Entrepreneur’s relief – the basics
Entrepreneurs’ relief is intended to reduce the rate of capital gains tax to a flat rate of 10% on certain qualifying business disposals. Certain aspects of the relief have recently changed.
A qualifying business disposal must include a material disposal of business assets. For these purposes, a disposal of business assets is a disposal of:
a) the whole or part of a business;
b) of (or of interests in) one or more assets in use, at the time at which the business ceases to be carried on, for the purposes of the business; or
c) one or more assets consisting of (or of interests in) shares or securities of a company.
Formerly, to qualify for relief, the assets or shares had to be held by the individual for at least 12 months to the date of disposal. However, the length of ownership condition has recently been increased such that, for disposals made on and after 6 April 2019, the taxpayer will have to have held the assets or shares for at least 24 months for the relief to apply.
Shareholders - In order for a shareholder to claim on the disposal of shares, the following conditions generally need to be met:
a) the company in which those shares are held must be the individual’s personal company;
b) the shareholder must be an employee or officer, or of a company in the same group; and
c) the company must be a trading company or a holding company of a trading group.
All three of these conditions must be met for the whole of a 24-month period (for disposals from 6 April 2019) that ends with the disposal of the shares, cessation of the trade, or the company leaving the trading group and not becoming a member of another trading group.
Personal company - A company is the personal company of the individual at any time when all of the following conditions apply:
1. the individual holds at least 5% of the ordinary share capital of the company;
2. the individual can exercise at least 5% of the voting rights on the ordinary share capital;
3. the individual is entitled to at least 5% of the profits available for distribution; and
4. the individual would be entitled to at least 5% of the assets available on a winding up.
Conditions numbered 3, and 4 were added for disposals made on and after 29 October 2018. However, the way the law was drafted would have made it difficult for some taxpayers to determine whether those conditions had been met for the full qualifying period. Therefore, the original draft legislation was modified before enactment to include an alternative test to both those, namely that in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.
Shareholding threshold - Where an individual’s shareholding has fallen below 5%, as a result of a fundraising event involving the issue of additional shares which takes place on or after 6 April 2019. The equity funding share issue must be made wholly for cash and be made for commercial reasons, and not as part of arrangements driven by tax avoidance.
In these circumstances the shareholder will be entitled to the relief which would otherwise be lost, by making one or both of the following elections:
• claim the relief on a deemed sale and reacquisition at market value at the point immediately before the additional shares are issued which removes the personal company qualification; or
• defer taxation of the gain made on this deemed sale until the actual disposal of the shares.
The second election will generally be required as the taxpayer will make a deemed sale with no sale proceeds with which to pay the CGT due.
Beware disposals to family members – the ‘market value’ rule
At first sight, the calculation of a capital gain or loss on the disposal of an asset is relatively straightforward – simply the difference between the amount received for the sale of that asset and the cost of acquiring (and, where relevant) enhancing it, allowing for the incidental costs of acquisition and disposal. However, as with all rules there are exceptions, and particular care needs to be taken when disposing of an asset to other family members.
Spouses and civil partners - The actual consideration, if any, is ignored for transfers of assets between spouses and civil partners. Instead, the consideration is deemed to be that which gives rise to neither a gain nor a loss. The effect of this rule, which is very useful for tax planning purposes, is that the transferee simply assumes the transferors base cost – and the transferor has no capital gain to worry about.
Other connected persons - While the no gain/no loss rules for transfers between spouses and civil partners is useful from a tax perspective, the same cannot be said to be true for market value rule that applies to transfers between connected persons. Where two persons are connected, the actual consideration, if any, is ignored and instead the market value of the asset at the time of the transfer is used to work out any capital gain or loss.
The market value of an asset is the value that asset might reasonably be expected to fetch on sale in the open market.
Who are connected persons? - A person is connected with an individual if that person is:
• the person’s spouse or civil partner;
• a relative of the individual;
• the spouse of civil partner of a relative of the individual;
• the relative of the individual’s spouse or civil partner;
• the spouse or civil partner of a relative of the individual’s spouse or civil partner.
For these purposes, a relative is a brother, sister or ancestor or lineal descendant. Fortunately, the term 'relative' in this context does not embrace all family relationships and excludes, for example, nephews, nieces, aunts, uncles and cousins (and thus the actual consideration is used in calculating any capital gain).
As noted above, the deemed market value rule does not apply to transfers between spouses and civil partners (to which the no gain/no loss rules applies), but it catches those to children, grandchildren, parents, grandparents, siblings – and also to their spouses and civil partners.
Example 1 - Barbara has had a flat for many years which she has let out, while living in the family home. Her granddaughter Sophie has recently graduated and started work and is struggling to get on the property ladder. To help Sophie, Barbara sells the flat to her for £150,000. At the time of the sale it is worth £200,000.
As Barbara and Sophie are connected persons, the market value of £200,000 is used to work out Barbara’s capital gain rather than the actual consideration of £150,000. If she is unaware of this, the gain will be higher than expected (by £14,000 if Barbara basic rate band has been utilised), and Barbara may find that she is short of funds to pay the tax.
This problem may be exacerbated where the asset is gifted – the gain will be calculated by reference to market value, but there will be no actual consideration from which to pay the tax.
Annual tax on enveloped dwellings
The annual tax on enveloped dwellings (ATED) is a tax that applies, in the main, to companies owning residential property which is valued at more than £500,000.
The tax only applies on properties that are classed as ‘dwellings’. This is a property where all or part of it is used as a residence, for example a house or a flat. The ‘dwelling’ also includes the property's gardens or grounds. However, properties such as hotels, guest houses, boarding school accommodation and student halls of residence fall outside the definition of a ‘dwelling’, and thus outside the scope of the tax.
Valuing the property
The tax only applies to dwellings with a value of at least £500,000. The amount of the charge depends on the value of the dwelling. Therefore, it is necessary to know the value of any residential property owned wholly or partly by a company (or a partnership with at least one corporate partner). The key date is the valuation date. From 1 April 2018 the valuation date is 1 April 2017. If the property was acquired after 1 April 2017, the value is the date of acquisition.
The valuation is an open market valuation.
How much is the charge?
The charge is an annual charge payable for the period from 1 April to the following 31 March.
The chargeable amount for 1 April 2019 to 31 March 2020 is shown in the following table.
Property value Annual charge
More than £500,000 up to £1 million £3,650
More than £1 million up to £2 million £7,400
More than £2 million up to £5 million £24,800
More than £5 million up to £10 million £57,900
More than £10 million up to £20 million £116,100
More than £20 million £232,350
Payment and returns
An ATED return must be filed by 30 April each year. The return should be filed using HMRC’s ATED online service. An agent can be appointed to file the return on the company’s behalf.
The tax must also be paid by 30 April.
Partner note: FA 2013, Pt. 3 (ss. 94—174, Sch. 33 – 35).
Give from income to save inheritance tax
Within a family scenario, there are many situations in which one family member may make a gift to other family members. However, the way in which gifts are funded and made can make a significant difference to the way in which they are treated for inheritance tax purposes.
Not all gifts are equal - There is no inheritance tax to pay on gifts between spouses and civil partners. A person can make as many lifetime gifts to their spouse or civil partner as they wish (as long as they live in the UK permanently). There is no cap on the value of the gifts either.
Other gifts may escape inheritance tax if they are covered by an exemption. This may be the annual exemption (set at £3,000 per tax year), or a specific exemption such as that for gifts on the occasion of a marriage or civil partnership or the exemption for ‘gifts out of income’.
Gifts that are not covered by an exemption will counts towards the estate for inheritance tax purposes and, if the donor fails to survive for at least seven years from the date on which the gift was made, may suffer an inheritance tax bill if the nil rate band (currently £325,000) has been used up.
Gifts from income - The exemption for ‘normal expenditure out of income’ applies where the gift:
• formed part of the taxpayer’s normal expenditure;
• was made out of income; and
• left the transferor with enough income for them to maintain their normal standard of living.
All of the conditions must be met for the exemption to apply. Where it does, there is no requirement for the donor to survive seven years to take the gift out the IHT net.
What counts as ‘normal’ expenditure? - For the purposes of the exemption, HMRC interpret ‘normal’ as being normal for the transferor, rather than normal for the ‘average person’.
To meet this condition it is sensible to establish a regular pattern of giving –for example, by setting up a standing order to give a regular monthly sum to the recipient. It is also possible that a single gift may qualify for the exemption if the intention is for it to be the first of a series of gifts, and this can be demonstrated. Likewise, regular gifts may not qualify if they are not made from income.
