a friendly service covering audit, tax, accounts, self assessment,

VAT & payroll please contact us.

New clients - easy three step process

We  offer cloud-based accounting solutions.  Using good technology saves time.  With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button software can make a real difference to the way you run your business.

 

 

Adrian Mooy & Co - Accountants Derby

... a digital firm using the best tech to help our clients

like yours grow and be more profitable.

Welcome to Adrian Mooy & Co Ltd

We offer a personal service and welcome new clients.

We are a firm of Chartered Certified Accountants

and tax advisors in Derby helping businesses

From start-up to exit & everything in-between.

Whether you’re struggling with company formation,

KASHFLOW

+

SNAP

IRIS

OPENSPACE

SAGE

MAKING

TAX

DIGITAL

XERO

+

RECEIPT

BANK

CHASER

FUTRLI

FLUIDLY

GO

CARDLESS

annual accounts and taxation, payroll or VAT you can

count on us at every step of your business’s journey.  For

QBO

If you are looking for a Derby accountant then please contact us.

○  Tax solutions to help you keep more of your income

○  Cloud-based accounting solutions

○  Transparent affordable pricing

Accountants Derby

TAX BRIEFING

SEPT 2019

Would you like a Consultation?

Call us on 01332 202660

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Services

We offer a range of high quality services

Web-based accounting

Xero is a web-based accounting system designed with the needs of small business owners in mind.

 

It can automatically connect to your bank and download your bank statements. From there it’s simple to tell Xero what transactions relate to and once told it remembers and looks out for similar transactions. This saves time and makes keeping your accounts up to date easier.

 

Log in from any web browser. As your accountant we can log in and provide help.

 

Making Tax Digital - VAT

Our process for delivering tax accounting vat self assessment and payroll services

 

Arrow indicating direction of process flow

Our Process

Understand your needs

Firstly we listen and gain an understanding of your business and what you are aiming to achieve.

Continuous improvement

We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.

Build a relationship

Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.

Confirm your expectations

Our aim is  to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.

Actively communicate

Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.

Our Process

Understand your needs

Confirm your expectations

Actively communicate

Build a relationship

Continuous improvement

Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time.    Eddie Morris

Call us on 01332 202660

Testimonials

First class! Super accountant! We have been with Adrian Mooy & Co since 1994. They provide a prompt, accurate & reliable service. There is always someone at the end of the phone to help and advise us. They have always delivered and we are more than happy to recommend them.    Ian Cannon

Helpsheets

  • Determining whether goodwill exists in a business

    A business generally comprises various assets, one of which is often goodwill. However, a new business will not normally have goodwill; the goodwill of a business is broadly the advantage of the reputation and connection with customers that the business possesses. A new business will not usually have a ‘name’ or reputation as such. Goodwill is not necessarily reflected in the accounts of a business, even if goodwill exists. The business may have built up its goodwill from scratch over time. HM Revenue and Customs (HMRC) confirms: ‘The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist’. However, in some cases HMRC may contend that there is little or no goodwill in the business.

    For example, if the goodwill is attributable to the personal skills of the proprietor (e.g. a chef or mobile hairdresser), HMRC’s view is that such ‘personal’ goodwill is not transferable on a sale of the business. Thus if a business with personal goodwill is sold to a company upon incorporation of the business (with the proceeds being left outstanding as a loan owed to the proprietor, which is repaid by the company as funds allow), there is a danger that the value of the goodwill transferred will be lower than anticipated because of the personal goodwill element, which HMRC considers cannot be transferred to the company.

    There may be circumstances where HMRC argues there is no goodwill in the business whatsoever. This might happen if an asset such as land or buildings generates one or more income streams; HMRC could contend that the income streams do not represent goodwill. For example, in The Leeds Cricket Company Football Sr Athletic Company Limited v Revenue and Customs [2019] UKFTT 559 (TC), the appellant (‘the company’) contracted with Yorkshire County Cricket Club for the sale and purchase of freehold property at Headingley cricket stadium. Prior to the sale, the company carried on a cricket business comprising hospitality (i.e. finding clients and organising/attending meetings), advertising (i.e. selling advertising packages for boards at the ground), and catering (i.e. 19 full-time staff were employed to provide meals and refreshments to stadium visitors on cricket days).

