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Helpsheets ... continued 9 from homepage

  • Managing a rental business from home

    A landlord will often manage their property rental business from home, and in doing so will incur additional household expenses, such as additional electricity and gas, additional cleaning costs, etc. As with other expenses, the landlord can claim a deduction for these when working out the profits of the rental business.

    Most unincorporated landlords will now prepare accounts on the cash basis.

    Wholly and exclusively incurred

    The basic rule for an expense to be deductible in computing the profits of a rental business is that the expenses relate wholly and exclusively to that business. This applies equally to a deduction for household expenses – they can be claimed where they relate wholly and exclusively to the rental business.

    Actual costs

    Where the expenses are wholly and necessarily incurred, a deduction can simply be claimed for the actual expenses. In reality, this will take some working out as household bills will not be split between personal and business expenses. Any reasonable basis of apportionment can be used – such as floor area, number of rooms, hours spent etc. Records should be kept, together with the basis of calculation.

    Simplified expenses

    Where a landlord spends more than 25 hours a month managing the business from home, the simplified expenses system can be used to work out the deduction for the additional costs of working from home. The expenses depend on the number of hours worked in the home each month, and the deduction is a flat monthly amount, as shown in the table below.

    Hours of business use per month Flat rate per month

    25 to 50 hours £10

    51 to 100 hours £18

    101 hours or more £26

     

    The hours are the total hours worked at the home by anyone in the property rental business.

    Example

    Nadeem runs his property rental business from home. In 2018/19, he spends 60 hours a month working on the business in all months except August and December, in respect of which he spends 30 hours in each on those months working on the business.

    For 2018/19 he is able to claim a deduction of £200 for expenses of running his business from home (10 months @ £18 plus 2 months @ £10).

    The simplified expenses rule does not cover telephone and internet, which can be claimed in addition to the deduction for simplified expenses.

  • Timing dividends right could help save tax

    Timing the date of a dividend payment from a company can determine the amount and the due date of the tax payable. This may be a useful strategy in a family-owned company.

    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. Fortunately, 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.

    The amount of tax payable on dividend income is determined by the amount of overall income an individual receives during a tax year. This includes earnings, savings, dividend and non-dividend income. Dividend tax paid depends primarily on which tax band the first £2,000 falls in.

    Accelerating payment - The timing of the dividend payment may have a marked impact on the directors’ and shareholders’ personal tax situation. A dividend is not paid until the shareholder receives the funds direct or the dividend amount is put unreservedly at his or her disposal, for example by a credit to a loan account on which the shareholder has the power to draw. If the personal tax allowance and basic rate band for a tax year have not been fully utilised towards the end of the tax year, payment of a dividend may mean that the unused portion can be mopped up.

    Example - Graham is the sole director and shareholder of a limited company.

    He is considering whether to pay a dividend before the end of the 2019/20 tax year. In that tax year he has other income of £25,000. He has retained profits in the company of £100,000.

    For 2019/20 the personal tax allowance is £12,500 and the basic rate tax band is £37,500. The dividend allowance is £2,000.

    If Graham pays a dividend of £27,000 before the end of the 2019/20 tax year, he will fully utilise his basic rate band, and will be liable to tax at 7.5% on the £25,000 of the dividend income (the first £2,000 of the dividend being covered by the dividend allowance).

    Delaying payment - Where the shareholder already has income exceeding the basic rate band in one tax year, delaying the dividend until the start of the next tax year.

    Example - Following on from the above example, say Graham has already paid himself a salary of £50,000 in the 2019/20 tax year, thus fully using up his basic rate band. If he pays the £27,000 dividend before the end of the tax year, he will pay tax on it of £8,125 (£27,000 - £2,000 allowance x 32.5%). This tax will be due for payment on 31 January 2021.

    If he waits until the start of the next tax year (2020/21) to pay the dividend, and also receives a salary of £25,000 during that year, the tax due on the dividend will be £1,875 (£25,000 x 7.5%) – a potential saving of £6,250. Graham will also benefit from a delay in the due date for payment of the tax until 31 January 2022.

    Fluctuating income - Dividend payments can often be timed to smooth a director/shareholder’s earnings year-on-year. Broadly, where profits fluctuate, a company could consider declaring and paying dividends equally each year, or by declaring a smaller dividend in the first year (when profits are higher) and treating the remainder of the payment as a shareholder loan. At the start of the next tax year, a further (smaller) dividend can be declared, which will repay the loan. Care must be taken with this type of arrangement, not least because the loan must be repaid within nine months of the company’s year-end to avoid a tax charge arising on the company.

    The family business potentially offers considerable scope for structuring tax-efficient payments to family members using a mixture of both salary and dividends. A pre-dividend review may be particularly beneficial towards the end of the company’s year-end.

  • Closing - when a member’s voluntary liquidation is beneficial

    Although it is possible to strike off a company and for distributions made prior to dissolution to be treated as capital rather than as a dividend, this is not an option where the amount of the distributions exceeds £25,000.

    Where the taxpayer’s personal circumstances are such that it is beneficial for the remaining funds to be taxed as capital (and liable to capital gains tax), rather than as a dividend, a member’s voluntary liquidation (MVL) can be an attractive option, as depending upon the level of funds to be extracted the costs of the liquidation may be more than covered by the tax savings that can be achieved.

    What is an MVL?

    An MVL is a process that allows the shareholders to put the company into liquidation. This route is only an option if the company is solvent (i.e. its assets are greater than its liabilities). The directors must sign a declaration of solvency confirming that the company is able to pay its debts in full within the next 12 months and 75% of the members must agree to place the company into liquidation. The shareholders must pass a special resolution to wind up the company. They will also need to pass an ordinary resolution to appoint liquidators. The liquidator must be a licenced insolvency practitioner.

    What are the tax implications?

    Under an MVL the capital extracted from the company is treated as a capital distribution and is liable to capital gains tax, rather than being taxed as a dividend. Where entrepreneurs’ relief is in point, the rate of tax will only be 10%, assuming enough of the entrepreneurs’ relief lifetime limit remains available. If significant funds are available for distribution, this can generate considerable tax savings.

    Example

    Edward and Oliver are directors of a company in which they both own 50% of the shares and 50% of the voting rights. Each is entitled to 50% of the profits available for distribution and 50% of the assets on a winding up.

    They wish to wind the company up, but as they have cash and assets of £10 million to distribute, they opt for an MVL, to allow them to take advantage of the capital gains tax treatment. Both are additional rate taxpayers, and both meet the qualifying conditions for entrepreneurs’ relief.

    Edward and Oliver each receive £5 million on the winding up of the company. They both have the full amount of the entrepreneurs’ relief lifetime limit (£10 million) unused, and it is assumed for simplicity that the annual exempt amount has been used elsewhere. The gain is therefore taxed at 10% and each will pay tax of £500,000 on their distribution of £5 million.

    Had they not opted for an MVL and the extracted funds taxed as a dividend, they would have each paid £1,905,000 in tax on the £5 million distribution (£5m @ 38.1%).

    Anti-avoidance

    Anti-avoidance provisions apply which are designed to target ‘moneyboxing’ (where the company retains more funds than it needs in order to extract them as capital when the company is liquidated) and ‘pheonixism’ (where the company is liquidated, the value extracted as capital and a new company is set up to carry on what is essentially the same business). Liquidation distributions which are caught by the rules are treated as income rather than capital.

  • Tax-free childcare update

    HMRC have recently run a campaign to remind people that they could be missing out on up to £2,000 per child, per year, towards the cost of childcare.

    Working parents and guardians may be eligible to receive government top-ups of £2 for every £8 that they pay into a tax-free childcare account, up to a maximum of £2,000 per child (or £4,000 for disabled children), although there is an overall maximum limit of £10,000.

    The scheme is open to all working parents across the UK with children under 12, or under 17 if disabled.

    Under the scheme, the parent/guardian opens an online account via the government’s Childcare Choices website and decides how much to pay in and how often. The flexible nature of the accounts mean that accountholders can pay in more in some months, and less at other times, depending on how much they have spare to invest. The account holder’s circumstances are re-confirmed online every three months. Money can be withdrawn at any time but the government contribution will be lost.

    Again, the flexible nature of tax-free childcare allows anyone to pay into the account, including grandparents, other family members or employers.

    To qualify for the government contribution, account holders will usually have to be in work, expecting to earn at least the National Minimum Wage (NMW) or National Living Wage (NLW) for 16 hours a week on average, over the next 3 months. This currently equates to at least £1,707.68, which is equivalent to the NLW for people over 25.

    Where an individual is not working, they may still be eligible for tax-free childcare if their partner is working, and they receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or Employment and Support Allowance. It is also possible to apply where the claimant is starting or re-starting work within the next 31 days.

    Self-employed people who do not expect to make enough profit in the next three months can use an average of how much they expect to make over the current tax year. Additionally, the earnings limit does not apply to self-employed individuals who started their business less than twelve months ago.

    Where the individual, or their partner, has an ‘adjusted net income’ over £100,000 in the current tax year they will not be eligible for tax-free childcare.