In deciding whether a gift constitutes normal expenditure from income, HMRC will consider a number of factors, including:
• the frequency of the gift;
• the amount;
• the identity of the recipient; and
• the reason for the gift.
The amount of the gift is an important factor – to meet the test the gifts must be similar in amount, although they do not have to be identical. Where the gift is made by reference to a source of income that is variable the amount of the gift may vary without jeopardising the exemption.
Gifts will normally be in the form of money to the recipient, or a payment on the recipient’s behalf, such as school fees or a mortgage. The reason for making a gift may indicate whether it is made habitually – for example, a grandparent may makes a gift to a grandchild at the start of each university term to help with living costs. It is also important that having made the gift, the donor has sufficient income left to maintain his or her lifestyle.
When making gifts from income, check that they may meet the conditions to get the exemption.
When does the diesel supplement apply?
Employees with a company car are taxed – often quite heavily – for the privilege. The charge is on the benefit which the employee derives from being able to use their company car for private journeys.
The amount charged to tax is a percentage of the ‘list price’ of the car – known as the 'appropriate percentage'. The percentage depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars. For 2019/20, as for 2018/19, the supplement is set at 4%. However, the application of the diesel supplement cannot take the percentage of the price charged to tax above the maximum charge of 37%. Consequently, the diesel supplement has no practical effect where emissions are 170g/km or above as the maximum charge already applies.
The nature of the diesel supplement was reformed from 6 April 2018. From that date it applies to cars propelled solely by diesel (not hybrids) which do not meet the Real Driving Emissions 2 (RDE2) standard. The supplement is levied both on diesel cars which are registered on or after 1 January 1998 which do not have a registered Nitrogen Oxide (NOx) emissions value, and also on diesel cars registered on or after that date which have a NOx level that exceeds that permitted by the RDE2 standard.
Checking whether the supplement applies
So, how can employers tell whether the diesel supplement applies?
Diesel cars which meet the level of NOx emissions permitted by Euro standard 6d meet the RDE2 standard. Consequently, they are exempt from the entire diesel supplement. For cars that are manufactured after September 2018, employers can use the Vehicle Enquiry Service (see https://vehicleenquiry.service.gov.uk/) to identify whether a particular car meets the Euro 6d standard – the employer simply needs to enter the registration number of the car into the tool to find information on the vehicle, including its Euro status. Cars that are shown as meeting Euro status 6AJ, 6AL, 6AM, 6AN, 6AO, 6AP, 6AQ or 6AR meet Euro standard 6d and are therefore exempt from the diesel supplement. Where the car was registered on or after 1 September 2018, this information is also shown on the vehicle registration document, V5C.
From 6 April 2019 onwards, employers should use fuel type F (rather than A as previously) when reporting the allocation of a diesel car meeting the Euro 6d standard to HMRC on Form P46(Car) or when payrolling the benefit.
Cars that do not meet the Euro 6d standard are subject to the diesel supplement. HMRC advise that very few, if any, diesel cars were exempt from the diesel supplement in 2018/19.
Alan is allocated a company car registered in 2015. The car has CO2 emissions of 120g/km. It does not meet the Euro 6d standard. The diesel supplement applies and the appropriate percentage is increased by 4% from 28% (the percentage applying for 2019/20 to petrol cars with CO2 emissions of 120g/km) to 32%.
Louise is allocated a new diesel company car on 6 April 2019. The V5C shows that the car has CO2 emissions of 120g/km and that it meets Euro Status 6d. The diesel supplement does not apply and the tax charge for 2019/20 is based on the appropriate percentage of 28% for cars with CO2 emissions of 120g/km.
Tax aspects of using a work’s van
If an employee is able to use a work’s van for private use, which generally includes home-to-work travel, there will be a taxable benefit and a subsequent tax charge.
From 6 April 2019, the flat-rate van benefit charge has risen from £3,350 to £3,430, representing a small increase in real terms to a basic rate taxpayer of £16 a year.
If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2019/20 the flat-rate van fuel benefit charge has been increased from £633 to £655, so there is an increase in real terms to a basic rate taxpayer of just £4.40.
What is a van? - to qualify as a van, a vehicle must be:
• a mechanically propelled road vehicle; and
• of a construction primarily suited for the conveyance of goods or burden of any description; and
• of a ‘design weight’ which does not exceed 3,500kg; but
• not a motorcycle. Broadly, this means that it must have at least four wheels.
The design weight of a vehicle, also known as the ‘manufacturer's plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.
Human beings are not ‘goods or burden of any description’ so a vehicle designed to carry people (such as a minibus) will not be a van for these purposes.
Private use - A charge to income tax will generally arise if a company van is made available, by reason of the employment, to an employee or to a member of his or her family or household for private non-business-related use. It must be made available without a transfer of ownership from the employer to the employee.
There are three types of journeys that are classed as non-taxable business use:
• business journeys - journeys carried out as part of employment
• ordinary commuting - travel to and from home to a place of work
• insignificant private use beyond ordinary commuting
Pool vans - Broadly, vans used as pool vans that meet the following criteria will not attract a charge:
• the van is used by more than one employee
• the van is not ordinarily used by one employee to the exclusion of others
• the van is not normally kept at or near employees' homes
• it is used only for business journeys (some incidental private use is allowed eg. commuting home with the van to allow an early start to a business journey the next morning)
HMRC apply these rules strictly.
Tax charge - The benefit charge may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.
For 2019/20, a basic rate taxpayer will pay £686 for the use of a work’s van (£3,430 x 20%). For a higher rate taxpayer, the cost will be £1,372.
If fuel is also provided for private use, for 2019/20, a basic rate taxpayer will additional tax of £131 (£655 x 20%), and a higher rate taxpayer will pay £262.
Tax is normally collected through the employee’s Pay As You Earn (PAYE) tax code.
Penalties for late self-assessment returns
The normal due date for a self-assessment return where filed online is 31 January after the end of the tax year to which it relates. This means that self-assessment tax returns for 2017/18 should have been filed online by midnight on 31 January 2019, and self-assessment returns for 2018/19 must be filed online by midnight on 31 January 2020.
Returns do not have to be filed online – paper returns can be submitted. However, an earlier deadline of 31 October after the end of the tax year applies, so 31 October 2018 for 2017/18 paper self-assessment returns and 31 October 2019 for 2018/19 paper self-assessment returns.
A later deadline may apply if the notice to file the return was issued after 31 October following the end of the tax year. In this scenario, the deadline is three months from the date of issue of the notice to file, which will fall after the normal 31 January deadline. For example, if notice is given on 2 December, the filing deadline is the following 2 March. Where the notice to file is issued after 31 July but on or before 31 October, the deadline for filing a paper return is three months from the date of the notice (which will be after the usual 31 October deadline); however, the deadline for filing an online return will remain at 31 January, as this will be at least three months from the notice date.
Penalties are charged where tax returns are filed late (unless, the taxpayer can demonstrate that they have a reasonable excuse for filing late which is acceptable to HMRC). The penalties can soon mount up.
A penalty will apply where a paper return is not filed by 31 October after the end of the tax year (or such later deadline as applies where the notice to file was issued after 31 July) or where an online return is not filed by 31 January after the end of the tax year (or by such later deadline as applies where the notice to file was issued after 31 October). If the paper filing deadline is missed, a penalty can be avoided by filing a return online by the online filing deadline.
An initial penalty of £100 is charged if the filing deadline is missed. The penalty applies even if there is no tax to pay.
If the return remains outstanding three months after the filing deadline, further penalties start to apply. For online returns, the key date here is 1 May, from which a daily penalty of £10 per day is charged for a maximum of 90 days (a maximum of £900). At this point, it is advisable to file the return as soon as possible – each day’s delay costs a further £10 in penalties.
Further penalties are due if the return remains outstanding after another three months have elapsed (i.e. at 1 August where an online return was not filed by 31 January). In this case, the penalty is £300 or, if greater, 5% of the tax outstanding.
A further penalty of the greater of £300 or 5% of the tax outstanding is charged if the return has not been filed 12 months after the deadline (i.e. before the following 1 February).
The penalties can soon mount up, and can reach £1,600 or more where the return is 12 months late. Outstanding returns should be filed as a matter of urgency. Penalties are also charged for any tax paid late.
Furnished holiday lettings – is it worth qualifying?
When it comes to taxing rental income, not all properties are equal. Different rules apply to properties which meet the definition of ‘furnished holiday lettings’ (FHLs). While the rules now are not as generous as they once were, they still offer a number of tax advantages over other types of let.