    The issue was whether the sale involved: (a) a disposal of a business with attached goodwill; or (b) only a disposal of land with attached income streams. The First-tier Tribunal found that distinguishing between certain goodwill types (i.e. inherent (or ‘site’) goodwill and adherent (or ‘free’) goodwill) was an ‘artificial exercise’. The tribunal concluded that the cricket business (with attached goodwill) was transferred together with the property. The transfer was not merely a transfer of land with attached income streams. The appellant’s appeal was allowed.

    For a helpful summary of points to consider when seeking to establish whether goodwill exists, see Balloon Promotions and Others v Wilson (Inspector of Taxes) and another [2006] SpC 524, at paras 159-169. Even if goodwill contains a personal (non-transferable) element, there may also be elements of non-personal goodwill.

  • VAT and free meals for staff

    If a business provides a canteen for staff, VAT is due on what the business actually charges for the meals, etc. If a business charges the market rate, VAT would be due in the normal way.

    However, if a business provides subsidised or free meals to staff, VAT is still only due on the actual monies received. This means that no VAT is due on catering supplied free to staff and is only due on what the staff actually pay for a subsidised meal. Even if catering is provided free to staff, any associated input tax is fully recoverable (assuming the employer is not partially exempt) as a legitimate business expense.

    Employee contributions

    Where employees pay for meals and so on under a salary sacrifice arrangement, following the judgment of the CJEU in Astra Zeneca (Case C-40/09), employers must account for VAT on the value of the supplies unless they are zero-rated. Subject to the normal rules, the employer can continue to recover the input VAT incurred on related purchases.

    However, in RW Goodfellow and M] Goodfellow (MAN/85/0020), the tribunal held that deductions made from an emp1oyee’s wages to take account of catering and accommodation paid in accordance with the Wages Order in force for the industry could not be regarded as monetary consideration and no VAT was due.

    Businesses should be careful to distinguish between a contract of employment, such as in the above tribunal case where no VAT was due, and any agreement between employer and employee whereby a deduction from salary or wage is specifically related to a supply of catering, in which case VAT is due.

    Where deductions are made other than under a contract of employment, the value of the supply is the amount deducted. HMRC argues that deductions made from an emp1oyee’s wages to take account of catering and accommodation amount to monetary consideration, and that the amount of the deduction was, therefore, liable to VAT.

    Vending machines

    In other commercial situations, employers may provide free or subsidised meals or catering in another form, such as drinks or food from a vending machine.

    If a business installs vending machines for its employees to use free of charge and it gives them tokens to operate the machine or it is operated Without tokens or coins, no VAT is due on the supplies from the machine. If a business gives its employees money, or they have to pay for tokens to operate the machines, the supplies are standard rated, and the business must account for VAT on them.

    Restaurants and hotels

    If the proprietor of a restaurant, café or other catering establishment supply themselves or their family with meals, this is not regarded as catering and they need not account for VAT on those meals.

    However, they must account for tax on the full cost to the business of any standard rated items (e.g. ice cream, sweets and chocolates, crisps, soft or alcoholic drinks) that they take out of their business stock for their own or their family’s use.

    If an employer provides staff with free meals or accommodation in the establishment (e.g. a night manager) no VAT is due.

    If a business provides its staff with meals or accommodation it only has to account for VAT on the amount paid, so if they are supplied free no VAT is due. Any input tax incurred in providing free or subsidised meals can be recovered as a legitimate business expense.

  • An informal company wind-up

    Capital or income

    Usually, when a company distributes its profits to its shareholders they are liable to income tax on the payments they receive. However, a special rule means that distributions made in the course of winding up a company are taxed as capital instead. This provides tax-saving opportunities.

    Example. Owen and Jane are equal shareholders of Acom Ltd. Both are higher rate taxpayers. They decide to close the business and appoint a liquidator to wind up the company. All distributions of profit left in Acom from this point are capital meaning that Owen and Jane can deduct any unused part of their capital gains tax (CGT) annual exemption (£12,000 for 2019/20) and pay tax on the balance at a maximum of 20%. Assuming Acom has £98,000 to distribute in total, Owen and Jane would each be liable to CGT on £49,000. If their CGT exemptions are available in full they would each have to pay tax of up to £7,400 (£49,000 - £12,000) x 20%) but it would be less if they were entitled to entrepreneurs’ relief (ER).

    By comparison, if Acom distributed its profits before starting the winding up process, Owen and Jane would each be liable to income tax of at least £15,925 (£49,000 x 32.5%). By comparison the CGT bill is less than half that, but there’s still room for further tax saving.