    Broadly, ‘adjusted net income’ is total taxable income before any personal allowances and minus certain payments, such as those made under Gift Aid. It is also worth noting that the £100,000 limit includes any expected bonuses.

    It is not possible to receive tax-free childcare at the same time as claiming Working Tax Credit , Child Tax Credit , Universal Credit (UC) or childcare vouchers. Which scheme the individual is better off with depends on their situation. The Childcare Choices website includes a childcare calculator for parents to compare all the government’s childcare schemes on offer and check which works best for their families, including the 30-hour free childcare offer, tax-free childcare or universal credit.

    Employer-provided childcare

    Tax-free childcare effectively replaces HMRC’s employer-supported childcare scheme. However, parents who joined an employer-childcare voucher scheme before 4 October 2018 have the option of remaining in that scheme for as long as the employer offers it, or for as long as they stay with the employer. The employer-provided voucher scheme closed to new entrants from 4 October 2018.

    Where an individual decides to switch from childcare vouchers or directly contracted childcare, they must tell their employer within 90 days of applying for tax-free childcare.

    Finally, with regards to UC, HMRC recommend that the claimant waits until a decision on a tax-free childcare application is received before cancelling a UC claim.

    Anyone who pays for childcare would be wise to check their eligibility for tax-free childcare as they could be missing out on considerable financial support.

  • Payroll – how to deal with new starters

    From a payroll perspective, there are various tasks that an employer has to perform when they take on a new starter.

    For 2019/20 an employer needs to operate PAYE where the employee earns more than £118 per week (the lower earnings limit for National Insurance purposes). However, if any employees earn more than £118 per week, the employer must comply with RTI and report all payments to employees to HMRC (even those below £118 per week).

    Work out what tax code to use - The tax code is fundamental to the operation of PAYE and it is important that the correct tax code is used. To ensure that a new employee is taxed correctly, the employer will need to know the correct tax code to use.

    If the employee has a P45 and left their last job in the current tax year, the employer can simply use the code shown on the P45. If the employee left their last job in the 2018/19 tax year, the code on the P45 can be updated by adding 65 to codes ending in L, 59 for codes ending in N and 71 for codes ending in M.

    If the employee does not have a P45, the employer will need to ask the employee to complete a new starter checklist.

    New starter checklist - The new starter checklist enables the employer to gather information on the new employee. Even if the employee has a P45, it is still useful for the new starter to complete the checklist as it contains information which cannot be gleaned from the P45 (such as the type of loan where the new starter has a student loan which has not been repaid).

    As far as establishing which tax code to use, the employee will need to select one of three statements:

    • A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.

    • B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.

    • C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.

    The following table indicates what code should be used for 2019/20 depending on what statement the employee has ticked.

    Statement ticked Tax code to use

    A 1250L on a cumulative basis

    B 1250L on a Week 1/Month 1 basis

    C BR

     

    Does the employee have a student loan? - The employer will also need to establish whether the employee is making student loan repayments. If the employee has a P45 and is making loan repayments, the student loan box will be ticked. However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.

    Tell HMRC about the new employee - The employer will need to add the new employee to the payroll and also tell HMRC that the employee is now working for the employer. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.

  • VAT refunds for DIY builders

    If you build your own house or convert an existing property into a home, you may be eligible to apply for a VAT refund on building materials and services. You do not need to be VAT registered to claim a refund.

    What qualifies?

    Refunds can be claimed in respect of building materials that are incorporated into the building and which cannot be removed without tools or without damaging the building. Refunds are available for materials used to build both new homes and for certain conversions.

    A new home will qualify if it is separate and self-contained and you build it for you and your family to live in. The property must not be used for business purposes, although you are permitted to use one room as a home office.

    Conversions will qualify if the property was previously used for non-residential purposes and is converted for residential use. Conversions of residential building will only qualify if they have not been lived in for at least 10 years.

    Where you use a builder, the builder’s services will normally be zero-rated where they work on a new home. However, you can claim a refund for VAT charged by a builder working on a conversion.

    What does not qualify?

    Refunds are not available in respect of:

    • materials or services on which no VAT is payable because they are zero-rated or exempt;

    • professional fees, such as architects’ fees or surveyors’ fees;

    • costs of hiring machinery or equipment;

    • building materials which are not permanently attached to or part of the building;

    • fitted furniture, some gas and electrical appliances, carpets and garden ornaments.

    A refund is also denied if the building is not capable of being sold separately, for example, as a result of planning restrictions.

    How to claim

    The claim is made on form 431NB where it relates to a new build and on form 431 where it relates to a conversion. The forms are available on the Gov.uk website. The claim must be made within three months of the date on which the building work was completed.

    You must include all the relevant supporting documentation with your claim, such as valid VAT invoices to support the amount claimed. The refund will normally be issued within 30 days of making the claim.

    Partner note: www.gov.uk/vat-building-new-home/eligibility.

  • Fuel and mileage payments for company car drivers

    The car benefit tax charge does not cover fuel provided for a company vehicle. Where the company pays for all fuel, the fuel benefit will be charged, which is based on the cash equivalent of the benefit each tax year (£24,100 for 2019/20 multiplied by a percentage depending on the car’s CO2 emissions).

    If the company pays for all fuel, but the employee reimburses the company for private use, as long as the amount paid back is equal to, or more than, the amount for personal fuel in the same tax year, the employer will not have to pay anything to HMRC or report on such transactions.

    Where the employer does not directly meet the cost of fuel used for business in a company car, but pays the employee a business mileage allowance, no fuel benefit charge will arise if the mileage allowance does no more than meet the cost of fuel used for business travel. If the mileage allowance is excessive, but it’s only paid for genuine business travel, the ‘profit element’ will be chargeable to tax in the normal way. However, a car fuel benefit charge will arise where, for instance, the payments to the employee cover travel between home and work.

    An employee using their own car for work can claim a mileage allowance from their employer, which is designed to cover the costs of fuel and wear and tear for business trips. The mileage allowance will be tax-free if it does not exceed HMRC’s Approved Mileage Allowance Payment rates.

    The AMAP scheme does not apply for company cars. However, employees can still claim fuel expenses for all business mileage where they pay for the fuel. The rates are lower than the AMAP rates and are updated quarterly.

    HMRC’s guidance on fuel-only mileage rates for company cars confirms that employers are not obliged to use advisory fuel rates. Where an employer wishes to use them, they only apply where the employer:

    • reimburses employees for business travel in their company cars; or

    • requires employees to repay the cost of fuel used for private travel in those company cars.

    If the employer pays more than the relevant advisory fuels rates and the payments are not an actual reimbursement, the excess is taxed and subject to employees’ and employers’ National Insurance Contributions.

    Advisory fuel rates do not apply to electric cars, so any mileage payments should be based on actual costs incurred.

    Where an individual is provided with workplace facilities for charging a battery of a vehicle used by them (including as a passenger), no taxable benefit arises for costs relating to the provision of electricity at those facilities if the following conditions are met:

    • the charging facilities must be provided at or near an employee’s workplace

    • charging must be available to either all the employer’s employees generally, or all the employer’s employees generally at the employee’s workplace

    • charging facilities must be for a battery of a vehicle in which the employee is either the driver or a passenger.

    The benefit will remain taxable if it’s offered in conjunction with an optional remuneration arrangement.

  • When and how to incorporate

    Over the last decade, corporation tax rates for most companies – irrespective of size - have fluctuated between 19% and 21%. The main rate of corporation tax is expected to be cut to 17% from April 2020.

    Current corporation tax rates are still pretty favourable and are indeed generally lower than those paid by many individuals. In addition, there are other areas where company formation may help save tax. Although the costs and regulations involved with running a company are usually greater than trading as a sole trader or in partnership, and more administration is generally needed, using a company as a vehicle through which to trade remains a popular choice.

    The starting point for dealing with companies and company directors is to remember that a limited company exists in its own right, which means that the company’s finances are separate from the personal finances of the company owners. Strict laws mean that the shareholders cannot simply take money out of the company whenever they feel like it.

    When to incorporate - The question of whether to incorporate commonly arises as a business expands – the limited liability status that company formation provides is often needed to start winning contracts with bigger companies. However, incorporating may not be such a good deal in the early days of trade, or if there is no intention to grow beyond the status of a solely owned business. This may be particularly relevant if losses are envisaged in the early years of trading – for sole traders and partnerships, it is possible to carry back losses made in the first four years and offset them, where applicable, against personal income of the three preceding years. This often results in a substantial refund of tax becoming due and may offer a much-needed cash boost to the business.

    How to incorporate - Firstly, the company must choose a name, which cannot be the same as another registered company’s name. If it is too similar to another company’s name or trademark it may have to be changed.

    The company must have at least one director who is a natural person, and a public company must have at least two directors. A private company need not appoint a company secretary, although in practice many choose to do so.

    There must be at least one shareholder or guarantor, who can also be a director.

    The company will need to prepare a 'memorandum of association' and 'articles of association', as provided for by Companies Act 2006. Broadly, these documents set out how the company will be run.

