Expenses that landlords can deduct
Landlords must pay tax on any profit from their property rental business (although income from property of less than £1,000 a year can be ignored). In working out the profits, expenses are deducted from rental income. To ensure that the landlord does not pay more tax than is necessary, it is important to deduct all allowable expenses. Remember, the profit calculation is undertaken for the property income business as a whole, not on a property by property basis. Consequently, it does not matter whether the expenses incurred in relation to an individual property exceed the rental income from that property – it is the overall result that matters.
Cash basis - From 6 April 2017, the cash basis is the default basis for eligible landlords.
Allowable expenses - An expense is an allowable expense if it is incurred wholly and exclusively for the purposes of renting out the property.
Common examples of expenses which may be allowable include:
Interest and other finance costs - Relief is available for interest on a loan up to the value of the property when it was first let. However, the way in which relief is given for interest is changing from relief as a deduction from income to relief as a deduction at the basic rate from the tax that is due.
For 2017/18, relief for 75% of the interest costs is available as a deduction and relief for the remaining 25% as a basic rate tax reduction, for 2018/19, relief for 50% of the interest costs is available as a deduction, with relief for the remaining 50% as a basic rate tax reduction. For 2019/20, only 25% of the interest costs are deductible, with relief for the remaining 75% being given as a basic rate tax reduction. From 2020/21 relief for interest is given as a basic rate tax reduction.
Vehicles - A deduction for vehicle costs can, from 6 April 2017 onwards, be claimed using the approved mileage rates. This is generally easier than working out the deduction based on actual costs (although this method can be used if preferred). The rates are as follows:
Vehicle Rate - Cars and vans 45p per mile for first 10,000 business miles in the tax year
25p per mile for subsequent miles
Capital expenditure under the cash basis - Under the cash basis, expenditure for capital items is deductible unless specifically disallowed. Capital items for which a deduction is not allowed include land and cars.
Domestic items - Where the property is let furnished, a deduction is allowed for replacement domestic items, as long as they are of an equivalent standard to the item being replaced. A deduction is not allowed for enhancement expenditure.
Property allowance - A property allowance of £1,000 is available. Property income of less than £1,000 does not need to be reported to HMRC. Where income exceeds £1,000, the £1,000 allowance can be deducted instead of deducting actual expenses. This will be beneficial where actual expenses are less than £1,000.
Director’s loan accounts: recording personal expenses
HMRC commonly find errors in relation to directors’ loan accounts when making routine reviews of company tax returns. This article looks at the importance of maintaining proper records of cash and non-cash transactions between the company and the directors.
Directors’ personal expenses
A statutory rule states that a company may not deduct expenditure in computing its taxable profits unless it is incurred ‘wholly and exclusively’ for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur ‘personal’ expenses. However, many companies, particularly 'close' companies (broadly, one that is controlled by five or fewer shareholders (participators)), pay the personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense and may not therefore be deductible for corporation tax purposes. In such circumstances it may be appropriate for these items to be set against the director's loan account. However, establishing whether a payment forms part of a director's remuneration package can be complex.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director's loan account.
Cash transactions between the company and directors may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.
Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or mis posted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors' loan account balances may be incorrect resulting in s 455 tax being underpaid, or corporation tax relief not claimed by the company at the appropriate time.
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Capital allowances – write off small pools
Businesses which are not using the cash basis can claim capital allowances for capital items that are used in the business, such as plant and machinery, tools and equipment, and so on.
Where the annual investment allowance, which gives an immediate 100% deduction against profits is not claimed, either because the allowance has been used up or because a claim is not beneficial, for example to prevent personal allowances from being wasted, relief for qualifying capital expenditure is given by means of a writing down allowance. Allowances are given at the rate of 18% on the main pool. A reduced rate (8% before 1/6 April 2019 and 6% thereafter) applies to assets in a special rate pool, for example high emission cars and integral features.
Small pools allowance
The legislation allows the whole balance of the main pool to be written off in a single year when the value of the pool is less than £1,000. This is known as the small pools allowance. The allowance, equal to the tax written down value of the pool, is claimed instead of the writing down allowance.
The £1,000 limit is adjusted proportionately where the accounting period is more or less than 12 months (so £500 for a six-month period and £1,500 for an 18-month period).
Ben is a self-employed website designer. He prepares accounts to 31 March each year. He purchased a computer and printer in April 2017 for a total cost of £1,400. To preserve his personal allowance, he claims a writing down allowance instead of the annual investment allowance. The cost of the computer and printer is allocated to the main pool.
In 2017/18 he claims a writing down allowance of £252 (£1,400 @ 18%). The tax written down value of the pool on 1 April 2018 is £1,148.
For 2018/19 he claims a writing down allowance of £207 (£1,148@ 18%). The tax written down value is £941.
For 2019/20, Ben claims the small pools allowance and is able to deduct the remaining pool balance of £941 from his profits instead of a writing down allowance of £169. This reduces his profits for the year by £772.
Assuming Ben is a basic rate taxpayer, claiming the small pools allowance will save him tax of £154 in 2019/20.
Employees: tax-free benefits to keep them healthy
More than 25 million working days are lost annually due to work-related ill health matters, including the two leading causes of workplace absence, namely back injuries and stress, depression or anxiety. There are however, several areas where employers can use tax breaks and exemptions to help promote health and fitness at work.
Gym facilities and memberships
In-house gym facilities may be offered to employees at a convenient location to fit in around work and there will be no tax or NIC liability arising if the following conditions are satisfied:
For employers who cannot practically provide in-house gym facilities, it may be possible to negotiate favourable membership rates with a local gym or leisure centre. Whilst this may lead to a tax liability for employees, the preferential rate can often be up to 20% - 30% cheaper than the normal price, so this is still an attractive offer for employees. Depending on how the cost of the gym membership is funded, the fees will either be taxed as earnings or as a taxable benefit-in-kind. So, for example, if an employer gives the employee additional salary to pay for their gym membership, the money is taxed as earnings through PAYE. If the employer pays the gym membership direct, a taxable benefit-in-kind arises on the employee and should be reported to HMRC on form P11D, or through the payroll.
Where an employer pays for a gym membership and the employee contributes towards the cost from their net pay (after tax and NICs), this is referred to as ‘making good’. The amount of the benefit (cost of gym membership) is reduced by the amount of the contribution.
Health-screening, check-ups and recommended treatments
A tax and NIC-free exemption allows employers to fund one health-screening assessment and/or one medical check-up per year per employee.
Subject to an annual cap of £500 per employee, employer expenditure on medical treatments recommended by employer-arranged occupational health services may be exempt for tax and NICs. ‘Medical treatment’ means all procedures for diagnosing or treating any physical or mental illness, infirmity or defect. Broadly, in order for the exemption to apply, the employee must have either:
Employer-funded eye, eyesight test, and ‘special corrective appliances’ (i.e. glasses or contact lenses) may also be exempt for ta and NICs, providing certain conditions are satisfied.
Many employees struggle to fit physical activity into their busy working days but research shows that being active for just one hour can offset the potential harm of being inactive. As fitness and health issues become increasingly popular, anything an employer can do to help is likely to be most welcomed by employees.