    Winding up costs

    Usually, the tax advantage of capital distributions is only available when you appoint a liquidator to wind up your company. The trouble is a liquidator’s fees can be high and, depending on the value of your company, might significantly eat into or even outweigh the tax saving achieved.

    Rather than paying a liquidator to wind up your company you could do it yourself informally by notifying Companies House of your intention. However, CGT treatment will only apply if the amounts available to distribute are no more than £25,000 - any more than that and the whole of any distribution is taxed as income.

    Reduce the distributable amount

    If your company’s net value is more than £25,000 you’ll need to reduce it before you can use the informal winding up tax break. That will require you to make distributions from your company on which you’ll have to pay income tax. Despite this you can still save on tax and costs. You’ll need to crunch the numbers to see if it’s worthwhile.

    Example. Shaun is a higher rate taxpayer and the only shareholder of Bcom Ltd. It has distributable reserves of £35,000. Shaun could formally liquidate Bcom so that what he receives, after paying the liquidator’s fees of, say, £3,000, is liable to CGT. This would leave him with £28,000 after tax. If instead he paid a dividend of £10,000 and then applied to Companies House to dissolve the company, he would net £29,150. Not a massive tax saving but Shaun also avoids the time and red tape that goes with a formal liquidation.

    Reduce the value of your company to £25,000 by making distributions to shareholders and informally winding up the company. This will save the cost of a liquidator’s fees. Plus, each shareholder can use their annual capital gains tax exemption to reduce the amount on which they pay tax on their share of the final £25,000 distributed from the company.

  • New reporting procedure for cars

    New tax rates for zero and low emission company cars mean that from 6 April 2020 employers must provide more information to HMRC.

    Lower tax bills.

    There is a significant reduction in tax bills for drivers of electric and hybrid company cars which will apply for 2020/21. The changes will also benefit employers by reducing the amount of car benefit on which you have to pay Class 1A NI. As a result, HMRC is making changes to its reporting procedures for employers.

    New Forms P46 car.

    If after 5 April 2020 an employee’s company car is changed or they have use of one for the first time, and it’s a zero or low emissions car, you’ll need to notify HMRC in the new box that will be added to the P46 car. If it’s a hybrid with CO2 emissions of between 1g/km and 50g/km you must enter the vehicle’s zero emission mileage, i.e. the maximum distance it can be driven in electric mode without recharging. If you payroll your company car benefits, there will be a new field on the PAYE full payment submission in which to enter the mileage details.

    If you use a paper P46 car rather than the online version, make sure that you download and use the new-style form. Destroy any old-style forms. The new forms will be available to download from 6 April 2020.

    Hybrid information.

    If you’re leasing a hybrid vehicle, the leasing firm is required to provide you with the mileage information. If you own the vehicle, the zero emission mileage figure can be found on its “certificate of conformity”. If this isn’t available you can obtain the figure from the manufacturer.

    Existing company car users.

    You aren’t required to notify HMRC about employees who currently use electric or hybrid cars and continue with the same vehicle after 5 April 2020. However, it would be helpful if you notified the employees that their tax bills might reduce and that they should contact HMRC as soon as possible to check if their code number needs to be amended.

    There will be a new P46 car (online and paper versions) from 6 April 2020. Destroy any old paper versions. For hybrid cars you must provide details of the vehicle’s electric only range as shown on the certificate of conformity.

  • Salary sacrifice and minimum wage

    The government is cutting minimum wage red tape on salary sacrifice schemes. High profile cases, like Iceland’s Christmas savings club, saw employers penalised for diverting earnings to saving schemes for their employees which took their pay below the minimum wage. In future such schemes will be permitted, subject to conditions such as making good the shortfall.

    Further changes.

    There’s also good news regarding the methods for calculating hourly pay rates for workers for minimum wage purposes. The changes are expected to apply from 6 April 2020.

    In future you won’t be fined for offering salary sacrifice and other schemes to workers where initially this causes their pay to fall below minimum wage rates. The methods for calculating hourly pay rates are also being changed from 6 April 2020.

  • Using CEST employment status determinations

    Under the off-payroll working rules as extended from 6 April 2020, medium and large public sector organisations that engage workers who provide their services through an intermediary, such as a personal service company, must determine the status of the worker as if the services were provided directly rather than through an intermediary. If the worker is within the off-payroll working rules, the end client (or fee payer where different) must deduct tax and National Insurance from payments made to the worker’s intermediary, and also pay employer’s National Insurance.