    Private limited companies are also required to maintain a register of those persons who have significant control of the company – known as a ‘PSC Register’. The function of the Register is to increase corporate transparency for the purpose of combating tax evasion, money laundering and terrorist financing.

    The company must register with HMRC for corporation tax and PAYE as an employer at the same time as registering with Companies House. This must be done within three months of starting to do business. The company may also be required to register for VAT if it meets the registration criteria.

    Although there are disadvantages to incorporating a business, the lower tax rates and other reliefs currently on offer still make it an attractive proposition. Some advantages worth considering include:

     • ability to pay dividends to shareholders, which may in turn reduce liability to NICs

     • flexible succession planning, particularly for inheritance tax purposes

     • great investment opportunities, for example potential to raise money through tax-efficient schemes such as the Enterprise Investment Scheme (EIS)

     • limited liability status for shareholders, although directors may be asked to give personal guarantees of loans to the company and may still be held liable for the debts of a company

     • potential increased saleability

    Business owners are recommended to evaluate the advantages of incorporation on an on-going basis.

  • What is an EORI number and who needs one?

    An economic operator registration and identification (EORI) number will be needed for UK businesses to be able to continue to trade with the EU after the UK leaves the EU.

    If there is a no-deal Brexit

    In the event that the UK leaves the EU without a deal, an EORI number that starts with GB will be needed to move goods in and out of the UK.

    An EORI number is not needed if goods are only moved between Northern Ireland and Ireland. However, one is required for imports and exports that move directly between Ireland and Great Britain without going through Northern Ireland.

    A business that already has an EORI number starting with GB can continue to use it. It will be 12 digits long and include the VAT number where the business is registered for VAT.

    VAT-registered businesses

    Where a business is registered for VAT, HMRC send out EORI numbers automatically. It is advisable to keep the letter and a separate note of the number.

    Businesses not registered for VAT

    Businesses that are not registered for VAT will not receive an EORI number automatically. They will therefore need to apply for one if they wish to continue to trade with the EU post-Brexit.

    This is a simple process and can be done online on the Gov.uk website (see www.gov.uk/eori). Applicants will usually receive the number immediately; although it may take up to five working days if HMRC need to undertake more checks.

    Forgotten or misplaced EORI numbers

    A business which has lost or misplaced its EORI number can contact the EORI helpline online using the contact form on the Gov.uk website at www.gov.uk/eori.

    EU EORI number

    A business that wishes to trade with an EU country will also need an EU EORI number starting with the country code of the country that they wish to trade with. This should be obtained from the Customs authority of the EU country that the business will first trade with post Brexit.

  • Capital gains tax and chattels

    For capital gains tax purposes, not all chattels are equal. In some cases, it is possible to realise a profit on the disposal of a chattel and enjoy that profit tax free, whereas in other cases, capital gains tax must be paid. It all depends on whether the chattel is a wasting chattel or a non-wasting chattel, and where it falls in the latter camp, the amount of the disposal proceeds.

    What is a chattel? - The word ‘chattel’ is a legal term that means an item of tangible movable property. This covers personal possessions, including items of household furniture, paintings and antiques, cars, motorcycles. Items of plant and machinery which are not fixed to a building are also chattels.

    Exemption for cars - Private cars and other passenger vehicles are exempt from capital gains tax.

    Wasting assets - A wasting asset is an asset with a predictable life of 50 years or less. Certain chattels are always treated as wasting assets, such as plant or machinery.

    A gain or loss on a disposal of a wasting chattel is exempt from capital gains tax unless capital allowances have or could have been claimed on the asset. Capital gains tax also applies if a chattel with a predictable life of more than 50 years is loaned to a business which uses it as plant.

    Non-wasting chattels - Chattels with a predictable life of more than 50 years are non-wasting chattels. This would include paintings and jewellery.

    The capital gains tax position depends on the sale proceeds.

    Chattels exemption – proceeds £6,000 or less

    An exemption - the chattels exemptions – applies if a gain arises on the disposal of a chattel and the disposal proceeds do not exceed £6,000.

    Example 1 - Max purchases a painting from an unknown artist for £300. The artist becomes popular and Max sells the painting for £5,000, realising a gain of £4,700.

    As the disposal proceeds are less than £6,000, the chattels exemption applies, and the gain is exempt from capital gains tax.

    Chattels exemption – proceeds more than £6,000

    Where the proceeds are more than £6,000, the gain is reduced by five-thirds of the difference between the amount of the consideration and £6,000.

    Where the disposal proceeds are more than £15,000, the maximum gain will exceed the actual gain, so the relief is not in point.

    Example 2 - Ruby acquires an antique brooch for £3,000. It becomes a collectible item and she sells it for £10,000.

    The maximum chargeable gain is 5/3 (£10,000 - £6,000) = £6,667

    The actual gain is £7,000. As this exceeds the maximum permitted gain, the chargeable gain is £6,667.

    Losses - In the same way that the exemption operates to reduce the chargeable gain, it also caps the allowable loss. If a loss arises and the consideration on disposal is less than £6,000, it is deemed to be £6,000 for the purposes of computing the loss.

    Example 3 - Lola buys a painting for £7,000 which turns out to be a fake. She is able to sell it for £100, realising an actual loss of £6,900.

    However, in computing the allowable loss for capital gains tax purposes, the consideration is deemed to be £6,000. The allowable loss is therefore £1,000 (£6,000 - £7,000) rather than £6,900.

    Sets of chattels - Special rules apply to sets of chattels. This is to prevent people from artificially splitting a set worth more than £6,000 and selling each item separately to the same person for less than £6,000 each to benefit from the chattels exemption. The anti-avoidance provisions work to treat the set as a single asset in respect of which only one £6,000 limit is allowed.

  • Dying without making a will – who gets what

    The best way to ensure that your estate is passed on in accordance with your wishes is to make a will. However, even with the best of intentions, it may happen that someone dies without making a will, particularly where the death was sudden and unexpected.

    Where there is no will, the estate is divided up in accordance with the rules of intestacy. It is sensible to know what these are. Where the rules will give an outcome which is quite different to the desired one, a will should be made without delay.

    Married couples and civil partners - Married couple and civil partners inherit under the intestacy rules if they are still married at the time of death. Spouses and partners who have separated but not divorced or dissolved their partnership can also inherit under the intestacy rules.

    Where there are surviving children, grandchildren or great grandchildren and the estate is worth more than £250,000, the partner will inherit:

    • all personal property and belongings of the deceased

    • the first £250,000 of the estate

    • half of the remaining estate

    If there are no surviving children, grandchildren or great grandchildren, the partner will inherit all the personal property and belongings of the deceased and the whole of the estate with interest from the date of death.

    Children - If there is no surviving spouse or civil partner, the children will inherit the whole estate, divided equally between them where there are two or more children.

    If there is a surviving spouse or civil partner, the children will only inherit if the estate is worth more than £250,000. The children will inherit one half of the estate to the extent that it is worth more than £250,000, divided equally between them.

    All the children of the parent inherit equally from the estate, regardless of whether they are from the same or different relationships.

    Children receive their inheritance on reaching the age of 18 or marrying or entering a civil partnership if earlier.

    Grandchildren and great grandchildren - Children and great grandchildren only inherit under the intestacy rules if their parent or grandparent has died before the parent or grandparent. The grandchildren and great grandchildren inherit the share to which their parent or grandparent would have been entitled.

    Other close relatives - If there is no surviving spouse or civil partner, children, grandchildren or greatgrandchildren, other close relatives may inherit under the intestacy rules. The order in which relatives inherit is as follows: spouse or civil partner, children, grandchildren, great grandchildren, parents, siblings, grandparents, uncles and aunts.

    Exclusions - The intestacy rules make no provision for partners who are not married to or in a civil partnership with the deceased, regardless of whether they co-habit. Relations by marriage, stepchildren or stepparents, close friends and carers are also excluded.

    No surviving relatives - If there are no surviving relatives, the estate passes to the Crown under the rules of intestacy. This is known as 'bona vacantia'.

    Changing the outcome - As long as all the beneficiaries agree, an arrangement can be made which will allow the estate to be divided up other than as provided for under the intestacy rules, allowing someone who is excluded under the intestacy provisions, such as a stepchild, to benefit. This can be achieved by a Deed of Family Arrangement.

    A person may also be able to make an application to the court under the Inheritance (Provision for Family and Dependants) Act 1975 if they were dependant on the deceased when they passed away but do not inherit under the intestacy rules, for example, an unmarried partner.

  • Domestic reverse VAT charge for construction services

    The domestic reverse VAT charge for building and construction services was due to come into effect from 1 October 2019. However, in early September it was announced that the start date had been put back one year. As a result, the charge will now apply from 1 October 2020.

    Who is affected? - The charge will affect individuals and businesses who are registered for VAT in the UK and who supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

    Nature of a reverse charge - The reverse charge means that the customer receiving the specified supply has to pay the VAT rather than the supplier. In turn, the customer can recover the VAT under the normal VAT recovery rules.

