and employees will still be able to claim a deduction for the actual extra cost (although this will involve more work).

A director’s loan account is simply a means of keeping track of transactions between the director and the company of which they are a director. Where the company is a personal or family company, the director may borrow from the company or lend money to the company. Similarly, the director may meet expenses of the company, or the company may pay the director’s personal bills. These transactions are recorded in the director’s loan account. Dividend or salary payments may also be credited to the account.

If the director’s account is overdrawn at the end of the company’s accounting period or at any point during the tax year, there may be tax implications to address.

Close companies

If the company is close, as personal companies and most family companies are, there will be tax consequences for the company if the director’s account is overdrawn at the company’s year end. Broadly, a close company is one that is under the control of five or fewer participators or any number of participators if those participators are directors. A participator is someone who has an interest in the capital or income of the company.

The action that the company needs to take in respect of an overdrawn director’s loan account depends on whether the account is still overdrawn at the corporation tax due date, which is nine months and one day after the end of the accounting period.

If the loan has been repaid within this time frame, the company must disclose the loan on form CT600A when they prepare their corporation tax return, notifying HMRC of the amount that was outstanding at the end of the accounting period and the date(s) on which the repayments were made.

If the account remains overdrawn at the corporation tax due date, the company must pay section 455 tax on the outstanding loan balance along with their corporation tax. Anti-avoidance provisions exist to prevent the loan being repaid and then reborrowed in a bid to avoid the section 455 charge.

Section 455 tax

The company must pay section 455 tax on the amount by which the director’s account remains overdrawn nine months and one day after the company year end. The rate of section 455 tax is aligned with the upper dividend rate (currently 33.75%). The tax is paid with the corporation tax but crucially is not corporation tax.

Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the accounting period in which the loan is repaid.

Clearing the loan, whether by an injection of cash, declaring a dividend or by paying a bonus, will prevent a section 455 liability from arising. However, this will not always be the best option. If the loan is cleared by a dividend or a bonus, this will trigger tax and (in the case of a bonus) National Insurance liabilities which may be greater than the section 455 tax. It may be cheaper to pay the section 455 tax and to clear the loan at a later date when it can be done more tax efficiently.

Benefit in kind charge

If the loan balance exceeds £10,000 at any time in the tax year, a tax charge will arise under the benefit in kind provisions by reference to the difference between interest on the loan at the official rate and that paid by the director (if any). The employer will also pay Class 1A National Insurance on the taxable amount.

An increasing number of people live on cruise ships. They sell or rent out their main residence and spend their days living on the waves. The benefits are various – no meals to get yourself, entertainment every night, different ports to discover, even your washing done. You can even own a ‘villa at sea’, allowing residency aboard a ship for the duration of its life (or a minimum of 15 years). But what are the tax implications, if any? Unfortunately, UK tax liability is primarily determined by tax residence, not lifestyle, therefore a person may live on a ship and still be UK tax resident.

The UK tax system

Once residency is established, UK residents are taxed on their worldwide income/gains whereas non-UK residents are taxed only on UK-sourced income (rents, dividends, bank interest) and UK gains (property disposals); foreign income/gains are untaxed in the UK for non-UK residents.

Statutory residence test (SRT)

Determination of UK tax residence can be complicated and someone ‘living’ on a cruise ship must still assess their residence using the same rules as anyone else. Living on a cruise ship can support a non-UK resident tax position, but only if the steps comprising the SRT are not satisfied.

The first step determines if an individual will be considered automatically resident.

The second step determines if an individual will be considered automatically non-resident. There are three automatic overseas tests under this step and if any one of these tests is met the individual will be deemed non-UK resident for that year.

The third step considers whether the individual meets either the second or third automatic UK tests. If any one of these is met the individual will be deemed UK resident for the year.

The fourth and final step determines if an individual will be considered resident or non-resident under the ‘sufficient ties’ test.

First step

Under this test an individual will be automatically UK tax resident if:

• they spend 183 days or more in the UK in a tax year; or
• there is at least one period of 91 consecutive days (at least 30 of which fall in the relevant tax year) when their only home is in the UK and they spend a sufficient amount of time in that home in any one year.