Advantages - Properties that count as FHLs benefit from:
• capital gains tax reliefs for traders (business asset rollover relief, entrepreneurs’ relief, relief for business assets and relief for loans for traders); and
• plant and machinery capital allowances on items such as furniture, fixtures and fittings.
In addition, the profits count as earnings for pension purposes.
What counts as FHLs? - For a property to count as a FHL it must meet several tests. It must be in the UK or the European Economic Area (EEA), it must be furnished and it must be let commercially (i.e. with the intention of making a profit).
The property must also pass three occupancy conditions. The tests are applied on a tax year basis for an ongoing let, the first 12 months for a new let and the last 12 months when the let ceases.
The pattern of occupancy condition - The total of all lettings that exceed 31 continuous days in the year cannot exceed 155 days. If continuous lets of more than 31 days total more than 155 days in the tax year, the property is not a FHL.
The availability condition - The property must be let as furnished holiday accommodation for at least 210 days in the tax year. Periods where the taxpayer stays in the property are ignored as during these times the property is not available for letting.
The letting condition - The property must be commercially let as furnished holiday accommodation for at least 105 days in the year. Periods where the property is let to family or friends at reduced rate or free of charge are ignored as they do not count as commercial lets. Lets of longer than 31 days are also ignored, unless the let only exceeds 31 days as a result of unforeseen circumstances, such as the holidaymaker being unable to leave on time as a result of a delayed flight.
Second bite at the cherry - If seeking to secure FHL status, but the property does not meet the letting condition, all is not lost. Where the landlord has more than one property let as a FHL and the average rate of occupancy across the properties achieves the required 105 let days in the year, the condition can be met by making an averaging election.
A property may also be able to qualify if there was a genuine intention to meet the letting condition and the other occupancy conditions are met by making a period of grace election.
Further details on making averaging and period of grace elections can be found in HMRC helpsheet HS253 (see www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet).
Is it worth it? - While FHLs do enjoy favourable tax treatment, these are only available if the associated conditions are met. While FHLs, particularly in prime tourist locations, may be able to command high rental values in high season, the properties may lay empty for several weeks in the off season. By contrast, a longer term let will offer an element of security that multiple short lets may not provide.
Getting ready for MTD for VAT
The start date for Making Tax Digital (MTD) for VAT is fast approaching – from the start of your first VAT accounting period beginning on or after 1 April 2019, if you are a VAT registered business with VATable turnover over the VAT registration threshold of £85,000, you will need to comply with MTD for VAT. This will mean maintaining digital records and filing the VAT return using MTD-compatible software. Businesses within MTD for VAT will no longer be able to use HMRC’s VAT Online service to file their VAT return. However, you can still use an agent to file your return on your behalf.
Businesses whose VATable turnover is below the registration threshold do not have to join MTD, but can choose to do so if they wish. However, once they are within MTD for VAT, they must remain in it as long as they are VAT registered – there is no going back.
If you have yet to start preparing for MTD for VAT, it is now time to do so.
What does MTD for VAT mean for you?
Under MTD for VAT you will need to keep your business records digitally if you do not already do so. If you are already using software to keep your business records, you will need to check that your software supplier plans to introduce MTD-compatible software, and upgrade as necessary.
If you do not currently keep your VAT records digitally or your current software supplier does not plan to introduce MTD-compatible software, you will need to choose software that will enable you to fulfil your MTD for VAT obligations.
MTD-compatible software (also referred to as ‘functional compatible software’) is a software product or set of software products which meet the obligations imposed by MTD for VAT and enable records to be kept digitally and data to be exchanged digitally with HMRC via the MTD service. Where more than one product is being used, the data flows between the applications must be digital – data cannot be entered manually. However, businesses will be allowed to cut and paste data from one application to another until 31 March 2020, after which all links must be digital.
If you currently use spreadsheets to summarise VAT transactions, calculate VAT or to arrive at the information needed to complete the VAT, once MTD starts, you will be able to continue to do so. However, you will no longer be able to key the relevant figures into the appropriate boxes on the VAT return. Instead you will need to use MTD-compatible software to enable you to send your VAT returns to HMRC and to receive information back from VAT. Bridging software may be used to make spreadsheets MTD-compatible.
However, to comply with MTD for VAT, the data must be transferred digitally – it cannot be rekeyed into another software package. But there will be a transition period and businesses can cut and paste until 31 March 2020, after which all links between products must be digital.
HMRC use the term ‘bridging software’ to mean a digital tool which is able to take information from another application, such as spreadsheets or an in-house system, and allow the user to send the data to HMRC in the correct format.
HMRC produce a list of software companies that are working with them to produce MTD-compatible software. Details can be found on the Gov.uk website
Partner note: VAT Notice 700/22: Making Tax Digital for VAT.
A person may own a property jointly that is let out as part of a partnership business. This may arise if the person is a partner of a trading or professional partnership which also lets out some of its land and buildings. A less common situation is where the person is in a partnership that runs an investment business which does not amount to a trade, but which includes or consists of the letting of property.
When is there a property partnership?
The letting of a jointly-owned property in itself does not give rise to a partnership – and indeed a partnership is unlikely to exist where joint owners simply let a property that they own together. Whether there is a partnership depends on the degree of business activity involved and there needs to be a degree of organisation similar to that in a commercial business. Thus, for there to be a partnership where property is jointly owned, the owners will need to provide significant additional services in return for money.
Separate rental business
A partnership rental business is treated as a separate business from any other rental business carried on by the partner. Thus, if a person owns property in their sole name and is also a partner in a partnership which lets out property, the partnership rental income is not taken into account in computing the profits of the individual’s rental business – it is dealt with separately.
Further, if a person is a partner in more than one partnership which lets out property, each is dealt with as a separate rental business – the profits of one cannot be set against the losses of another.
Kate has a flat that she lets out. She is also a partner in a graphic design agency, which is run from a converted barn. The partnership lets out a separate barn to another business.
Kate has two property rental businesses. One business comprises the flat that she owns in her sole name and lets out, and the partnership rental business consisting of the barn which is let out as a separate rental business. This is a long-term arrangement.
Kate must keep her share of the profits or losses from the partnership property business separate from those relating to her personal rental business. She cannot set the profits from one against losses from the other. They must be returned separately on her tax return.
Partner note: HMRC’s Property Income Manual at PIM1030.
When should a business register for VAT?
All traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once annual sales reach a pre-set annual threshold. This threshold remains at £85,000 for the year commencing 1 April 2019.
The annual VAT threshold is determined by total sales and is not the same as total profits (which is generally sales minus expenses). A business can make a loss and still need to register for VAT!
In summary, a business must register if:
• its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies),have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or
• there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or
• the business takes over another business as a going concern, to which the two bullet points above apply.
The threshold operates on a month-by-month basis, so a check should be made at the end of each month to make sure the business hasn’t gone over the limit in the previous twelve months.
The month-by-month basis also works by looking forward, so it is equally important at the end of each month to consider whether the limit will be exceeded in the following twelve months. If it is anticipated that total sales may exceed the VAT threshold, the business needs to register.
Where registration is required, HMRC must be notified:
• within 30 days of the end of the relevant month (past sales condition); or
• by the end of the 30-day period (expected sales condition).
If the business does not register with HMRC within the specified time limit, a penalty will be charged, which can eventually be up to 15% of the VAT owed – in addition to the actual VAT due.
Voluntarily registration - A business can register for VAT even if its turnover (total sales) is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.
Example - A non-VAT registered sole-trader buys a new office photocopier for the business. The copier costs £100 plus VAT, so a total of £120 is paid (£100 plus VAT at 20%). £120 is set against business profits for income tax purposes. If the trader is a basic rate (20%) taxpayer, there will be a tax saving of £24 (20% of £120), so the copier actually costs the trader £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the copier costs the business just £80 – £16 is saved by being registered for VAT.
The business must not charge or show VAT on its invoices until the VAT number is received from HMRC. However, the VAT for this period must still be paid to HMRC. Therefore the business will need to increase its prices to allow for this and tell its customers why. Once the VAT number is received, the business can reissue the invoices showing the VAT separately.
Once registration has taken effect, there are a series of administrative obligations which must be complied with, and, importantly, a severe penalty regime exists for getting it wrong.
Using the property rental toolkit to avoid common errors
HMRC’s property rental toolkit highlights errors commonly found in tax returns in relation to property income. The toolkit can be used to help avoid those errors, some of which are discussed briefly below.