    Where the end client is a small private sector organisation, it is the worker’s intermediary that must undertake the status determination in order to ascertain whether IR35 applies.

    HMRC’s CEST tool - HMRC’s Check Employment Status for Tax (CEST) tool can be used to find out whether a worker is employed or self-employed or whether the off-payroll working rules apply. The CEST tool was updated and enhanced at the end of 2019 in preparation for the extension of the off-payroll working rules.

    The tool asks a series of questions about the contractual relationship between the worker and the engager. The following information is required:

    • details of the contract

    • the responsibilities of the worker

    • who decides what work needs doing and when and where

    • how the worker is paid

    • whether the engagement includes any corporate benefits or reimbursement of expenses

    In order to reach a decision on the worker’s status, the user works through the questions selecting the answer most appropriate to their circumstances from those available. The answers given are used to provide a result.

    The tool can be used anonymously – there is no requirement to provide personal details.

    It is not possible to save information entered into CEST so that the user can return to it later – it must be completed in one session.

    Possible outcomes - The CEST tool will provide a result determined from the answers provided. These can be reviewed before obtaining the result.

    The possible outcomes are:

    • off-payroll working rules (IR35) do not apply

    • off-payroll working rules (IR35) apply

    • unable to make a determination (for whether the off-payroll working rules apply)

    • self-employed for tax purposes for this work

    • employed for tax purposes for this work

    • unable to make a determination (for employed or self-employed for tax purposes).

    The tool will provide a reason as to why CEST reached the determination it reached.

    Reliance on decision - HMRC have confirmed that they ‘will stand by the result produced by the service provided that the information is accurate, and is used in accordance with [their] guidance’.

    A copy of the output should be retained.

    However, HMRC warn that they will not stand by results achieved using contrived arrangements.

    Use by end clients - Medium and large private sector organisations and public sector bodies that use workers providing their services through an intermediary can use CEST to fulfil their obligation to make a determination under the off-payroll working rules.

    They should print off the determination and give a copy of it with the reasons for it to the worker and other parties in the chain. They should also keep a copy.

    Use by workers - Workers supplying their services to small end clients can use the CEST tool to check whether they need to apply the IR35 rules. Where they receive a determination under the off-payroll working rules, they can use CEST to check that they agree with it, and to challenge it if they do not.

  • Preparing for year-end PAYE

    HMRC has issued its last-minute advice for employers about submitting their final PAYE reports for 2019/20 and preparing for 2020/21.

    End of year.

    As usual, this time of year is a busy one for employers. There are several routine but important actions you need to take plus one or two new ones for 2020/21.

    PAYE reports.

    When you run your last payroll for 2019/20 you must use the final submission indicator in the full payment submission (FPS) to notify HMRC or it will assume there’s more to come and bombard you with reminders. If your software won’t accept the final report indicator on an FPS, submit an employer payment summary (EPS) with the indicator ticked instead. If you simply forgot to use the indicator, send an EPS with the indicator ticked to show that you didn’t pay anyone in the final pay period and use the final submission indicator. The deadline for your final FPS or EPS for 2019/20 is 19 April. If you find a mistake in your 2019/20 figures, there are different ways to correct it depending on the software you use.

    Updating codes for 2020/21.

    HMRC has just completed the issue of P9 notice of coding email and paper notifications of new tax codes which you must apply for your employees. The codes have been calculated using 2019/20 rates and thresholds because those for 2020/21 will not be definite until any changes announced in the Budget are made. If this is the case, you’ll receive a P6b notice with detail of the new codes which you should implement on the next payroll run.

    Other changes.

    Changes to the employment allowance mean that entitlement will not be automatically carried forward to 2020/21 and you must include a claim through your payroll software. Don’t forget to download and install the updated payroll app from your software provider or HMRC’s “Basic PAYE Tools”. Finally, check that your employees’ pay is at least equal to the new national minimum/living wage rates which apply from 6 April.

    Make sure the “final submission” indicator is used for your last payroll run for 2019/20 by 19 April, you claim the employment allowance for 2020/21 and your employees’ pay is at least equal to the new national minimum wage rates.

  • Reduced payment window for residential property gains

    Currently, capital gains on the sale of residential property in the UK are reported on the self-assessment tax return and the total capital gains tax liability for the tax year is payable by 31 January after the end of the tax year. Thus, the capital gains tax on residential property gains arising in the 2019/20 tax year must be reported to HMRC on the 2019/20 self-assessment return by 31 January 2021 and the associated capital gains tax paid by the same date.