Second and third steps

If the answer to the above is ‘no’, that is not the end of the process. The next step is to consider the automatic overseas tests which determine UK residence if less than 16 days were spent in the UK, or the individual was UK resident in one or more of any of the previous three tax years, or more than 46 days were spent in the UK (and the individual was non-resident in the previous three tax years) .

Fourth step

If the above tests fail to give a clear answer, the ‘sufficient ties test’ applies, combining days spent in the UK with ties (connections). Ties include the following:

Family tie: spouse, civil partner, cohabiting partner or minor child (under 18) is UK tax resident.

Accommodation tie: UK accommodation (owned, rented or belonging to a friend) available for more than 91 consecutive days and more than one night was spent there. The test is satisfied in the case of a close relative's home if more than 16 nights are spent there during a tax year. Hotels/Airbnb usually qualify if long-term.

Work tie: more than 40 days working more than three hours in the UK during the tax year.

90-day tie: spending more than 90 midnights in the UK in either of the previous two tax years (not combined).

Country tie: UK is the country in which the individual spends most days during the tax year.

Therefore, to be non-UK resident, the individual on the cruise ship must:

• limit UK days according to the SRT day-count; and
• reduce UK ties, such as:

• • a UK home;
  • family in the UK;
  • substantive UK work; and
  • significant UK presence in prior years

Merely selling a house and living on a ship is not sufficient to gain non-UK residency if other UK ties remain.

Practical point

Note that time spent on a cruise ship does not count as time outside the UK if the ship is in UK territorial waters at midnight on any counted day. Therefore, a cruise away from the UK should be the preferred travel option to avoid tax complications (e.g. a cruise of the Southern Hemisphere starting in the USA and ending in the USA).

The Renters’ Rights Act 2025 received Royal Assent on 27 October 2025. The Act is not yet in force; the first tranche of provisions come into effect on 27 December 2025 (two months from the date of Royal Assent). Some key provisions, including the abolition of section 21 evictions, an end to fixed-term tenancies, restrictions on the payment of rent in advance and rent increases limited to once a year, take effect from 1 May 2026. The remaining provisions will be brought in progressively by statutory instrument.

Nature of the Act

The Act grants additional rights to tenants and imposes further obligations and costs onto landlords.

Under the Act, landlords will be required to sign up to a new private rented sector database. Sign-up will be online, and landlords will be required to pay to register.

Landlords will also be required to comply with a Decent Homes Standard which may require them to undertake work to ensure that their property complies with the standard.

In the future, landlords may also need to ensure that their property has an EPC rating of C or above.

Tenants will have greater rights to have a pet in their property; landlords cannot reasonably refuse such requests. Although landlords can require an additional deposit to cover pet damage, this is capped at three weeks’ rent. Where the cost of pet damage exceeds this, the landlord will need to take court action to recover this and may well end up out of pocket.

Landlords also face restrictions on rent increases and reduced grounds for retaining possession of their property. No fault section 21 evictions are to be abolished, but the landlord will remain able to recover possession should they wish to sell or live in the property themselves. However, landlords will need to give four months’ notice rather than the current two. Fixed-term tenancies will be banned, and all tenancies will become periodic by default. To end bidding wars, landlords will not be able to let the property for more than the advertised rent and will not be able to accept more than one month’s rent in advance. They will not be able to increase the rent more than once a year, and must give two months’ notice of any increase, which can only be to current market rents. These provisions will potentially reduce the landlord’s earning capacity.

Landlords who fail to comply with the Act may face financial penalties.

Tax relief for additional costs

Normal rules apply to determine whether tax relief is available for additional costs imposed on landlords as a result of the Act. Costs can be deducted in computing the profits of the property rental business if they are revenue in nature and incurred wholly and exclusively for the purposes of the property rental business. Additional management fees for ensuring properties comply with the Act and registration fees for signing up to the database fall into this category.

If the landlord has to undertake work on the property to meet the decent homes or EPC standards, the relief route will depend on the extent of the work. Improvement works are capital in nature and relief would be given when calculating the capital gain or loss on the disposal of the property. If the works are in the nature of repair rather than improvement, such as redecoration, the costs can be deducted when calculating the rental profit. Where it is necessary to replace domestic items, for example, if a cat scratches a sofa, to the extent that the cost is not met by tenants’ insurance, the landlord can deduct the replacement cost of a like-for-like item.