Computation - For unincorporated property businesses, the default basis is the cash basis where the qualifying conditions are met and the landlord does not elect to use the accruals basis. Where the business has moved into or out of the cash basis, transitional adjustments may be needed.
In some circumstances, a trade of providing services may be carried on in addition to the let of the property; and in some cases, the letting may amount to a trade.
It is important the correct computational rules are used.
Record keeping - Poorly-kept records may mean that things are overlooked – income may not be taken into account and allowable expenses not claimed. Property disposals may also be missed.
Property income receipts - All income which arises from an interest in land should be included as receipts of the property rental business. Receipts can include payments in kind (maybe work done on the property in lieu of rent). It should be noted that casual or one-off letting income is still treated as income from a property rental business.
Profits and losses from overseas lets, from furnished lettings and from properties let rent-free or below market rent should be dealt with separately. For other UK lets owned by the same person or persons, income and expenses are combined to work out the overall profit or loss for the property rental business.
Deductions and expenses - Expenses incurred wholly and exclusively for the purposes of the property rental business can be deducted in the computation of profits. Problems may arise where an expense has both a business element and a private element (for example, a car or phone used both privately and for the business). A deduction can be claimed only for the business part where this can be identified and meets the wholly and exclusively test.
The way in which relief for finance costs is being given is shifting from relief by deduction to relief as a basic rate tax reduction.
Allowances and reliefs - There are various reliefs that may be available.
Rent-a-room relief is available where a room is let furnished in the taxpayer’s own home, enabling receipts of £7,500 a year to be enjoyed free of tax.
The property income allowance of £1,000 means that rental income below this level does not need to be returned to HMRC. Where income exceeds this level, the allowance can be deducted instead of actual expenses where this is beneficial.
Capital allowances can be claimed in certain circumstances. They are available on certain items that belong to the landlord and which are used in the business, for example, tools, ladders, vehicles, etc. However, they are not available for domestic items in a residential property for which a replacement relief is available instead. Capital allowances are similarly not available for plant and machinery in a residential property unless it is a furnished holiday let.
Losses - Property rental losses must be treated correctly. They can only be carried forward and set against future property profits of the same property rental business.
Checklist - The checklist within the toolkit can be used to ensure that everything has been taken into account and that nothing has been overlooked.
Getting ready for off-payroll working changes
From 6 April 2020 the off-payroll working rules that have applied since 6 April 2017 where the end client is a public sector body are to be extended to large and medium private sector organisations who engage workers providing their services through an intermediary, such as a personal service company.
There are tax and National Insurance advantages to working ‘off-payroll’ for both the engager and the worker. The typical off-payroll scenario is the worker providing his or her services through an intermediary, such as a personal service company. Providing services via an intermediary is only a problem where the worker would be an employee of the end client if the services were provided directly to that end client. In this situation, the IR35 off-payroll anti-avoidance rules apply and the intermediary (typically a personal service company) should work out the deemed payment arising under the IR35 rules and pay the associated tax and National Insurance over to HMRC.
Compliance with IR35 has always been a problem and it is difficult for HMRC to police. In an attempt to address this, responsibility for deciding whether the rules apply was moved up to the end client where this is a public sector body with effect from 6 April 2017. Where the relationship is such that the worker would be an employee if the services were supplied direct to the public sector body, the fee payer (either the public sector end client or a third party, such as an agency) must deduct tax and National Insurance from payments made to the intermediary.
These rules are to be extended from 6 April 2020 to apply where the end client is a large or medium-sized private sector organisation. This will apply if at least two of the following apply:
Where the end client is ‘small’, the IR35 rules apply as now, with the intermediary remaining responsible for determining whether they apply and working out the deemed payment if they do.
Getting ready for the changes
To prepare for the changes, HMRC recommend that medium and large private sector companies should:
Workers affected by the changes should also consider whether it is worth remaining ‘off-payroll’; providing their services as an employee may be less hassle all round.
Entrepreneurs’ relief – what do the Budget changes mean?
Ahead of the 2018 Budget there was some speculation that entrepreneurs’ relief may be scrapped. In the event, this did not happen. However, the relief made an appearance with the announcement of changes to the personal company test, applying from Budget day, and of a doubling of the qualifying period throughout which the conditions must be met for two years from 6 April 2019.
Nature of the relief - Entrepreneurs’ relief reduces the rate of capital gains tax on disposals of qualifying assets to 10%. This is subject to a lifetime limit of £10 million. Spouses and civil partners have their own limit.
The relief is available where there is:
• a material disposal of business assets;
• a disposal associated with a material disposal; or
• a disposal of trust business assets.
Availability of entrepreneurs’ relief is contingent on the qualifying conditions being met. The qualifying conditions depend on the type of disposal.
The relief is complex, and a detailed discussion of the relief is beyond the scope of this article. However, guidance is available in HMRC’s Capital Gains Tax Manual at CG63950ff.
Shares in a personal company - Entrepreneurs’ relief is available for disposals of shares or securities in a personal company. To qualify, throughout the ‘qualifying period’ the company must be a personal company and either a trading company or the holding company of a trading group. The taxpayer must either be an officer or an employee of that company or of one or more members of the trading group.
The definition of a ‘personal company’ changed from 29 October 2018 (Budget day). Prior to that date, a personal company was one in which the individual held at least 5% of the ordinary share capital and that holding gave the holder at least 5% of the voting rights in the company.
From 29 October 2018 two further conditions must be met. The holding must also provide entitlement to at least 5% of the company’s distributable profits and 5% of the assets available for distribution to equity holders in a winding up.
Qualifying period - Entrepreneurs’ relief is only available if the conditions are met throughout the ‘qualifying period’. This is currently set at one year. However, it was announced in the Budget that the qualifying period will be doubled to two years from 6 April 2019 (except in relation to disposals where the business ceased prior to 29 October 2018).
Securing the relief - The timing of the disposal is important in securing the relief. If the disposal is one of shares in a personal company, and the new definition is not met, the qualifying period clock cannot start to run until the date when all conditions are met. To secure relief, the shares should not be disposed of until at least two years from the date on all of the conditions are first met.
Where the conditions have already been met for one year but will not have been met for two years by 6 April 2019, it may be preferable to dispose of the shares prior to 6 April 2019 to secure the relief. Alternatively, if the disposal is to take place after that date, it will make sense to wait until conditions have been met for two years in order to benefit from the relief.
Government childcare scheme – tax-free top-up
Working parents can receive a tax-free top up from the Government to help with their childcare costs. The top up is worth £500 every three months (£2,000 a year). A higher top-up of £4,000 a year (£1,000 every three months) is available where the child is disabled.
To receive the top-up, eligible parents must open an account online. The Government will provide a top-up of £2 for every £8 deposited by the parents, up to the above limits. The money in the account is then used to pay for childcare with a registered provider.
Who is eligible?
To qualify for tax-free childcare, the claimant (and their partner if they have one) should be in work, on sick leave or annual leave or on parental, maternity, paternity or adoption leave. The scheme is open to both the employed and the self-employed. However, earnings conditions apply.
The claimant (and their partner if they have one) must earn a minimum of £131.36 per week on average (which is equivalent to 16 hours at the National Living Wage of £8.21 per hour for 2019/20 for people age 25 and over). This equates to £1,707.68 over three months. This limit does not apply to a self-employed person who started their business within the previous three months.
There is also an earnings cap – tax-free childcare is not available where the claimant or their partner has ‘adjusted net income’ of more than £100,000. This is broadly taxable income before personal allowances, less items such as gift aid.
Tax-free childcare is available for a child who is 11 or under and who lives with the claimant. Eligibility ceases on 1 September following their 11th birthday. A disabled child remains eligible until they are 17.
Using tax-free childcare
Tax-free childcare can be used to pay for childcare that is approved childcare. This includes childminders, nurseries, nannies, after school clubs, playschemes and home care agencies. The childcare provider must sign up to the scheme.
Interaction with tax-credit and Universal Credit
Tax-free childcare is not available at the same time as working tax credit, child tax credit or universal credit. The childcare calculator is available on the Gov.uk website at www.gov.uk/tax-free-childcare.
Employer-supported childcare and childcare vouchers
Similarly, an employee cannot benefit from both the tax-free top-up under the Government scheme and the tax exemption for employer-provided childcare vouchers or employer-supported care. Again, what is the best option will depend on personal circumstances. An employee within an employer scheme must tell their employer they have applied for tax-free childcare within 90 days of making the application.
How to apply
Applications for tax-free childcare can be made online at www.gov.uk/apply-for-tax-free-childcare.
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Jointly-owned property – who pays the tax?