    Supplies within the scope of the charge - The reverse charge will apply to supplies of building and construction services which are supplied at the standard or reduced rates that also need to be reported under the CIS. These are called specified supplies.

    However, where materials are included within a service, the reverse charge applies to the whole amount. By contrast, where deductions are made from payments to subcontractors under the CIS, no deductions are made from any part of the payment that relates to material.

    Move to monthly returns - The introduction of the reverse charge will mean that some businesses may become repayment traders claiming VAT back from HMRC rather than paying it over to HMRC. To aid cashflow and reduce the delay in claiming the VAT back, repayment traders can move to monthly returns.

    Planning ahead - The delayed start date has given businesses an extra year to prepare for the charge. In order to be ready for its introduction, businesses within the CIS should:

    • check whether the reverse charge will affect their sales, their purchases or both

    • update their accounting systems and software to deal with the reverse charge from 1 October 2020

    • consider whether the change will impact on cashflow

    • ensure that staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

    Contractors should review their contracts with subcontractors to determine whether the reverse charge will apply to services received under the contract. Where it does, they will need to notify their suppliers.

    Subcontractors will need to contact their customers to obtain confirmation from them as to whether the reverse charge will apply, and also whether the customer is an end user or intermediary supplier.

    Impact of change of start date - HMRC recognise that the start date was changed at short notice and that businesses may have changed their invoices to meet the needs of the reverse charge and cannot easily change them back. Where errors arise as a result, HMRC will take the change of date into account.

  • Optimising tax-free benefits in family companies

    Making use of statutory exemptions for certain benefits-in-kind offers an opportunity to extract funds from a family company without triggering a tax charge.

    The essential point to note is that to make the tax saving, the benefit itself, rather than the funds with which to buy the benefit, must be provided.

    Mobiles - No tax charge arises where an employer provides an employee with a mobile phone, irrespective of the level of private use. The exemption applies to one phone per employee.

    A taxable benefit will however, arise if the employer meets the employee's private bill for a mobile phone or if top-up vouchers are provided which can be used on any phone

    Example - John and Jan Smith are directors of their family-owned company. Their two children also work for the company. The company takes out a contract for four mobile phones and provides each member of the family with a phone. The bills are paid directly to the phone provider by the company. The bills are deductible in computing profits. Each family member receives the use of a phone tax-free, which means they do not need to fund one from their post-tax income.

    Pension contributions - Pensions remain a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider. Higher amounts may be invested, but tax relief will not be given on the excess. Any tax relief received from HMRC on excess contributions may have to be repaid.

    Pension contributions paid by a company in respect of its directors or employees are allowable unless there is an identifiable non-trade purpose. Contributions relating to a controlling director (one who owns more than 20% of the company’s share capital), or an employee who is a relative or close friend of the controlling director, may be queried by HMRC. In establishing whether a payment is for the purposes of the trade, HMRC will examine the company’s intentions in making the payment.

    Pension contributions will be viewed in the light of the overall remuneration package and if the level of the package is excessive for the value of the work undertaken, the contributions may be disallowed. However, HMRC will generally accept that contributions are paid ‘wholly and exclusively for the purposes of the trade’ where the remuneration package paid is comparable with that paid to unconnected employees performing duties of similar value.

    Subject to certain conditions being satisfied, other tax-free benefits that a family company may consider include:

    • bicycles or bicycle safety equipment for travel to work

    • gifts not costing more than £250 per year from any one donor

    • Christmas and other parties, dinners, etc, provided the total cost to the employer for each person attending is not more than £150 a year

    • one health screening and one medical check-up per employee, per year

    • the first £500 worth of pensions advice provided to an employee (including former and prospective employees) in a tax year

    • medical treatments recommended by employer-arranged occupational health services. The exemption is subject to an annual cap of £500 per employee

    Employing family members, and providing them tax-free benefits, often enables a family-owned company to take advantage of the lower tax rates, personal allowances and exemptions that may be available to a spouse, civil partner, or children. In turn, this arrangement can help reduce the household’s overall tax bill.

  • VAT registration – sooner or later?

    Once a business is up and running, the next major administrative area to be faced often concerns the subject of VAT. At first glance, it looks complicated - not to mention time-consuming - particularly for small businesses. However, taken one step at a time, the rules governing VAT registration and invoicing are generally quite straight-forward and relatively easy to navigate.

    The law states that all traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once their taxable turnover reaches a pre-set annual threshold, which is currently £85,000. Broadly, a business must register for VAT 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.

    A business can register for VAT voluntarily if its turnover 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 - Sandra is a non-VAT registered carpenter and a basic rate taxpayer. She buys a new saw to use in her business, which cost £100 plus VAT, so she pays a total of £120 (£100 plus VAT at 20%), which can be set against her business profits for income tax purposes. As Sandra is a basic rate (20%) taxpayer, she will save tax of £24 (20% of £120), so the saw actually costs her £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 saw actually costs him £80 – saving £16 by being registered for VAT.

    Is non-registration preferable? - VAT-registered businesses supplying goods and services to private individuals often feel dis-advantaged compared with their non-registered counterparts because they have to charge an additional 20% on every bill issued.

    A trader who does not want to have to register for VAT, may be able to stay below the annual VAT registration threshold by supplying labour-only services and getting customers to buy any goods needed themselves.

    Example - Bob is a non-VAT registered plumber, but his turnover is creeping up towards the VAT registration threshold. He could ask his customers to buy materials for a job directly from a DIY shop. Although the customers will have to pay the VAT on these items, they won’t have to pay VAT on Bob’s invoice for labour services. This will also have the additional advantage of reducing Bob’s annual turnover for VAT registration purposes.

    Registration benefits - Deciding whether to register for VAT voluntarily before the registration threshold is reached is a big decision that can have lasting implications for the financial health of the business. It is vital therefore, that the matter is given careful consideration. There are several positive reasons supporting voluntary registration, including:

    • Reclaiming VAT - although a registered business will have to charge VAT on goods and services (known as charging ‘output tax’), it will also be able to reclaim VAT that it is charged by other businesses (known as ‘input tax’). Where input tax exceeds output tax in a given period, the business will generally be able to reclaim the difference from HMRC.

    • Marketplace perceptions - some businesses choose to register for VAT in order to appear larger than they are. Customers are likely to be aware of the £85,000 registration threshold and where a business is not registered, its customers will know that the business turnover is lower than this. A business may therefore consider registration as a way of increasing its standing amongst competitors, and in the eyes of clients.

  • Can we deduct entertaining expenses?

    The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible. Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

    What counts as business entertainment?

    Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

    Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

    Exception 1: Entertaining employees

    One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.

    It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

    Exception 2: Normal course of trade

    The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

    Exception 3: Contractual obligation to provide entertainment

    Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

    Exception 4: Small gifts carrying an advert

    The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

    Remember…

    Just because entertaining is incurred for business purposes does not mean that it is allowable – business entertaining needs to be added back in the corporation tax computation.

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  • Travel expenses and the 24-month rule

    As a general rule, employees are denied a tax deduction for the cost of travel between home and work. Likewise, subject to a few limited exceptions, if the employer meets the cost of home to work travel, the employee is taxed on it.

    One of the main exceptions to this rule is where an employee attends a ‘temporary workplace’. This is a workplace that the employee goes to in order to perform a task of limited duration or one that he attends for a temporary purposes, even if the attendance is on a regular basis.

    Example 1 - Polly is based in the Milton Keynes office. She is seconded to the Bedford office for 12 months to cover an employee’s maternity leave. At the end of the secondment, she will return to the Bedford office.

    The Bedford office is a temporary workplace.

    Consequently, Polly is allowed a deduction for travel from her home to the Bedford office.

    Example 2 - James is a health and safety officer. He is based in the Liverpool head office. Each week he visits factories in Manchester and Bury to carry out safety checks. The factories are temporary workplaces as each visit is self-contained.

    Consequently, James is allowed a deduction for travel expenses incurred in visiting the factories, even if he travels there from home.

    24-month rule - A workplace does not count as a temporary workplace if the employee attends it in a period of continuous work which lasts, or is expected to last more than 24 months. A ‘period of continuous work’ is one where the duties are performed at the location in question to a ‘significant extent’. HMRC regard duties being performed to a 'significant extent' at a particular location if an employee spends 40% or more of their working time there.

    The upshot of this rule is that where the employee has spent, or is likely to spend, 40% of their working time at the location in question over a period of more than 24 months, that location will be a permanent location rather than a temporary location. Consequently, home to work travel is ‘ordinary commuting’ (travel between home and a permanent workplace), which is not deductible.

    It is important to appreciate that both parts of the test must be met for the workplace to be a permanent workplace – more than 40% of time spent there and over a period of more than 24 months.

    Example 3 - George is employed full-time at a care home in Southampton, a role which he has held for four years. He is sent to full-timework at a new care home in Bournemouth for three years, after which time he will return to the Southampton care home.

    Although the move to the Bournemouth posting is not permanent, the posting lasts more than 24 months and, as such, the Bournemouth home does not qualify as a temporary workplace.

    Consequently, George is not allowed a deduction for the cost of travelling from home to the Bournemouth care home.