    However, from 6 April 2020 this will change. From that date, gains arising on disposals of residential property by UK residents must be notified to HMRC with 30 days of the completion date, and a payment on account of the eventual tax liability made by the same date.

    What disposals are affected? - The new rules will apply from 6 April 2020 to disposals by UK residents of UK residential property which give rise to a residential property gain. The rules applied to disposals by non-residents from April 2019.

    A new return - Rather than notifying HMRC of the gain on the self-assessment return, there will be a new return for advising HMRC where a gain arises on the disposal of a residential property. If there is no taxable gain, for example if the property is disposed of to a spouse or civil partner on a no gain/no loss basis, there is no requirement to make a return.

    The return must be submitted to HMRC within 30 days from the date of completion.

    Payment on account of tax due - The taxpayer must also make a payment on account of the capital gains tax liability within 30 days of the completion date. This is considerably earlier than now, where the lag is at least nine plus months and may be as much as almost 22 months.

    Amount to pay - The amount to pay is effectively the best estimate of the capital gains tax at the time of the disposal, taking into account disposals to date in the tax year.

    Example 1 - Paul sells a second home, completing on 31 May 2020 realising a gain of £50,000. He has made no other disposals in 2020/21 at the time that the property is sold.

    He can take into account his annual exempt amount (for purposes of illustration this is assumed to be £12,000 for 2020/21) when working out his liability. Paul is a higher rate taxpayer.

    The payment on account is therefore £10,640 ((£50,000 - £12,000) @ 28%).

    Where a capital loss has been realised before the residential property gain, this can be taken into account when calculating the payment on account.

    The return must be filed and the payment on account made by 30 June 2020.

    Example 2 - Rebecca sells her city flat, which is a second property, on 1 August 2020, realising a gain of £100,000. In May 2020, she sold some shares, realising a loss of £10,000. Rebecca is a higher rate taxpayer.

    The loss can be set against the residential property gains of £100,000, leaving a net gain of £90,000. As her annual exemption is available, the chargeable gain is £78,000 and the payment on account is £21,840.

    No account is taken of a loss realised after the residential gain. - Final capital gains tax liability for the year

    The final capital gains tax liability for the year is computed via the self-assessment return taking into account all gains and losses for the year. The payment on account is deducted from the final bill and the balance payable by 31 January after the end of the tax year.

    If the payment on account is more than the final liability, for example if losses were realised later in the tax year, a refund can be claimed once the self-assessment return has been submitted.

  • Winding up your personal service company

    Come April, many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because they fall within the off-payroll working rules, with the result that because tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies on the payroll.

    Where the personal service company is not needed, the question arises as how best to wind it up and extract any remaining cash.

    Striking off

    Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.

    The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.

    If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.

    Members’ voluntary liquidation (MVL)

    Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.

    An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.

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  • Cash basis accounting - effect on tax of reducing profits

    There are circumstances where using the cash basis of accounting can reduce your profits and create a permanent tax saving. These include where calculating your profits using the normal basis of accounting means:

     • you’re liable to the high income child benefit charge (HICBC)

     • some of your income falls into a higher tax bracket; or

     • your taxable income exceeds £100,000.

    Example

    John is self-employed. His accounts (prepared on the normal accruals basis) for the year ended 31 March 2019 show a profit of £61,000. If the cash basis of accounting were used his profit would be £52,000. John’s spouse receives child benefit for two children for 2018/19 of £1,789. Because his profit for that year is greater than £50,000 John is liable to the HICBC. The maximum charge would apply because his income exceeded £60,000, i.e. the charge would be £1,789. However, using the cash basis of accounting would reduce John’s profits and therefore the HICBC to £358 saving him £1,431.

  • Maximise your VAT claim for road fuel

    If your business pays for fuel for work and private journeys, there are different methods to work out the VAT reclaimable. There are further complications if your business is partially exempt.

    Different methods

    Until 2014 if a business paid for road fuel for its owners or workers which they used for business and private journeys, it was expected to reclaim none of the VAT or all of it. If it opted for the latter, it had to account for VAT on the private use using HMRC’s scale charges. Some businesses did well out of the arrangement while others did badly. These days while the scale charges still exist and continue to be used, you can instead work out the amount reclaimable on fuel costs by applying the general VAT rules. These say you can use any fair and reasonable method of apportioning the VAT between business (reclaimable) and private (not reclaimable) use.