Where property is jointly-owned, the way in which the rental income can be split between the joint owners for tax purposes depends on whether the joint owners are married or in a civil partnership or not.
Married couples and civil partners
Where a property is jointly owned by a married couple or civil partners, the basic rule is that the rental income is split equally, regardless of the actual underlying ownership.
Tom and Richard are married. They jointly own a flat in which Tom has a 70% stake and Richard has a 30% stake. The flat is let out. The rental profit is £8,000 a year.
Despite owning the property in unequal shares, Tom and Richard are both taxed on 50% of the rental income (£4,000).
However, where the beneficial ownership is unequal, the couple can elect (on Form 17) for the income to be assessed for tax purposes in accordance with their actual beneficial shares. In the above example, were Tom and Richard to make a Form 17 election, Tom would be taxed on rental profits of £5,600 (70%) and Richard would be taxed on £2,400 (30%).
For married couples and civil partners, the only permissible allocations are 50:50 (the default position) and, on the making of a Form 17 election, in accordance with actual ownership where the property is owned in unequal shares.
Joint owners who are not married or in a civil partnership
Where a property is owned jointly by individuals who are not married or in a civil partnership, it is usual for the rental income to be allocated in accordance with the ownership share. However, the joint owners can agree to a different division of profits and losses – the allocation for tax purposes does not have to mirror the actual ownership of the property. However, where a different allocation is agreed, the split for tax purposes must match the actual allocation of rental profits.
Jake and his girlfriend Jade jointly own a flat which they let out. Jake owns 20% of the property and Jade owns 80% of the property. The rental profit is £10,000 a year.
Jade has £3,000 of her basic rate band available, whereas Jake has £9,000 of his basic rate band available. Therefore, to minimise the tax payable on the rental income, they agree that it will be shared so that Jade receives 30% (£3,000) and Jake receives 70% (£7,000).
Where joint owners are not married or in a civil partnership it is possible to agree an actual allocation that minimises tax. However, depending on the relationship between the owners, the tax considerations may be secondary as each owner may be keen to receive a share of rental profits proportionate to their actual stake in the property.
Airbnb-type lets – is rent-a-room relief available?
Many homeowners have taken advantage of sites such as Airbnb to let out a spare room on a temporary basis or their whole property while they are away. In most cases, as long as the associated conditions are met, hosts can enjoy rental income of up to £7,500 tax-free under the rent-a-room scheme. This continues to be the case as planned legislation to restrict the availability of the relief has not been introduced.
Rent-a-room relief is a relief that allows individuals to earn up to £7,500 per year tax-free from letting out furnished accommodation in their own home. This limit is halved where more than one person benefits from the income such that each person can enjoy rental income of up to £3,750 per year tax free.
The relief is available to owner occupiers and tenants. To qualify, the rental income must relate to the let of furnished accommodation in the individual’s only or main home. While the relief was introduced to boost the supply of cheap residential accommodation, there is no minimum period of let and applies equally to very short lets. Further, the individual can let out as much of their home as they want.
The relief can be used where a room is let furnished to a lodger. It can also be used where the letting amounts to a trade, for example, where the individual runs a guest house or a bed-and-breakfast or provides services such as meals and cleaning.
Where gross rental income is less than £7,500 (or £3,750 where the income is shared), the relief is automatic – there is no need to tell HMRC.
Where the gross rental income exceeds the rent-a-room limit, the individual has a choice of deducting the rent-a-room limit and paying tax on the excess or calculating the profits in the normal way by deducting the actual expenses. Claiming rent-a-room relief will be beneficial if there is a profit and actual expenses are less than the rent-a-room limit. This is done on the tax return.
It is not possible to create a loss by deducting the rent-a-room limit if, for example, rental income is less than the limit – the income is simply treated as being nil. Where deducting actual expenses from rental income produces a loss, it is better not to claim rent-a-room relief to preserve the loss.
Rent-a-room relief cannot be claimed where the accommodation is not in the individual’s main home, where accommodation is provided unfurnished or where a UK home is let out while the owner is working abroad.
Rent-a-room relief is available for Airbnb-type accommodation as long as the conditions are met. The issue is not whether the income is from an Airbnb-type let; rather, whether the conditions for rent-a-room relief are met. This is likely to be the case if the nature of the Airbnb let is such that it comprises the let of a furnished spare room in the taxpayer’s home, or the whole home for a short period, such as a weekend or a couple of weeks when the homeowner is on holiday.
However, where the individual uses Airbnb or similar to let accommodation in a property which is not his or her main home, for example a holiday cottage, rent-a-room relief is not available and the normal property rental rules apply. The individual may, however, benefit from the property income allowance of £1,000.
Stamp duty land tax on non-residential properties
Stamp duty land tax (SDLT) is payable in England and Northern Ireland on the purchase of property over a certain price. It applies equally to residential and non-residential properties, although the rates are different. Stamp duty land tax is devolved with land and buildings transaction tax (LBTT) applying in Scotland and land transaction tax (LTT) applying in Wales.
Non-residential property - As the name suggests, non-residential property is property other than that which is used as a residence. This includes commercial property, such as shops and office, agricultural land and forests. The non-residential rates of SDLT also apply where six or more residential properties are brought in a single transaction.
Mixed use properties - The non-residential rates of SDLT also apply to mixed use properties. These are properties which have both residential and non-residential elements. An example of a mixed use property would be a shop with a flat above it.
Rates - SDLT is charged at the appropriate rate on each ‘slice’ of the consideration. No SDLT is payable where the consideration is less than £150,000, or on the first £150,000 of the consideration where it exceeds this amount.
The rates of SDLT applying to non-residential properties are shown in the table below. They also apply to the lease premium where the property is leasehold rather than freehold.
Consideration SDLT rate
Up to £150,000 Zero
The next £100,000 (i.e. the ‘slice’ from £150,001 to £250,000) 2%
Excess over £250,000 5%
ABC Ltd buys a commercial property for £320,000. SDLT of £5,500 is payable, calculated as follows.
On first £150,000 @ 0% £0
On next £100,000 @ 2% £2,000
On remaining £70,000 @ 5% £3,500
Total SDLT payable £5,500
New leasehold sales and transfers - The purchase of a new non-residential or mixed use leasehold property triggers a SDLT liability on the purchase price (the lease premium) and also on the annual rent payable under the lease (the net present value). The two elements are calculated separately and added together.
The lease premium element is calculated using the rates above, while the rent element is payable at the rates in the table below. No SDLT is payable on the rent if the net present value is less than £150,000.
Net present value of the rent SDLT rates
£0 to £150,000 Zero
£150,001 to £5,000,000 1%
Excess over £5,000,000 2%
Existing leases - SDLT is only payable on the lease price where an existing lease is assigned.
SDLT calculator - HMRC have published a handy calculator on the Gov.uk website which can be used to work out the SDLT payable on a commercial transaction. It can be found at www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro.
Scotland and Wales - The rates of LBTT payable on the purchase of non-residential properties in Scotland can be found at www.revenue.scot/land-buildings-transaction-tax/guidance/calculating-tax-rates-and-bands and the rates of LTT payable on the purchase of non-residential properties in Wales can be found at https://gov.wales/land-transaction-tax-rates-and-bands.
Claiming a deduction for pre-letting expenses
For tax purposes, a property rental business begins when the first property is let. However, it is likely that the landlord will have incurred some expenses prior to that date in getting the property ready to let and in finding a tenant and agreeing the let.
Once the letting has commenced, expenses incurred in relation to that let will be deductible in computing the taxable rental profits, as long as the conditions for deductibility are met. It is therefore necessary to distinguish between expenses incurred as part of the letting business and preparatory expenses incurred before the property rental business began.
While no relief is available for preparatory expenses at the time that they are incurred, relief may be available under the special rules for pre-letting expenses once the business has commenced.
Relief for pre-letting expenses - For relief to be available in respect of expenses incurred before the start of the property rental business, the expenditure must meet all of the following conditions:
• the expenditure is incurred within a period of seven years before the date on which the rental business started
• the expenditure is not otherwise allowable as a deduction for tax purposes
• the expenditure would have been allowed as a deduction had it been incurred after the rental business had started
Consequently, to be allowed under the pre-letting expenditure rules, the expenditure must be incurred wholly and exclusively for the purposes of the business and (otherwise than in accordance with the cash basis rules permitting a deduction for capital expenditure) must be revenue in nature.
The type of expenditure which might qualify for relief under the pre-letting expenses rules would include the costs of advertising, cleaning, tidying up the garden, and suchlike.