    Change of circumstances - Circumstances can and do change. If at the outset a posting is expected to last 24 months, the workplace will be treated as a temporary workplace. If later the posting is extended so that it will last more than 24 months, the workplace ceases to be a temporary workplace from the date that it becomes apparent the posting will exceed 24 months.

    Fixed term appointments rule - An employee undertaking a fixed-term appointment is not entitled to relief for home to work travel, even where it lasts less than 24 months, if the employee attends the workplace for all, or almost all of the period which they are likely to hold the appointment.

    Example - Imogen takes on a 12-month contract at an office in Marlow. Although the appointment is less than 24 months, the Marlow office is not a temporary workplace as Imogen works there for duration of the contract.

    Tax exemption - If the employer pays or reimburses travel expenses which would be deductible if met by the employee, the payment or reimbursement is exempt from tax.

  • Inheritance tax and spouses and civil partners

    Special rules apply for inheritance tax purposes to married couples and civil partners. To ensure valuable tax reliefs are not lost, it is beneficial to consider the combined position, rather than dealing with each individual separately. Married couples and civil partners benefit from exemptions that are not available to unmarried couples.

    Inter-spouse exemption - The main inheritance tax benefit of being married or in a civil partnership is the inter-spouse exemption. Transfers between married couples and civil partners are not subject to inheritance tax. This applies both to lifetime transfers and to those made on death.

    The inter-spouse exemption makes it possible for the first spouse or civil partner to die to leave their entire estate to their partner without triggering an IHT liability.

    Transferable nil rate bandThe proportion of the nil rate band that is unused on the death of the first spouse or civil partner can be used by the surviving partner on his or her death. This makes tax planning easier and there is no panic about each spouse using their own nil rate band. If the entire estate is left to the spouse on the first death, on the death of the surviving spouse or civil partner, there will be two nil rate bands to play with.

    If the first spouse or civil partner to die has used some of their nil rate band, for example, to leave part of their estate to their children, the surviving spouse or civil partner can utilise the remaining portion. It should be noticed it is the unused percentage that is transferred, rather than the absolute amount unused at the time of the first death – this provides an automatic uplift for increases in the nil rate band.  The nil rate band is currently £325,000.

    Residence nil rate band - The residence nil rate band (RNRB) is an additional nil rate band which is available where a main residence is left to a direct descendant. It is set at £150,000 for 2019/20, and will increase to £175,000 for 2020/21. The RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million.

    The unused proportion of the RNRB can be transferred to the surviving spouse.

    Example - George and Maud have been married for over 50 years. Maud died in 2017 leaving £32,500 to each of her two children. The remainder of her estate, including her share of the family home, was left to her husband George.

    George dies in July 2019. His estate was worth £780,000 and included the family home, valued at £550,000, which was left equally to the couple’s children, Paul and Joanna.

    At the time of her death Maud had used up £65,000 of her nil rate band. The nil rate band at the time of her death was £325,000. The transfer to George was covered by the inter-spouse exemption and was free from inheritance tax. Maud has used up £65,000 of her nil rate band (20%), leaving 80% unused. She has not used her RNRB band as she left her share of her main residence to George.

    On George’s death, the executors can claim the unused portion of Maud’s nil rate band and RBRB. The nil rate bands available to George are as follows:

    Nil rate bands                                                                             £

    George’s nil rate band                                                           325,000

    George’s RNRB                                                                     150,000

    Unused portion of Maud’s nil rate band (80% of £325,000)  260,000

    Unused proportion of Maud’s RNRB (100% of £150,000)    150,000

    Total                                                                                     £885,000

    As George’s estate on death is less than the available nil rate bands, no inheritance tax is payable.

  • Check your tax calculation

    Each year HMRC undertake a PAYE reconciliation for employed individuals who are not required to submit a tax return to check that the correct amount of tax has been paid. Where it has not, HMRC will send out either a P800 tax calculation or a PA302 simple assessment.

    P800 tax calculation

    A P800 tax calculation may be issued if an employee has paid too much tax, or if they have paid too little and the tax underpayment can be collected automatically through an adjustment to their PAYE tax code. There are various reasons why a person who pays tax under PAYE may have paid the wrong amount of tax. This may be because:

    • they finished one job and started a new one and were paid for both jobs in the same tax month;

    • they started receiving a pension at work; or

    • they received Employment and Support Allowance or Jobseeker’s Allowance (which are taxable).

    P800 calculations for 2018/19 are being sent out by HMRC from June to November 2019.

    If the P800 shows that tax has been overpaid, it will say whether a refund can be claimed online. If so, this can be done through the personal tax account. Where a claim is made online, the money should be sent to the claimant’s bank account within 5 working days. In the event a claim is not made within 45 days of the date on the P800, HMRC will send out a cheque. If an online claim is not possible, HMRC will also send out a cheque.

    PA302 simple assessment

    Instead of a P800 tax calculation, an individual may instead receive a PA302 simple assessment. This is effectively a bill for tax that has been underpaid. HMRC may issue a simple assessment if:

    • the tax that is owed cannot be taken automatically from the individual’s income;

    • the individual owes HMRC tax of more than £3,000; or

    • they have to pay tax on the State Pension.

    A simple assessment bill can be paid online.

    Check your calculation

    If you receive a tax calculation or simple assessment from HMRC, do not simply assume that it is correct – HMRC can and do make mistakes. It is prudent to check that their figures are correct. When checking the calculation, check HMRC’s figures against your records, such as your P60, your bank statements and letters from the DWP. Check that employment income and any pension income is correct, and that relief has been given for expenses and allowances. HMRC have produced a tax checker tool (available on the Gov.uk website at www.gov.uk/check-income-tax) which can be used to check the amount of tax that should have been paid.

    If you think that your tax calculation is incorrect, you will need to contact HMRC. This can be done by phone by calling 0800 200 3300. If you do not agree with your simple assessment, you have 60 days to query this with HMRC by phone or in writing. The simple assessment letter explains how to do this.

  • Avoiding common errors when computing business profits

    HMRC produce a range of Toolkits for agents, which highlight errors commonly made in returns so that agents can take steps to avoid them. The business profits toolkit provides guidance on errors that are found in relation to business profits for small and medium-sized businesses. They are helpful to anyone computing taxable business profits.

    Risk area 1 – Record keeping

    Good record-keeping is essential for business profits to be calculated correctly. Poor records may result in sales or allowable expenditure being omitted from the accounts, with the result that the level of profit or loss is incorrect.

    Risk area 2 – Business income

    The profit or loss will only be correct if all income is included in the accounts. Unless the business is an unincorporated business that has opted to use the cash basis, business income should be included on an accruals basis, matching the income to the period in which it was earned.

    Not all sources of business income will be immediately obvious – the income of the business may, for example, include scrap sales, contra sales or barter arrangements. Cash sales may also be overlooked.

    Risk area 3 – Expenditure

    To ensure that the profit is not overstated, all allowable expenditure should be taken into account. However, a deduction is only permitted for expenses which are wholly and exclusively incurred for the purposes of the business. Attention should also be paid to specific prohibitions, such as for business entertaining.

    Purchases and expenses should be reviewed to ensure that they have been included.

    Sole traders and partnerships comprising individuals can use simplified expenses rather than claiming actual expenses.

    Risk area 4 – Stock and work in progress

    Where the business is one that holds stock, care must be taken to include it at the correct value – this is the lower of cost and net realisable value. Errors will arise if stock is overlooked or valued incorrectly.

    Work-in-progress can be a complex area and advice should be taken to ensure that the treatment is correct.

    Risk area 5 – Miscellaneous items

    Miscellaneous areas should also be considered. These may include a review of post-balance sheet events and consideration as to whether any adjustment to the accounts is required. Staff costs should also be reviewed and amounts unpaid nine months after the end of the period should be added back. As far as directors are concerned, consideration should be given to the date on which amounts are credited to the director’s loan account.

  • Tax credits – do I have to tell HMRC if my circumstances change?

    Tax credits are benefit payments that are paid to people in work who are on a low income or have children. There are two tax credits – working tax credit (for those working but on a low income) and child tax credit (for those on low income, regardless of whether they are working or not, with children). Existing tax credit claimants need to renew them each year.

    New claimants must claim Universal Credit rather than Working or Child Tax Credits; eventually, existing tax credit claimants will be moved over to Universal Credit.

    Tax credits can go up or down as a result of changes in family or work circumstances.

    A tax credit claimant must report any of the following changes in circumstance to HMRC.

    1. Living circumstances change, for example if a partner moves out, or you start to live with a new partner, you get married or form a civil partnership, or you separate permanently, or you divorce.

    2. Your partner or child dies.

    3. A child leaves home or is taken into care.

    4. A child is taken into custody.

    5. A child over the age of 16 leaves approved education or training or a careers service.

    6. Childcare costs go down by more than £10 per week, or you start receiving help with childcare costs.

    7. If you are in a couple, your combined working hours fall to below 30 hours per week.

    8. Working hours fall below the minimum needed for working tax credit, which depend on circumstances.

    It is necessary to make a new claim if a relationship ends or you start a new relationship, or if your partner dies.