It is becoming increasingly noticeable that after a purchase is made in a shop or restaurant, the customer is asked ‘Do you want a receipt?’. Answering ‘no’ may help reduce paper, but business customers intending to claim against tax should always answer such a question in the affirmative. Keeping receipts is not a legal requirement for most personal transactions as consumer rights remain valid without one, other evidence (e.g. bank statements) proving that the transaction has taken place. However, for businesses, the situation is very different when claiming expenses against tax.

HMRC’s stance

Receipts and invoices are the primary evidence of expenses incurred relating to business activities. Without receipts, HMRC may disallow expense deductions and, if missing or inaccurate records are found in an investigation, businesses may face significant fines or additional scrutiny.

Recent tax cases highlight HMRC’s increasing insistence on proper documentation. The tax case of Mediability v HMRC [2023] UKFTT 315 (TC) underlines the importance of receipts, providing a real-world example of how a lack of correct evidence can undermine expense claims. In this case the taxpayer attempted to justify business expenses using solely bank statements without supporting receipts. The Tribunal ruled that this was insufficient, and many of the claims were disallowed.

The tax case of the actor, Tim Healy, in T Healy v HMRC [2012] TC01940 is another case which shows that inadequate record-keeping (particularly missing receipts) can cost taxpayers valuable deductions. Mr Healy claimed tax deductions for accommodation, subsistence and taxi fares incurred whilst working in London. Some claims were allowed, but crucially his subsistence expenses and taxi costs claims were not because he could not provide sufficient evidence (i.e. receipts) to show whether the expenses were business related.

Electronic storage

For businesses dealing with the final customer (e.g. restaurants and shops), paper receipts will need to remain. For other businesses, HMRC believes the way of the future is that where paper receipts are issued, businesses wishing to claim tax relief for such expenses must scan and store receipts digitally. Making Tax Digital is the first step towards digital record-keeping.

E-invoicing v paper

Many B2B businesses are moving away or have already moved away from paper receipts, replacing them with e-invoicing.

E-invoicing is the digital exchange of invoice information directly between buyers and customers or suppliers. Unlike traditional paper invoices or PDF documents sent by email, the e-invoicing process typically begins with the supplier creating an invoice using specialised software. The e-invoice is then transmitted electronically to the customer's system, which automatically receives and processes it. The invoice data is integrated into the customer's accounting system, eliminating the need for manual data entry and paper handling.

Mandating e-invoicing

In the Autumn Budget 2025, the UK government confirmed plans to introduce mandatory e-invoicing for all VAT invoices from April 2029. Under this scheme, VAT registered businesses will be required to generate, transmit and store invoices in specific electronic formats that tax authorities can automatically process. A detailed implementation roadmap will be published as part of the 2026 Budget.

E-invoicing is not HMRC’s initiative. Many EU countries have already mandated e-invoicing, with others, notably Belgium, France and Poland, introducing implementation in 2026. Different methods are being used by each country and HMRC is looking closely at the success or otherwise of the methods used. For example, Belgium plans to focus initially on how invoices are sent, keeping reporting separate, and France will use approved private platforms to handle invoice exchange, thereby introducing a new layer of digital reporting. Poland intends to tie e-invoicing directly to real-time tax reporting where invoices are sent to the government’s tax platform. Under this process, the system will check each invoice, assign it an official reference number and send to the customer. As every invoice will move through the government’s system, the tax office automatically receives the data.

It is reasonable to assume that if a person pays too much tax, HMRC will automatically send the overpayment back to them. Unfortunately, this is not the case, and where a taxpayer is due a tax refund, they may need to claim it.

Why an overpayment may arise

There are various reasons why a person may pay more tax than they need to. For example, where a taxpayer is in Self-Assessment and makes payments on account, if their circumstances change and their income falls, they may have paid more than they need to. An employee may pay too much tax if they have been given the wrong tax code, or if they have only worked for part of the tax year and not had the benefit of their full personal allowance.

Determining if you have overpaid tax

There are various routes by which a tax overpayment can come to light. For example, taxpayers who do not complete a Self-Assessment tax return and have paid too much tax will receive either a P800 calculation or a Simple Assessment letter. These are normally sent out between June and March following the end of the tax year. The letter will tell them that they have paid too much tax and how to claim a refund. If the taxpayer is within Self-Assessment, they will not receive a letter. However, they may find out that they have overpaid tax when they complete their Self-Assessment tax return. However, if HMRC’s return software is used to complete the return, remember the tax calculation does not take into account any payments that have already been made, and when these are deducted from the amount that the taxpayer owes, it may become clear that the taxpayer has paid too much.