Where expenditure qualifies for deduction under the pre-letting expenses rules, the expenditure is treated as if it were incurred on the day on which the property rental business began. In this way, it is deducted from the rental income of the first accounting period of the property rental business.
Example - Teresa buys a house to let out. The property costs £250,000, and the associated costs of the purchase are £4,000. The purchase completes on 28 February 2019.
Teresa arranges for some work to be undertaken on the property prior to letting it out. This comprises painting the property (£2,000) and some minor repairs (£400). She also buys carpets and curtains (£3,000) and arranges for the cleaning (£200) and the garden tidying (£150).
She incurs costs of £400 on advertising for a tenant.
A tenant is found, and the property is let from 1 May 2019.
The property rental business starts on 1 May 2019. Relief is available under the pre-letting rules for the following expenses: repairs and maintenance (decorating and minor repairs): £2,400; cleaning: £200; gardening: £150; and advertising: £400.
These costs are treated as if they were incurred on 1 May 2019 and are deducted from the rental income if the first period of letting.
The cost of property and associated expenses are not allowable (relief will be given on the eventual sale under the capital gains tax rules). Likewise, no relief is available for the initial purchase of the carpets and curtains, although relief will be available if at some future point they are replaced in accordance with the relief for the replacement of domestic items.
The dividend allowance, which was originally introduced from 6 April 2016, was cut from £5,000 a year to £2,000 from 6 April 2018. The cut is likely to have a significant impact on employees and directors of small businesses who receive both salary and dividend payments.
Many family-owned companies allocate dividends towards the end of their financial year and/or the tax year, so it was not until March/April 2019 that the impact of the reduction first started to hit home. Unfortunately, many other taxpayers may not become aware of the change until they complete their 2018/19 tax return, which in most cases, will be due for submission to HMRC by 31 January 2020.
How much tax is paid on dividend income is determined by the amount of overall income the taxpayer receives. This includes earnings, savings, dividend and non-dividend income. The dividend tax will primarily depend on which tax band the first £2,000 falls in.
The tax rates on dividend income, above the allowance, remain at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
For a basic rate taxpayer, the reduction in the allowance means an increase in tax paid on dividends of £225. For a higher rate taxpayer, the reduction increases the annual tax bill on dividends by £975, and for additional rate taxpayers, the increase is £1,143. Note that if dividend income falls between multiple tax bands, these figures will be different.
Dividend income is taxed at the taxpayer’s highest rate. This can often work in the taxpayers favour, particularly where a mixture of salary and dividends is received. For example, if a director receives a salary of £40,000 and a dividend of £12,000, their tax liability for 2019/20 will be as follows:
Amount taxed Tax due
On salary of £40,000
Personal allowance £12,500 £0
Basic 20% rate £27,500 £5,500
On dividend of £12,000
Dividend allowance £2,000 £0
Basic rate 7.5% £8,000 £600
Higher rate 32.5% £2,000 £650
Total tax due for year £6,750
In this example, personal allowances are deducted first against the salary, leaving £27,500 of other income falling within the basic rate tax band (£37,500 for 2019/20). Dividend income falling within the basic rate band is £10,000 (£37,500 minus £27,500 used), with the remaining £2,000 falling above the basic rate limit. The dividend nil rate is allocated to the first £2,000 of dividend income, falling wholly within the basic rate band, leaving £8,000 within the basic rate band and taxable at the lower 7.5% rate. The remaining £2,000 of dividend income is taxable at the dividend upper rate of 32.5%.
Individuals who are not registered for self-assessment generally do not need to inform HMRC where they receive dividend income of up to £2,000. Those with income between £2,000 and £10,000 will need to report it to HMRC. The tax can usually be paid via a restriction to the PAYE tax code number, so that it is deducted from salary or pension. Alternatively, the taxpayer can complete a self-assessment tax return and the tax can be paid in the usual way (generally 31 January following the end of the tax year in which the income was received). Those receiving more than £10,000 in dividends will need to complete a tax return.
The allocation of various rate bands and tax rates can be complicated, even in situations where straight-forward dividend payments are made. Family business structures may be particularly vulnerable to the impact of the reduction in the dividend allowance, especially where multiple family members take dividends from the family company. A pre-dividend review may be beneficial is such cases.
Tax relief for charitable donations
Individuals who donate to charity can do so tax-free. There are various ways of making tax-relieved gifts to charity – the way in which the relief works depends on whether the donation is made via Gift Aid, as a deduction from wages or a pension via the Payroll Giving Scheme, in a will or whether it is a gift of land or property.
A donation through Gift Aid is treated as having been made net of the basic rate of tax, allowing the charity to reclaim the tax element from HMRC. Thus, the amount given equates to 80% of the donation and the charity benefits from the remaining 20%. This results in every £1 given through Gift Aid being worth £1.25 to the charity.
To enable the charity to reclaim the tax, the donor must complete a Gift Aid declaration, in which the donor must confirm that they are a UK taxpayer. This is important – the tax that is paid to the charity comes from the tax paid by the individual, and if the individual has not paid sufficient tax to cover tax claimed by the charity on the donation, HMRC may ask the donor to pay the equivalent amount in tax. Taxpayers who make regular donations and who have a Gift Aid declaration in place should check that they have paid enough tax. This may be important for pensioners who, following an increase in the personal allowance, find that they are no longer taxpayers.
Donors who pay tax at the higher or additional rate of tax are able to claim relief of the difference between the higher or additional rate and the basic rate through their self-assessment returns. It is important that this is not overlooked and that records of donations are kept so the additional relief can be claimed.
Payroll giving schemes enable employees to make donations to charity as a deduction from their pay and to receive tax relief at source for those donations. Employers wishing to operate a scheme must appoint a payroll giving agency. A list of approved payroll giving agencies is available on the Gov.uk website. The employer deducts the donation from the employee’s gross pay for PAYE purposes and pays it over to the payroll giving agency. The payroll giving agency passes the donation on to the employee’s chosen charity.
As the deduction is made from gross pay, no tax is paid on it. However, the employee will still pay National Insurance on the amount donated (as will the employer).
Gifts in a will
Where a donation to charity is made in a will, the donation will either reduce the value of the estate before inheritance tax is calculated, or, if 10% or more of the estate is left to charity, reduce the rate of inheritance tax by 10% from 40% to 36%.
Giving land, property or shares to charity
Income tax or capital gains tax relief may be available for donations of land, property or shares to charity. Income tax relief is given by deducting the value of the donation from total taxable income for the tax year in which the gift was made to the charity. Relief is claimed in the self-assessment return.
Where land, property or shares are sold to a charity for more than the cost, but less than their market value, no capital gains tax is payable.
Tax-free mobile phone
Mobile phones are ubiquitous – they are also subject to a tax exemption which enables employees to enjoy a mobile phone provided by their employer without suffering a benefit in kind tax charge. However, as with all exemptions there are conditions to be met for the exemption to apply.
Nature of the exemption
The exemption applies where an employer provides an employee with a mobile phone for his or her use. However, ownership of the phone must not be transferred to the employee. The exemption covers the use of the phone and the cost of all calls, including private calls. It also applies to the provision of a SIM card for use in the employee’s own phone.
The exemption is limited to one phone or SIM card per employee. Phones or SIM cards provided to members of the employee’s family or household by virtue of the employee’s employment are treated as if they were provided to the employee.
If the employee is provided with more than one mobile phone or SIM card, second and subsequent phones or SIM cards are taxed as a benefit in kind (as an asset made available for the employee’s use).
If the exemption does not apply, the employer can meet the cost of business calls without triggering a tax charge.
Contract between employer and supplier
While the end result may seem to be the same if the employer contracts with the phone supplier or if the employee takes out the contract and the employer either pays the bill or reimburses the employee, from a tax perspective the outcome is very different.
The mobile phone exemption only applies if the contract is between the employer and the phone supplier. If the contract is between the employee and the phone supplier and the employer meets the cost, the employer is meeting a personal bill of the employee rather than providing the employee with a mobile phone. This is an important distinction and can mean the difference between the exemption being available and the employee suffering a tax hit.
The exemption applies to smartphones. To count as a phone, the device must be capable of making and receiving voice calls. Tablets, such as iPads, do not qualify (even if calls can be made via What’s App or similar services). The fact that a device has telephone functionality does not in itself qualify it as a mobile phone. As a general rules, devices that use Voice Over Internet Protocol (VOIP) systems will not qualify.
Beware the OpRA rules
The exemption is lost if the mobile phone is made available to the employee under a salary sacrifice or other optional remuneration arrangement (OpRA). Where this is the case, the alternative valuation rules apply and the benefit is valued by reference to the salary foregone instead.