    You must also tell HMRC if any of the following occur.

    1. You go abroad for eight weeks or more.

    2. You leave the UK permanently or lose your right to reside in the UK.

    3. You reduce your working hours to less than 16 hours per week while claiming childcare costs.

    4. You have been on strike for more than 10 consecutive days.

    Changes in income, benefits and working hours

    If tax credits are overpaid, the overpayment will need to be returned to HMRC. To avoid building up an overpayment which will have to be paid back, HMRC should be notified if any of the following occur.

    1. A change in income (if increases or decreases by £2,500 HMRC should be notified immediately so that tax credit payments can be adjusted)

    2. Combined working hours for a couple who have children are increased to 30 hours a week or more.

    3. You have a baby or take on responsibility for another child.

    4. You start or stop claiming benefits or your benefits change.

    5. You start or stop getting a disability payment.

    6. Your child is certified blind (or is no longer blind).

    7. You start paying for registered or approved childcare.

    8. You stop getting help with childcare.

    The above changes must be reported to HMRC within one month of the date on which they occur.

    Changes can be notified online at www.gov.uk/changes-affect-tax-credits.

  • Director’s loan accounts – avoiding the risks

    HMRC produce a series of toolkits which set out common errors that they find in returns. The hope is that by being familiar with the mistakes that are routinely made, steps can be taken to avoid them. Although the toolkits are aimed primarily at agents, they are useful for anyone who has to complete a tax return. The director’s loan accounts toolkit highlights the key areas of risk in relation to directors’ loan accounts. The latest version of the toolkit was published in May 2019 and should be used for personal tax returns for 2018/19 and for company returns, for the financial year 2018.

    Personal expenses

    Expenses are only deductible in computing taxable profits to the extent that they are incurred wholly and exclusively for the purposes of the trade. A company is a separate legal entity to the directors and shareholders. However, many close companies meet director’s personal expenses. Where these are not part of the director’s remuneration package, the company cannot deduct the cost when computing its taxable profits. Instead, they should be charged to the director’s loan account. The director’s loan account toolkit focuses on expenses that do not form part of the director’s remuneration package.

    Risk areas

    1. Review of the accounts - any personal expenditure incurred by the director and paid for by the company must be allocated correctly, i.e. an allowable expense where it forms part of the director’s remuneration package and charged to the director’s loan account. Account headings should be reviewed to identify director’s personal expenditure which has not been treated correctly.

    2. Loans to participators – under the close company rules, tax (section 455 tax) is charged at 32.5% on loans to directors who are also shareholders where the loan remains outstanding nine months and one day after the end of the accounting period. Review overdrawn loan accounts to check whether the company is liable to pay section 455 tax.

    3. Review of expenses and benefits – where a director is provided with anything other than pay, it may need to be reported to HMRC as a benefit in kind on form P11D. Review expenses and benefits for taxable items that may have been missed. It should be noted that if the director’s loan account balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will arise on the loan unless the director pays interest at a rate that is at least equal to the official rate (2.5% since 6 April 2017).

    4. Self-assessment – check whether the director needs to send a self-assessment return. The directors’ loan accounts toolkit states that “Company directors do not need to send a tax return unless that have other taxable income that needs to be reported, or if HMRC has sent a notice to file a return”.

    5. Record keeping – good keeping is essential. Poor records may mean expenditure is missed or allocated incorrectly.

    Checklist

    The toolkit features as useful checklist which can be completed to make sure that nothing is overlooked. The checklist contains a helpful link to HMRC guidance.

  • Calculating the Class 4 NIC liability

    The self-employed pay two classes of National Insurance contributions – Class 2 and Class 4.

    Class 2 contributions are weekly flat rate contributions which provide the mechanism by which the self-employed build up their entitlement to the state pension and certain contributory benefits. By contrast, Class 4 contributions are based on profits from the self-employment and operate more like a tax in that they do not confer any benefit or pension entitlement.

    Nature of Class 4 contributions - Class 4 National Insurance contributions are payable by self-employed earners aged 16 or over and below state pension age. The liability is triggered once profits from the self-employment reach the lower profits limit, set at £8,632 for 2019/20. This is aligned with the primary and secondary thresholds for Class 1 National Insurance purposes.

    Class 4 contributions are payable at the main rate on profits between the lower profits limit and the upper profits limit and at the additional rate on profits in excess of the upper profits limit. For 2019/20, the upper profits limit is set at £50,000, aligning with both the upper earnings limit for Class 1 National Insurance purposes and the rate at which higher rate tax becomes payable.

    The main Class 4 rate is set at 9% for 2019/20 and the additional Class 4 rate is set at 2%.

    Example 1 - John is self-employed as a personal trainer. In 2019/20 his profits from self-employment are £7,250.

    As his profits are below the lower profits limit, he does not need to pay any Class 4 National Insurance contributions for 2019/20.

    However, as his profits exceed the small profits limit of £6,365 for Class 2 National Insurance purposes, he must pay weekly Class 2 contributions of £3 per week.

    Example 2 - Jane is self-employed as an interior designer. In 2019/20 her profits from self-employment are £32,000.

    She must pay Class 4 National Insurance contributions on her profits to the extent that they exceed the lower profits limit for 2019/20 of £8,632.

    Her Class 4 National Insurance liability is as follows:

    9% (£32,000 - £8,632) = £2,103.12

    Jane must also pay Class 2 contributions of £3 per week.

    Example 3 - Jackie is a self-employed accountant. For 2019/20 her profits from self-employment are £77,000. She must pay Class 4 National Insurance contributions on her profits to the extent that they exceed the lower profits limit for 2019/20 of £8,632.

    Her Class 4 National Insurance liability is as follows:

    (9% (£50,000 - £8,632)) + (2% (£77,000 - £50,000)) = £4,263.12

    Jackie must also pay Class 2 contributions of £3 per week.

    Paying the Class 4 National Insurance liability - Class 4 National Insurance contributions are payable with tax under the self-assessment system. The liability must be paid by 31 January after the end of the tax year to which it relates – so Class 4 National Insurance contributions for 2019/20 must be paid by 31 January 2021.

    Unlike Class 2 contributions, Class 4 contributions are taken into account in computing payments on account. Payments on account must be made where the previous year’s tax and Class 4 National Insurance liability was £1,000 or more unless at least 80% of the tax due for that year was collected at source.

  • Family member pension contributions

    Although there continues to be plenty of speculation over possible pension tax relief cuts, as things currently stand, paying into a pension generally remains a tax-efficient way of saving for old-age. Given that there may well be future changes in this area, it might be beneficial to consider starting, or topping up, pension plans sooner rather than later.

    Most employer pension contributions will count as allowable business expenses, so a company could currently save up to 19% in corporation tax if it makes qualifying contributions on behalf of its employees. This may be particularly beneficial in a family-owned company where pensions for family members can be built up whist saving both the investor and the company money. In order to qualify for a deduction, the pension contributions should be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.

    Reliefs - Subject to certain conditions, tax relief is currently available on pension contributions at the highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.

    A contribution of £100, will currently only cost a basic rate taxpayer £80. The contribution is deemed as being made net of tax (£80) and the pension provider claims the tax relief (£20) from the government. The gross contribution (£100) is invested in the pension plan. Higher rate and additional rate taxpayers need only to pay £60 and £55 respectively to achieve the same £100 of pension savings.

    Pensions are a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So, an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider. Higher amounts may be invested, but tax relief will not be given on the excess. Any tax relief received from HMRC on excess contributions may have to be repaid.

    It’s worth noting that where family members are employed and pension contributions paid by the company, there needs to be a genuine business reason for it. The family member should be paid a commercial amount for work that they have actually undertaken, and the company should be able to prove that this is the case.

    Auto-enrolment - A spouse/civil partner or other family member may be employed to help with a business. If they are paid a salary and they are not a director, they may be an ‘eligible worker’, which means the business may need to automatically enrol them into a pension scheme. A worker that is eligible to join a workplace pension is an employee aged between 22 and the state pension age that is paid over £833 per month or £192 per week.

    If they are a director, there may still be enrolment obligations (see the Pensions Advisory service at www.pensionsadvisoryservice.org.uk for further details). The minimum contributions employers and their staff must pay into their workplace pension scheme has increased with effect from 6 April 2019. Anyone employing staff should check that these legal obligations are being complied with.

    One-person limited companies are exempt from pensions auto-enrolment, which means that the company does not have to provide a workplace pension whilst the owner/director is the only employee.

    Working out how best to utilise pension contributions tax relief can be complicated, and seeking professional advice is recommended.

  • Just starting out

    As long as HMRC can be satisfied that a business is being run on a commercial basis with a view to making a profit, they will usually allow taxpayers to claim tax relief for a trading loss in one tax year against other taxable income (for example PAYE income or a pension) from the same year, or the preceding year. This can be quite beneficial as the claimant can choose which year to claim the losses against. However, HMRC will usually restrict loss relief claimed by individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.