    Scale charge pros and cons

    One advantage of HMRC’s scale charge is that it’s simple to use. The drawback is you can end up paying too much VAT. As a rule of thumb, the less fuel paid for by the business the less likely it is that the scale charge will be the most VAT-efficient option. To use the apportionment method instead you’ll need to keep a record of business and total mileage for each car for which the business pays for fuel.

    For each return period you can choose which method to use and opt for the most VAT efficient. What’s more, you can use different methods for each car for which your business pays the fuel.

    Partial exemption

    If you want to work out the most VAT-efficient method, and your business is partially exempt, you’ll need to consider another factor. You must decide if the cost of fuel is attributable to taxable or exempt supplies your business makes, or both. In virtually all cases car journeys will be for the business as a whole and therefore the VAT on the fuel falls in the last category. This is known as the “residual VAT” or “residual input tax”. You can now decide whether to claim/account for VAT using the scale charge or by apportionment.

    You can change methods each VAT period and for each car for which your business has bought fuel. The options are to pay HMRC VAT based on its scale charges or account for private mileage. If your business is partially exempt you must reduce your claim according to the partial exemption rules. The scale charge can be similarly reduced.

  • Helping children onto the property ladder - 1

    Property taxation is fraught with potential traps. For example:

    • Restricted income tax relief on borrowings to finance residential lettings;
    • Stamp duty land tax (SDLT) (or local equivalents) can be onerous for higher-value properties - especially with the additional 3% ‘surcharge’ that applies to buy-to-let properties;
    • Capital gains tax (CGT) has an effective 8% surtax on the disposal of dwellings;
    • Inheritance tax (IHT) awaits, and most property investment businesses cannot access the business property relief that is available to most trading businesses so that the latter doesn’t have to be ‘broken up’ to pay off IHT;
    • Property is ‘lumpy’; one tends to hold only a few but they each have high value, and it is cumbersome to keep moving the ownership of fractions of property. A gift of property to someone other than your spouse/civil partner will normally be subject to CGT as if you had sold it for its full market value.

    In particular, there is anti-avoidance legislation to consider, such as:

    • ‘Settlements’ legislation;
    • Gifts with reservation of benefit;
    • Pre-owned assets tax.

    Broadly speaking, these act to ensure that you cannot give something away while continuing to derive any benefit from it.

    Start them young - Children under the age of 18 cannot hold legal title to property but they can hold a beneficial interest in property beforehand. One can gift property (or an interest therein) to a simple trust that holds the property until they are old enough to give good receipt; meanwhile, any rental income, etc. belongs to and can be taxable on them.

    Gifts directly from parents to minor children can be caught by the settlements legislation to ‘bounce’ any resulting investment income back to the donor parent, but grandparents, etc., are not generally caught.

    More complex trust arrangements can be devised to ‘hold on’ to the property for longer if there is concern that children/grandchildren will not be mature enough to handle significant wealth at age 18.

    Start young(er)  - Wealth planning prefers a timeframe of decades, rather than months. A married couple or civil partnership can trigger a gain of £24,000 this tax year (2019/20) but pay no CGT, as the personal annual exemption is £12,000. Given time, even relatively modest transfers can accumulate to significant capital wealth without having to pay any CGT.

    It is also possible to make regular gifts out of one’s surplus income that are immediately exempt from IHT, and do not interfere with the usual £3,000 per annum limit (nor do they have to be survived by seven years). Depending on the extent of one’s surplus income, such gifts can dwarf the traditional gift limits. Gifts out of surplus income can effectively act as a ‘safety valve’ to stop further funds accumulating unnecessarily in one’s IHT estate; that is what the regime is designed for.

    Gradual transfers of wealth can more easily be effected by giving away shares in one’s property company over time, instead of fractional interests in the properties themselves. Note that a poorly drafted arrangement to transfer property interests over several years can easily result in CGT arising on all the planned transfers, immediately.

  • Helping children onto the property ladder - 2

    Help them to buy - Note that the 3% SDLT surcharge will apply to the entire purchase price when any co-owner is not buying their only property/replacement home, etc., so co-investing in the property directly, alongside a first-time buyer, can be tax-inefficient. Likewise, if the young buyer hopes to benefit from the main residence CGT exemption, any interest in the property that is attributable to a joint investor who has not occupied the property as their only/main residence will not benefit. It may therefore be more tax-efficient to lend money to the young buyer, so that their more tax- efficient acquisition and ownership covers more / all of the property.