Using a SIPP to save for retirement
A SIPP is a self-invested personal pension which is set up by an insurance company or specialist SIPP provider. It is attractive to those who wish to manage their own investments. Contribution to a SIPP may be made by both the individual and, where appropriate, by the individual’s employer.
The range of potential investment is greater for a SIPP than for a personal pension or group personal pension scheme.
The SIPP can invest in a wide range of assets, including:
A SIPP can also borrow money to purchase investments. For example, a SIPP could take out a mortgage to fund the purchase a commercial property, which could be rented out. The rental income would be paid into the SIPP and this could be used to pay the mortgage and other costs associated with the property.
Tax-relieved contributions can be made to the SIPP up to the normal limits set by the annual allowance. This is set at £40,000 for 2019/20. The annual allowance is reduced by £1 for every £2 which adjusted net income exceeds £150,000 where threshold income exceeds £110,000, until the minimum level of £10,000 is reached. Anyone with adjusted net income of £210,000 and above and threshold income of at least £110,000 will only receive the minimum annual allowance of £10,000. Where the annual allowance is unused, it can be carried forward for three years. Any contributions made by the employer also count towards the annual allowance.
SIPPs operate on a relief at source basis, meaning that the individual makes contributions from net pay. The SIPP provider claims back basic rate relief, with any higher or additional rate relief being claimed through the self-assessment return.
Drawing a pension
A SIPP is a money purchase scheme and the value of benefits available to provide a pension depend on contributions that have been made to the scheme, investment growth (or reduction) and charges.
It is possible to draw retirement benefits at age 55. A tax-free lump sum can be taken to the value of 25% of the accumulated funds. Withdrawals in excess of this are taxed at the individual’s marginal rate of tax.
To prevent recycling contributions, where pension benefits have been flexibly accessed a reduced money purchase annual allowance, set at £4,000 for 2019/20, applies.
Partner note: www.pensionsadvisoryservice.org.uk
Student loan deductions
Employers fulfil many collection roles for HMRC, one of which is the collection of student loan repayments.
There are now three types of student loans for which employers may be responsible for deducting loan repayments from an employee’s pay. These are:
• Plan 1 Student Loans;
• Plan 2 Student Loans; and
• Post-graduate Loans (PGLs).
Employees must make repayments in respect of a student loan when their income exceeds the threshold for their particular loan type. Each loan has its own repayment threshold:
Annual Monthly Weekly
Plan 1 Student Loan £18,935 £1,577.91 £364.13
Plan 2 Student Loan £25,725 £2,143.75 £494.71
Post-graduate Loan £21,000 £1,750.00 £403.84
Repayments are made at the rate of 9% on income in excess of the threshold for Plan 1 and Plan 2 Student loans, and at a rate of 6% on income in excess of the threshold for PGLs.
Where an employee has both a student loan and a PGL, deductions will be made at the combined rate of 15% where income exceeds the higher loan threshold.
An employer will need to start making deductions in respect of a student or PGL if any of the following apply:
• a new employee is taken on and has a ‘Y’ in the student loan box on their P45;
• a new employee tells the employer they are repaying a student loan;
• a new employee completes a starter checklist confirming that they have a student loan;
• the employer receives a SL1 start notice from HMRC;
• the employer receives a PGL1 start notice from HMRC; or
• the employer receives a Generic Notification Service Student Loan reminder.
The employer should check they are aware of the type of loan that the employee has, confirming the loan type with the employee where necessary.
Stopping deductions - The employer should only stop making student loan deductions if they receive a SL2 stop notice or a PGL2 stop notice from HMRC; deductions should not be suspended at the request of the employee.
Where a stop notice is received, the employer should stop the deductions from the first payday from which it is practical to do so.
Paying deductions over to HMRC - The employer should pay amounts deducted from employees’ pay in respect of student loan deductions over to HMRC, together with payment of tax and NI, taking care to ensure that the payment reach HMRC by 22nd month where payment is made electronically or by 19th month where payment is made by cheque.
Leavers - If an employee in respect of whom student loan or PGL repayments are being deducted leaves, the employer should enter a ‘Y’ in box 5 of the P45. This will tell the new employer to make deductions for student loan repayments. A ‘Y’ should be entered in this box even if the employee’s income is below the repayment threshold so no deductions have yet been made. No entry should be made on the P45 if a stop notice has been received.
MTD software – what do you need?
Making Tax Digital (MTD) for VAT went live on 1 April 2019. VAT registered businesses with VATable turnover above the VAT registration threshold of £85,000 are required to comply with the requirements of MTD for VAT from the start of their first VAT accounting period beginning on or after 1 April 2019. For certain businesses the start date is delayed until 1 October 2019. Where the business is VAT registered but VATable turnover is below £85,000, MTD for VAT is optional.
MTD for VAT imposes two digital requirements – digital record-keeping and digital VAT returns.
Digital record-keeping - Under MTD for VAT, records must be kept digitally within MTD-compatible software. Some software will record all VAT records and accounts. The type of package used may affect whether it is necessary to retain the original document.
Where a business receives an invoice and enters the information into the MTD-compatible software, the original invoice must be retained. However, if the invoice is scanned into the software, there is no need to retain it, unless it is required for another purpose. It should be noted that VAT law requires the originals of some documents to be retained.
Records that must be kept digitally include:
• business name, address, VAT registration number and VAT schemes used;
• supplies made – time of supply (tax point), value of supply and rate of VAT;
• supplies received – time of supply, value of supply, amount of input tax claimed;
• reverse charge transactions.
To support the VAT returns, summary data must also be maintained in the MTD software:
• total output tax owed
• total tax owed on acquisitions from other EU member states
• total tax that is required to be paid on behalf of a supplies under a reverse charge
• total input tax entitled to claim on business purchases
• input tax on allowable acquisitions from other EU member states
• total tax that need to be paid or reclaimed following the correction of an error
• any other adjustment allowed or required by the VAT rules
Where the flat rate scheme is used, there is no need to keep a digital record of purchases unless they are capital expenditure goods on which input tax is claimed. Nor is it necessary to keep a digital record of the goods used in the limited cost business calculation.
VAT returns - The second part of MTD for VAT is the requirement to file VAT returns digitally using compatible software. HMRC’s VAT Online service can't be used for MTD for VAT.
Compatible software - MTD-compatible software (functional compatible software) is a software program or set of software programs or applications that are capable of:
• recording and preserving digital records;
• providing information and returns to HMRC using the API platform; and
• receive information via the API platform.
Some software packages will perform all of the above, some will perform some but not all, so more than one product may be needed. Spreadsheets can be used to record data, but another piece of software will be needed to file the return.
The links between the different software packages used should be digital. However, while transferring data manually between programs is not acceptable under MTD for VAT – such as keying numbers from a spreadsheet into a package to send a return or ‘cutting and pasting’ HMRC are operating a ‘soft landing’ and will permit this for the first year.
Software suppliers - HMRC produce a list of software suppliers who produce software compatible with MTD for VAT. The list can be found on the Gov.uk website at www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat.
Employees – claim a tax deduction for expenses
Employees often incur expenses in doing their job – this may be the cost of a train ticket or petrol to visit a supplier, or purchasing stationery or small tools which are used in their job. Employers will frequently reimburse the employee for any expenses that they incur, but where such a reimbursement is not forthcoming, the employee may be able to claim a tax relief.
Employment expenses are deductible only if they are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. The test is a harsh test to meet; the ‘necessary’ condition means that ‘each and every’ jobholder would be required to incur the expense. Consequently, there is no relief if the expense is not ‘necessary’ and the employee chooses to incur it (even if the ‘wholly and exclusively’ parts of the test are met). The rules for travel expenses are different, but broadly operate to allow relief for ‘business travel’.
In the performance of the job v putting the employee in a position to do the job
A distinction is drawn between expenses that are incurred in actually performing the job and those which are incurred in putting the employee in the position to do the job. Expenses incurred in travelling from the office to a meeting with a supplier and back to the office are incurred in performing the job. By contrast, childcare costs or home to work travel are incurred to put the employee in a position to do the job. Relief is available only for expenses incurred as part of the job, and not for those which incurred, albeit arguably necessarily, to enable the employee to do the job.
Expenses for which relief may be claimed
A deduction can be claimed for any expense that meets the ‘wholly, exclusively and necessarily’ test. Examples include professional fees and subscriptions, travel and subsistence costs, additional costs of working from home, cost of repairing tools or specialist clothing, phone calls, etc.