    Early days - The provisions for tax relief on business losses can be particularly useful in the early years of trading. Broadly, this is because a loss incurred in any of the first four tax years of a new business may be carried back against total income of the three previous tax years, starting with the earliest year. Therefore, if tax has been paid in any of the previous three years, the taxpayer should be entitled to a repayment of tax, which may be especially welcome in those often difficult first few years of running a business.

    The rules for this carry back stipulate that the maximum amount of the loss must be offset each year – it is not permissible to offset just a proportion of the loss in order to spread the loss across three years to take advantage of beneficial tax rates. Again, relief will not be available unless the taxpayer was trading on a commercial basis with a view to making a profit within a reasonable timescale. In practice, this requirement may be difficult to prove in the case of a new business and the taxpayer may need a viable business plan to support a claim.

    Cap on relief - A cap now restricts certain previously unlimited income tax reliefs that may be deducted from income. Trade loss relief against general income, and early trade losses relief, as outlined above, are two areas where this restriction might apply. The cap is set at £50,000 or 25% of income, whichever is greater. ‘Income’ for the purposes of the cap is calculated as ‘total income liable to income tax’. This figure is then adjusted to include charitable donations made via payroll giving and to exclude pension contributions – the adjustment is designed to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result, known as ‘adjusted total income’, will be the measure of income for the purpose of the cap.

    The cap applies to the year of the claim and any earlier or later years in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.

    No need to lose out - Where a loss is made in a tax year, but the trader does not have any other income against which it can be set, the loss can be carried forward indefinitely and used to reduce the first available profits of the same business in subsequent years.

    Finally, losses arising from a business may be set off against any chargeable capital gains. Relief may be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.

  • Curtailment of letting relief

    Landlords have been hit with a number of tax hikes in recent years, and this trend shows no signs of abating. From 6 April 2020, lettings relief – a valuable capital gains tax relief which is available where a property which has at some point been the owner’s only or main residence is let out – is seriously curtailed.

    Now - Under the current rules letting relief applies to shelter part of the gain arising on the sale of a property which has been let out as residential accommodation and which at some time was the owner’s only or main residence. The amount of the letting relief is the lowest of the following three amounts:

    • the amount of private residence relief available on the disposal;

    • £40,000; and

    • the gain attributable to the letting.

    Under the current rules, periods of residential letting count regardless of whether or not the landlord also lives in the property.

    From 6 April 2020 - From 6 April 2020, letting relief will only be available where the owner of the property shares occupancy with a tenant. From that date, lettings relief is available where at some point the owner of the property lets out part of their main residence as residential accommodation and shares occupation of that residence with an individual who has no interest in the residence.

    To the extent that a gain that would otherwise be chargeable to capital gains tax because it relates to the part of the main residence which is let out as residential accommodation, the availability of lettings relief means that it is only chargeable to capital gains tax to the extent that it exceeds the lower of the amount of the gain sheltered by private residence relief; and £40,000.

    Example 1 - Tom owns a property which he lives in as his main residence. He lived in it for a year on his own, then to help pay the bills he let out 40% as residential accommodation.

    In June 2020 he sells the property realising a gain of £189,000. He had owned the property for five years and three months (63 months).

    The final nine months of ownership are covered by the final period exemption – this equates to £27,000.

    For the remaining 54 months, private residence relief is available for the first 12 months and 40% of the remaining 48 months – a total of 31.2 months (12 + (40% x 48)). This is worth £93,600. (31.2/63 x £189,000).

    Private residence relief in total is worth £120,600 (£27,000 + £93,600).

    The gain attributable to the letting is £68,400 (£189,000 - £120,600). This is taxable to the extent that is exceeds £40,000 (being the lower of £40,000 and £120,600).

    Thus the letting relief is worth £40,000 and the chargeable gain is £28,400.

    Example 2 - Lucy buys a flat for £300,000 which she lives in for one year as her main residence. She then buys a new home which she lives in as her main residence and lets the flat out for three years, before selling it and realising a gain of £96,000.

    If she sells it before 6 April 2020, she will be entitled to private residence relief of £60,000 (30/48 x £96,000). The final 18 months are exempt as she lived in the flat for 12 months as her main residence. The gain attributable to letting is £36,000, all of which is sheltered by lettings relief (as less than both private residence relief and £40,000).

    If she sells the property after 6 April 2020, the final period exemption only covers the last nine months, reducing the private residence relief to £42,000 (21/48 x £96,000). The remainder of the gain of £54,000, which is attributable to the letting, is chargeable to capital gains tax as letting relief is no longer available as Lucy does not share her home with the tenant.

    Consider realising a gain on a let property which has also been a main residence prior to 6 April 2020 to take advantage of the letting relief available prior to that date.

  • Nominating your main residence

    Private residence relief shelters a gain on the sale of a residence from capital gains tax while the property has been the owner’s only or main residence. Where a property has been an only or main residence at some point, the final period of ownership (currently 18 months but reducing to nine months from 6 April 2020) is also exempt from capital gains tax.

    Only one main residence at a time - As the name suggests, the relief is only available in respect of the only or main residence. Thus, where a person has more than one home, only one of those homes can be the ‘main residence’ at any given time.

    However, as long as certain conditions are met, the taxpayer is free to choose which property is classed as the ‘main’ residence for capital gains tax purposes – it does not have to be the one in which the owner spends the majority of his or her time.

    Only one main residence per couple - A couple who are married or in a civil partnership and who are not separated can only have one main residence between them.

    Property must be a residence - Only properties that are lived in as a home can be a ‘main residence’ – a property which is let out can’t be a main residence while it is let.

    Making an election - Where a person has only one residence, that residence is their only or main residence. Where they acquire a second residence, they have a period of two years to nominate which residence is the main residence for capital gains tax purposes. Where residences are acquired or sold, the clock starts again from the date on which the particular combination of residences changes, and the taxpayer then has another two years in which to elect which residence is the main residence.

    The election should be made in writing to HMRC. The letter should include the full address of the property being nominated as the main residence and should be signed by all owners of the property.

    No election made - In the absence of an election, the property which is the main residence will be determined as a question of fact and will be the property in which the person lives in as their main home. For example, if a couple has a family home and a holiday home, in the absence of an election, the family home will be treated as the main residence.

    Advantages of flipping - There are a number of advantages to a property being the main residence at some point in the period of ownership as not only is any gain while the property is the only or main residence exempt from capital gains tax; the final period of ownership is also exempt. Where the property is let, occupying the property as a main residence at some point may open up the option of lettings relief (although it should be noted that the availability of lettings relief is to be seriously curtailed from April 2020).

    Once an election has been made to nominate a property as a main residence, this can be varied any number of times (‘flipping’). This can be very useful from a tax planning perspective, for example, occupying a property as a main residence after it has been let but before it is sold can shelter some of the gain. Flipping properties and making use of the capital gains tax annual exempt amount to shelter any gain that falls into charge when the property is not the main residence can be beneficial in reducing the tax bill.

  • Are low emissions cars tax efficient?

    Significant changes are being made from 2020-21 to the company car tax benefits-in-kind bands affecting ultra-low emission vehicles (ULEVs).

    The taxable benefit arising on a car is calculated using the car’s full manufacturer’s published UK list price, including the full value of any accessories. This figure is then multiplied by the ‘appropriate percentage’, which can be found by reference to the car’s CO2 emissions level. This will give the taxable value of the car benefit. The employee pays income tax on the final figure at their appropriate tax rate: 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers. This formula means that in general terms, the lower the C02 emissions of the car, the lower the resulting tax charge will be.

    For 2019-20, the appropriate percentage for cars (whether fully electric or not) is 16% for those emitting 50g/km CO2 or below, and 19% for those emitting CO2 of between 51 and 75g/km. This means that the taxable benefit arising on a zero-emissions car costing, say £30,000 is £4,800, with tax payable of £960 for a basic rate taxpayer - for a higher rate taxpayer this equates to tax payable of £1,920.

    By way of comparison, a 2001cc petrol-engine car with a list price of £30,000, will attract an appropriate percentage of 37% in 2019-20. This equates to a taxable benefit charge of £11,100, and a liability of £2,220 a year for a basic rate taxpayer.

    New bands - In April 2020, new ULEV rates will be introduced, and the most tax efficient cars will be those with CO2 emissions below 50g/km. There will also be additional financial incentives for electric only cars

    From 2020-21, five new bandings are being introduced for full and hybrid electric cars. Fully electric (zero emissions) cars will attract an appropriate percentage of just 2%. This means that the tax benefit arising on an electric car costing say, £30,000 will be just £600. The resulting tax payable by a basic rate taxpayer will be £120 a year and £240 for a higher rate taxpayer.