    The older lender acting as guarantor can sometimes increase access to lending arrangements or reduce their cost - but there is a risk that such a guarantee may be called in. If you have spare capital wealth but want to retain it ‘just in case’, consider using it as funding for an offset arrangement that will again act to reduce the borrower’s finance costs; it may also prove slightly more tax-efficient for you as you will no longer be taxed on the interest that you might otherwise have earned. Here again, though, the offset funds are at risk if the mortgage defaults.

    Lending money, acting as guarantor or providing funds for offset mortgages has no effect for IHT or CGT purposes, although one’s estate would be affected if the funds were forfeit.

    Parents, etc., are sometimes required (or advised) to put their names on the legal title to mortgaged property; but without any actual beneficial interest such as a joint owner would ordinarily have (simply, their names might be recorded on the land register but they have no entitlement to proceeds from sale, etc.). The SDLT surcharge guidance has been updated specifically to confirm that a purely legal interest will not trigger the additional 3%.

    Help them to help-to-buy - The government’s help-to-buy individual savings account (ISA) is potentially useful: the government will ‘top up’ a qualifying investor’s fund by 25% - to a maximum of £3,000 on savings of £12,000 (overall - not annually). A qualifying investor has to be 16 or over and saving to buy their first home (to live in, although they can rent it out later on). The target property cannot be worth more than £250,000 (£450,000 in London).

    Give something away but keep the income? - There may come a time when parents want to divest themselves of capital but retain their income, to cover living costs, care fees, etc.

    It would be possible to give most of the ownership in a rental property to adult children or grandchildren, but then to agree to share the net rental income therefrom so as to favour the older co-owner(s). HMRC’s manual states:

    ‘...the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.’

    Strictly, the younger owner is entitled to demand his or her ‘fair share’ of the net rental income, so it could be argued that he or she is ‘giving’ away their income, and this might be considered a ‘settlement’. However, the settlements legislation is meant to apply only where a person ostensibly gives away his or her income but somehow still benefits from it; if the younger co-owner ‘genuinely’ does not benefit from the share he or she gave up, there may be a settlement, but that alone does not trigger the anti-avoidance tax legislation.

    Conclusion - There are many routes to helping children onto the property ladder. Some are more tax-efficient than others. Long-term planning is highly recommended in order to balance the different requirements of the various tax regimes that may apply, and it is vital to seek appropriate advice.

  • Leasing assets to your company

    Over the last decade, the emergence of the sharing economy has meant that millions of people worldwide are now able to earn supplemental income from personal assets. Companies like Airbnb have expanded beyond short-term rentals; it is now possible to book local tours, classes, photoshoots, and other bespoke experiences. While this opens up a world of opportunities, any business should be structured properly to ensure tax efficiency.

    Individual or company ownership?

    If an individual is already earning via self-employment or PAYE, they may seek to incorporate a new business - particularly if they are in the higher-rate tax bracket - in order to take advantage of favourable corporation tax rates and tax-planning options. Although there are many more advantages to incorporation, there are some circumstances where an individual may prefer - or require - to retain ownership of a personal asset, rather than transferring ownership to a limited company.

    Unless the individual has already built up funds in an existing company from a related venture, a newly-formed company will have limited capital, preventing it from purchasing the asset outright. The transfer can be achieved through crediting a director’s loan account to represent the amount due to the director. In the case of an existing company, if the director has borrowed money and has not yet repaid it, this can offset the balance owed. In either case, an individual must raise an invoice to their company listing all items; the sale price must be in keeping with the market value at the time of sale.

    Wit a wide range of possibilities, careful consideration is crucial. This would be especially true for the transfer of specialised or classic/ antique equipment, where asset values may appreciate over time. If the asset was purchased many years ago and current market value has appreciated beyond the purchase price, the sale could give rise to a capital gains tax (CGT) liability for the individual. In this scenario, a director’s loan is unfavourable as the individual has incurred a tax bill but has received no financial compensation for the sale; a transfer of funds should be made, if possible.

    Renting assets to the company

    An entirely legal alternative would be for the individual to rent their personal asset to their limited company for business use. To ensure the arrangement is legitimate, the individual should draw up a formal lease agreement with the company, treating the agreement as if they were leasing to another party. The agreement should detail the monthly cost of the lease, due dates for payment(s), the term of the lease, any requirements relating to insurance, and arrangements in the event of a missed payment. The rental fee must be reasonable and in line with rental rates for similar assets locally.