Where the expense is reimbursed by the employer, a deduction cannot be claimed as well; however, the amount reimbursed is not taxable and is ignored for tax purposes.
Using your own car
Where an employee uses his or her own car for business travel, the employer can pay tax-free mileage payments up to the approved rates. For cars and vans, this is 45p per mile for the first 10,000 miles in the tax year and 25p per mile for any subsequent miles.
If the employer does not pay mileage allowances or pay less than the approved amount, the employee can claim tax relief for the difference between the approved amount and the amount paid by the employer.
Flat rate expenses
Employers in certain industries are able to claim a flat rate deduction for certain expenses in line with rates published by HMRC (see www.gov.uk/guidance/job-expenses-for-uniforms-work-clothing-and-tools#claim-table). Although claiming the flat rate removes the need to keep records of actual costs, employees can claim a deduction based on actual costs where this is more beneficial.
How to claim
There are different ways to make a claim depending on your circumstances. Claims can be made online using HMRC’s online service, by post on form P87, by phone or, where a self-assessment return is completed, via the self-assessment return.
A landlord will usually take a deposit from a tenant when letting a property to cover the cost of any damage caused to the property by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in an official tenancy deposit scheme.
The purpose of the deposit is to cover items such as damage to the property that extends beyond normal wear and tear. The items covered by the security deposit should be stated in the letting agreement.
The deposit charged cannot now exceed five weeks rent.
Is it taxable?
The extent to which the deposit is included as income of the rental business depends on whether all or part of the deposit is retained by the landlord. In a straightforward case where a security deposit is taken by the landlord, held for the period of the tenancy and returned to the tenant at the end of the rental period, the deposit is not included as income of the property rental business.
However, if at the end of the tenancy agreement the landlord retains all or part of the deposit to cover damage to the property, cleaning costs or other similar expenses, the amount retained is included as income of the property rental business. The retained deposit is a receipt of the business in the same way as rent received from the tenant. However, the actual costs incurred by the landlord in making good the damage or having the property professionally cleaned are deducted in computing the profits of the business.
The retained deposit is reflected as rental income of the property rental business for the period in which decision to retain the deposit is taken, rather than for the period in which the deposit was initially collected from the tenant.
Kevin purchases a property as a buy to let investment. He collects a security deposit of £1,000 from the tenant. The terms of the deposit are set out in the tenancy agreement.
The let comes to an end in July 2019. When checking out the tenant, it transpires that the tenant has failed to have the carpets cleaned, as per the terms of the agreement, and also that he has damaged a door, which needs to be repaired.
After discussion, Kevin and the tenant agree that £250 of the deposit will be retained to cover cleaning and repair costs. The balance of the despot (£750) is returned to the tenant in October 2011.
Kevin spends £180 having the property professional cleaned and £75 having the door repaired.
When completing his tax return, he must include as income the £250 retained from the tenant. However, he can deduct the actual cost of cleaning the property (£180) and repairing the door (£75). As the amount actually spent (£255) exceeds the amount retained, he is given relief for the additional £5 in computing the profits of his property rental business.
The balance of the deposit returned to the tenant is not taken into account as income of the business.
Property income receipts – what should be included?
When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.
Rent and other receipts
Income from a property rental business includes all gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be taken into account.
The treatment of deposits can be complex. A deposit may be taken to cover the cost of any damage incurred by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in a tenancy deposit scheme.
Deposits not returned at the end of the tenancy or amounts claimed against bonds should normally be included as income. However, any balance of a deposit that is not used to cover services or repairs and is returned to the tenant should be excluded from income.
Where a property is owned by two or more people, it is important that the profit or loss is allocated between the joint owners correctly. Where the joint owners are married or in a civil partnership, profits and losses will be allocated equally, even if the property is owned in unequal shares, unless a form 17 election has been made for profits and losses to be allocated in accordance with actual ownerships shares where these are unequal.
Where the joint owners are not spouses or civil partners, profits and losses are normally divided in accordance with actual ownership shares, unless a different split has been agreed.
Overseas rental properties
Where a person has both UK and overseas rental properties, it is important that they are dealt with separately. The person will have two property rental business – one for UK properties and one for overseas properties. Losses arising on an overseas let cannot be offset against profits of a UK let and vice versa. Proper records should be kept so that the income and expenses can be allocated to the correct property rental business.
Furnished holiday lettings
Different tax rules apply to the commercial letting of furnished holiday lettings and where a let qualifies as a furnished holiday let it must be kept separate from UK lets that are not furnished holiday lettings. Likewise, furnished lets in the EEA must be dealt with separately from UK furnished holiday lets.
Getting it right
Good record keeping is essential to ensure that not only that all sources of income are taken into account, but also that any income received is allocated to the correct property rental business.
Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).
Non-residents landlord scheme
A non-resident landlord is a landlord who lets out property in the UK but spends more than six months in the tax year outside the UK. A special tax scheme – the non-residents landlord scheme – applies to these landlords. Under the scheme, tax must be deducted by a letting agent or tenant from the rent paid to the non-resident landlord and paid over to HMRC.
Tenants - A tenant falls within the NRL scheme where the landlord is a non-resident landlord and the rent paid to the landlord is more than £100 a week. Where the rent is less than £100 a week (£5,200 a year), the tenant is not required to deduct tax from the rent (unless told to do so by HMRC). The tenant is also relieved of the obligation to deduct tax if HMRC have notified the tenant in writing that the landlord can receive the rent without tax being deducted; however the tenant must still register with HMRC and complete an annual return.
Where the tenant pays rent to a letting agent, it is the letting agent rather than the tenant who must operate the scheme.
Letting agents - Letting agents must also operate the NRL scheme where they collect rent on behalf of a non-resident landlord, regardless of how much rent they collect (unless HMRC have informed the letting agent in writing that the landlord can receive the rent without tax being deducted).
A letting agent is someone who helps the landlord run their business, receives rent on their behalf or controls where it goes and who usually lives in the UK.
Complying with the scheme - To comply with the scheme, tenants and letting agents must
Calculating the tax - Tax should be calculated on a quarterly basis on:
Deductible payments are those that the tenant or letting agent can be ‘reasonably satisfied’ will be deductible in computing the profits of the landlord’s property rental business. Reassuringly, in their guidance, HMRC state that they ‘do not expect letting agents and tenants to be tax experts’.
The quarters run to 30 June, 30 September, 31 December and 31 March. The tax deducted must be paid over to HMRC within 30 days of the end of the quarter.
The non-resident landlord - The non-resident landlord can set the tax deducted under the scheme against that payable on the profits of his or her property rental business.
Simplified expenses for smaller businesses
Certain unincorporated small businesses may choose to use the ‘cash basis’ when calculating taxable income, under which participants are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming calculations designed for big businesses. Whilst easing the administrative burdens of preparing ‘traditional’ accounts, using the cash basis can also help with cash flow as it will not be necessary to accrue for income not yet received, or expenditure not paid out.
To complement the cash basis, HMRC also introduced ‘simplified expenses’ for small businesses. Basically, instead of working out the exact cost of certain expenses, HMRC allow the business to deduct a standard, or flat rate amount. Simplified expenses can apply to the following expenses:
The taxpayer should, where relevant, record business miles for vehicles, hours worked at home and the number of people living at the business premises during the course of the tax year. At the end of the tax year, HMRC’s flat rates are used to work out the expenses, which are then included on the self-assessment tax return.
Vehicles - HMRC’s flat rate mileage allowances are designed to cover all vehicle-related running costs (insurance, repairs, servicing, fuel etc.). Current rates are as follows:
Using mileage rates is not obligatory, but once they have been used for a vehicle, they must continue to be used for as long the vehicle is used for the business.
Where a car is purchased for business use, capital allowances may be claimed, but only if simplified expenses are not being used to work out business expenses for that vehicle.
Business use of home - A monthly deduction is allowable if certain criteria are satisfied. Rates are:
Number of hours worked Monthly amount
25 to 50 £10.00
51 to 100 £18.00
101 or more £26.00
The number of hours worked in a month is the number of hours spent wholly and exclusively on work done by the person in the person’s home wholly and exclusively for the purposes of the trade.
Mixed use - Where premises are used for both business and private purposes, instead of making the standard deduction outlined above, the business can make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:
Number of relevant occupants Applicable amount
3 or more £650
A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.
Benefits - Simplified expenses may help reduce business and household costs, without needing to retain the associated paperwork. However, like any flat-rate scheme, simplified expenses may result in an increased tax liability. The scheme may not be for everyone and certain checks should therefore be made before using it.