    For cars emitting CO2 between 1-50g/km, the percentage will depend on the car’s electric range:

    Mileage                     Percentage

    130 miles or more        2%

    70 – 129 miles             5%

    40-69 miles                  8%

    30-39 miles                 12%

    Less than 30 miles      14%

    ULEVs with CO2 emissions of between 50g-74g/km CO2 will be on a graduated scale from 15% to 19% (diesel-only vehicles will continue to attract a further 4% surcharge) as follows:

    CO2 emissions         Percentage

    51 to 54g/km               15%

    55 to 59g/km               16%

    60 to 64g/km               17%

    65 to 69g/km               18%

    70 to 74g/km               19%

    75 or more                   20%

    Plus                             1% per 5g/km

    Up to a maximum        37%

    Whilst the journey towards ‘greener’ driving has been, and continues to be, a rocky one, in 2014/15 a sub-130g/km petrol car was considered green enough to merit an 18% appropriate percentage. However, by 2020/21, the appropriate percentage on such a car will have risen to 30%. A sub-100g/km band car that was only subject to a 12% charge in 2014/15 will also have risen to 24% by 2020/21. On the other hand, clean air all-electric cars will finally plummet to 2% under the new company car tax incentives from April 2020.

    The incentives are clearly designed to encourage ULEVs as a company car driver’s car of choice.

  • Family companies – optimal salary for 2019/20

    For personal and family companies it can be beneficial to extract some profits in the form of a salary. Where the individual does not have the 35 qualifying years necessary to qualify for the full single-tier state pension, paying a salary which is equal to or above the lower earnings limit for National Insurance purposes will ensure that the year is a qualifying year.

    New tax rates and allowances came into effect from 6 April 2019, applying for the 2019/20 tax year. These have an impact on the optimal salary calculation for family and personal companies. As in previous years, the optimal salary level will depend on whether or not the National Insurance employment allowance is available.

    It should be remembered that directors have an annual earnings period for NI purposes.

    Employment allowance unavailable - Companies in which the sole employee is also a director are not able to benefit from the employment allowance. This means that most personal companies are not eligible for the allowance. Where the allowance is not available or has been utilised elsewhere, the optimal salary for 2019/20 is equal to the primary and secondary threshold set at £8,632 (equivalent to £719 per month and £166 per week).

    At this level, assuming that the director’s personal allowance (set at £12,500) is available, there is no tax or employer’s or employee’s National Insurance to pay. However, as the salary is above the lower earnings limit of £6,136 (£512 per month, £118 per week), it will provide a qualifying year for state pension and contributory benefit purposes.

    The salary is deductible in computing the company’s taxable profits for corporation tax purposes, saving corporation tax of 19%.

    Employment allowance is available - It is beneficial to pay a salary equal to the personal allowance (assuming that this is not used elsewhere) where the employment allowance (set at £3,000 for 2019/20) is available to shelter the employer’s National Insurance that would otherwise arise to the extent that the salary exceeds £8,632.

    Although employee’s National Insurance is payable to the extent that the salary exceeds the primary threshold of £8,632, this is more than offset by the corporation tax deduction on the higher salary.

    For 2019/20, a salary equal to the personal allowance of £12,500 exceeds the primary threshold by £3,868. Therefore, employee’s National Insurance of £464.16 (£3,868 @ 12%) is payable on a salary of £12,500. However, as salary payments are deductible for corporation tax purposes, the additional salary of £3,868 saves corporation tax of £734.92 (£3,868 @ 19%). This exceeds the employee’s National Insurance payable by £270.46.

    So paying a salary equal to the personal allowance of £12,500 allows more profits to be retained (to the tune of £270.46) than paying a salary equal to the primary threshold of £8,632.

    If the director has a higher personal allowance, for example, where he or she receives the marriage allowance, the optimal salary is one equal to that higher personal allowance.

    Director is under 21 - Where the director is under the age of 21, the optimal salary is one equal to the personal allowance of £12,500 regardless of whether the employment allowance is available. No employer National Insurance is payable on the earnings of employees or directors under the age of 21 until their earnings exceeds the upper secondary threshold for under 21's set at £50,000 for 2019/20. Employee contributions are, however, payable as normal

    Any benefit in paying a salary above the personal allowance? - Once the personal allowance is reached it is not worthwhile paying a higher salary as further salary payments will be taxed and the combined tax and National Insurance hit will outweigh the corporation tax savings.

  • Worthless assets and negligible value claims

    Where an asset has been lost or destroyed or the value of the asset has become negligible, it may be possible to take advantage of an allowable loss for capital gains tax purposes. It should be noted, however, that the loss will only be an allowable loss if any gain on the disposal of the asset would have been a chargeable gain.

    A distinction is drawn between assets that have ceased to exist and those that have become of negligible value.

    Assets that have been lost or destroyed - The entire loss, destruction, dissipation or extinction of an asset is treated as a disposal or that asset, regardless of whether or not any compensation is received. The resulting loss is allowable for capital gains tax purposes. If any compensation is received, this is treated as proceeds from the disposal.

    Negligible value claim - If the asset still exists but has become of negligible value, as long as one of two conditions – A or B – is met, a negligible value claim can be made by the owner of the asset.

    The legislation does not define ‘negligible’ but HMRC take the view that it means that is worth ‘next to nothing’.

    Condition A is that the asset has become of negligible value while still owned by the person.

    Condition B is that:

     • the disposal by which the person acquired the asset was a no gain/no loss disposal (as is the case between spouses and civil partners)

     • at the time of that disposal, the asset was of negligible value

     • between the time when the asset became of negligible value and the disposal by which the person acquired it, any other disposal of the asset was on a no gain/no loss basis

    Asset must still exist - For a negligible value claim to succeed, the asset must exist when the claim is made. If the asset has ceased to exist, for capital gains tax purposes there has been an actual disposal of the asset (as outlined above in relation to assets lost or destroyed).

    No time limit - There is no time limit by which a negligible value claim must be made. However, the asset must be of negligible value at the date of the claim. The claimant must be able to demonstrate that the asset became of negligible value while owned by them (or where acquired from a spouse or civil partner in a no gain/no loss disposal, while owned by their spouse or civil partner). Evidence should be retained to support the claim.

    Effect of a successful claim - A successful negligible claim gives rise to a deemed disposal of the asset, with the asset immediately being reacquired for the amount specified in the claim. The loss on the deemed disposal is an allowable loss, provided that any gain that had arisen on the disposal of the asset had been an allowable loss. It should be noted that the allowable loss arises from the deemed disposal rather than from the negligible value claim itself.

    In certain circumstances where the claim relates to qualifying shares, the loss can be set against income.

  • Weighing up LLPs

    A limited liability partnership (LLP) is similar to an ordinary partnership in that a number of people or limited companies join together and share the costs, risks, and responsibilities of the business. They also take a share of the profits and pay income tax and NICs on their share of the partnership profits.

    However, an LLP differs from an ordinary partnership in that its debt is usually limited to the amount of money each partner invested in the business and to any personal guarantees given to raise business finance. Therefore, members have some protection if the business runs into difficulties because their liability is restricted in general terms to the level of their investment.

    So, what other advantages can an LLP as a trading vehicle offer?

    Advantages

    Along similar lines to a company, an LLP is a separate legal person, meaning that the members are not personally or jointly liable for the LLP’s debts, and all contracts are between the LLP and its clients or third parties. If the LLP becomes insolvent, a member’s personal liability is normally limited to the amount of their agreed capital contribution plus the value of any personal guarantee. However, where negligence is involved, members may be personally liable to the full extent of their assets if they have assumed personal responsibility for the advice or work.

    The separate legal entity status also means that there is no need, for example, to transfer legal title to property on a change of membership. LLPs also have unlimited capacity and can enter into contracts and hold property in the same way as an individual.

    Members of the LLP are usually taxed as if they were partners and not employees or directors. They are therefore not liable to pay PAYE or Class 1 NICs.

    Businesses often find it easier to recruit new members to an LLP than to an ordinary partnership, where the prospect of unlimited liability can be a major disincentive to potential partners.

    Disadvantages

    The benefits of limited liability combined with a favourable tax treatment should not be underestimated, but they do come at a price, most notably the associated disclosure obligations.

    Where the LLP’s profit before members’ remuneration exceeds £200,000, there is a requirement to report the amount of profit attributable to the highest paid member (but not their name). Other disclosure includes total members’ remuneration, total members, average members’ remuneration and related party transactions.

    There will be costs to set up the LLP and ongoing filing fees. The administrative costs in notifying clients and suppliers and transferring bank accounts, leases and agreements will need to be considered.

    Corporate-type accounts have to be prepared, circulated to each member and filed on a public register within nine months of its year end. LLP accounts must comply with UK generally accepted accounting principles and other specific regulations.

    Loans and debts due to members (the equivalent of partnership current accounts), are required to be shown as liabilities rather than as part of capital alongside the partnership capital accounts. This in turn reduces the LLP’s net worth and may affect its credit rating and borrowing capacity.

    In relation to tax matters, the following areas will need careful thought:

    • tax relief for losses in trading LLPs is restricted

    • there will be no scope for tax-efficient share incentives for staff as there are with a company

    • anti-avoidance provisions may apply to ‘disguised employment’ situations

    Weighing up the pros and cons, in many cases, an LLP is likely to be more attractive to those who would have formed a partnership rather than a limited company, but who ultimately seek the benefit of limited liability.

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