A taxpayer can also check whether they have paid too much by looking at their personal tax account online or via the HMRC app.

Claiming the refund

Where a taxpayer needs to claim a tax refund, there are various ways in which this can be done. A claim can be made online using the tool on the Gov.uk website at www.gov.uk/claim-tax-refund. A tax refund can also be claimed through the taxpayer’s personal tax account or via the HMRC app. The refund will normally be made within five days of making the claim online.

If the tax calculation letter tells the taxpayer that they will receive a cheque, they do not need to claim a refund. The cheque will normally be sent within 14 days of the date on the letter.

Where the taxpayer is within Self-Assessment, HMRC may not issue a tax refund if a tax payment, for example, a payment on account, is due within 45 days. Instead, they will set the refund against the next tax bill.

Interest is paid on overpaid tax at a rate of 1% below the Bank of England base rate, subject to a minimum level of 0.5%.

Many digital platforms and online marketplaces in the UK, such as eBay, typically consider a seller to be a trader if they list items frequently or in bulk, or if the individual is perceived as selling items with the intent to generate profit. Being classified as a trader leads to additional fees not applied to private sellers. In addition, if 30 or more sales transactions are completed or total sales exceed approximately £1,707 after fees, eBay and other similar platforms are obliged to report such transactions and certain other information to HMRC as trading. HMRC will therefore expect such income to be declared on a self-assessment tax return. Such platforms will notify the seller that the information has been shared with HMRC.

Trading or not - The £1,707 threshold does not mean that gross earnings below this amount need not be declared as legislation requires declaration above the trading allowance of £1,000. The trading allowance allows taxpayers to earn up to £1,000 in gross trading income or what HMRC terms as ‘casual services’ (which would include selling on eBay or such activities as carers, gardening, etc.) per tax year without having to pay tax or declare to HMRC.

Differentiate – business or hobby - Many would say that such a limit would equate to being a hobby, but HMRC does not rely on any monetary test to determine trading, instead looking at the overall nature of the activity. The difficulty lies in the fact that many activities sit somewhere in between.

HMRC often refers to a set of indicators known as the ‘badges of trade’ when deciding whether an activity constitutes a business. These are not strict rules but guiding principles.

HMRC guidance (in the Business Income Manual at BIM20205) lists the badges as follows:

• 1. profit-seeking motive;
• 2. the number of transactions;
• 3. the nature of the asset;
• 4. existence of similar trading transactions or interests;
• 5. changes to the asset;
• 6. the way the sale was carried out;
• 7. the source of finance;
• 8. interval of time between purchase and sale; and
• 9. method of acquisition.

One key badge is the first ‘badge’ – whether there is the intention to make a profit. If an individual is seeking to make a profit, adjusting prices, marketing their goods or services, or expanding operations, this points strongly towards a business. Consistent losses over time, especially without a credible plan to become profitable, may suggest a hobby instead.

Another significant ‘badge’ is the frequency and regularity of transactions. A one-off or occasional sale is less likely to be considered a business, although legislation does include ‘any venture in the nature of trade’ which allows for the possibility of isolated or speculative transactions being ‘trading’. The quantity of the purchased item can also indicate a trade. The oft-cited tax case under this heading is Rutledge v CIR [1929] 14 TC 490, where the transaction involved the purchase and sale of one million rolls of toilet paper.

The nature of the asset or service is also relevant. Some items are more likely to be traded for profit (e.g. a consignment of mobile phones or the purchase of materials) with the intention of turning those items into products for sale. Items such as furniture, electronics or personal vehicles, whilst having a value, are primarily used for personal enjoyment rather than trading for profit.

The time lag between purchase and sale may be important in establishing whether there is a trade. A short period of ownership suggests trading, whereas an asset held for some time or owned for a time personally before selling is in a stronger position to argue that the asset was purchased as an investment rather than a trading activity.

Practical point - Whether a sale is undertaken for profit or enjoyment, clear records of purchases, holding periods and the intended use of items could help justify the classification of the sale as a trade or hobby to HMRC.