    The individual would then declare the lease/ rental income via a self-assessment tax return. While retaining the ability to use the asset for personal use may be required, if it is instead used solely for business purposes this can reduce one’s overall tax liability by allowing the individual taxpayer to deduct several expense types from their rental profits. This could include insurance, interest, repairs/maintenance and/or general administrative costs, amongst others.

    You may rent many asset types to your limited company; office space, machinery, equipment, vehicles, computers, property, etc. Certain assets may require special treatment, so you should always consult with a professional to ensure your arrangements are legitimate.

  • HMRC to stop sending paper tax returns

    HMRC have announced that from April 2020, as part of paper-saving measures, they will no longer automatically send out blank paper Self Assessment returns.

     

    Instead, taxpayers who have filed paper returns in the past will simply receive a short notice to file telling them that HMRC will in future communicate with them digitally. If they wish to continue filing a paper return they may do so but will need to either phone HMRC to request one or download and print a blank return. Anyone already identified by HMRC as unable to file a return online may still receive a paper return for the 2020/21 tax year in April 2020.

     

    The HMRC paper-saving initiative also means that no blank P45 and P60 forms will be sent out to employers from April 2020. These forms will instead have to be obtained via payroll software.

  • Structures and buildings capital allowances

    A new tax relief for capital expenditure on construction works applies to qualifying expenditure incurred on or after 29 October 2018. Broadly, the structures and buildings allowance (SBA) provides tax relief on the structural elements of a building, where previously there was no relief available. SBA expenditure does not, however, qualify for the capital allowances annual investment allowance (AIA).

    The main features of the SBA are summarised as follows:

     

    • The allowance is given at a 2% flat rate over a 50-year period, pro-rated for short tax periods.

    • Relief is available for new commercial structures and buildings only, but this can include costs for new conversions or renovations. It may be claimed where all the contracts for the physical construction works were entered into after 28 October 2018.

    • Relief is not available for land costs or rights over land.

    • The structure can be located in the UK or overseas, business must be in the charge to UK tax.

    • Tax relief is limited to the costs of constructing the structure or building, including costs of demolition or land alterations necessary for construction, & direct costs.

    • Relief cannot be claimed for costs incurred in applying for and obtaining planning permission.

    • The claimant must have an interest in the land on which the structure or building is constructed.

    • Relief is not available for dwelling-houses, nor any part of a building used as a dwelling where the remainder of the building is commercial.

    • Business expenditure on integral features and fittings of a structure or building that are allowable as expenditure on plant and machinery, continue to qualify for writing-down allowances for plant and machinery including the AIA, up to its annual limit (£1,000,000 until 31 December 2020).

    • Where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure qualifies for a separate 2% relief over the next 50 years.

     

    The structure must be used for a qualifying activity, taxable in the UK. Qualifying activities are:

    • any trades, professions and vocations

    • a UK or overseas property business (except for residential and furnished holiday lettings)

    • managing the investments of a company

    • mining, quarrying, fishing and other land-based trades such as running railways and toll roads

     

    The sale of the asset does not result in a balancing adjustment (the purchaser takes over the remainder of the allowances written down over the remainder of the 50-year period).

    Claiming SBAs - Only possible to make a claim from when a structure first comes into use.

    The claimant will need an allowance statement for the structure. Where the claimant is the first person to use the structure, a written allowance statement must be created before making the claim & must include information to identify the structure, such as address and description, the date of the earliest written contract for construction, the total qualifying costs, the date the structure was first used for a non-residential activity.

    Where a used structure is being purchased, the claimant can only claim SBA if they obtain a copy of the allowance statement from a previous owner.

    For any extensions or renovations that were completed after the structure was first used, the claimant can record separate construction costs on the allowance statement or create a new allowance statement.

    Record-keeping - A key message is that record keeping and cost segregation will be of paramount importance. In order to claim the allowance, evidence of qualifying expenditure must be produced in the form of an allowance statement, submitted to HMRC. Records can include things like formal contracts, emails or board meeting notes.

  • Student loan scheme information for employers

    If you employ more than a few staff, the chances are that at least one of them will have a student loan. As their employer you’re responsible for collecting repayments, the arrangements for which are increasingly complex.

    Changing rules for student loans - Where a former student is employed, repayments are made by deduction from their salary along with PAYE tax and NI. As well as understanding what HMRC requires, you might also have to explain it to your employees if they have questions about how the deductions are worked out.

    Different loan schemes - There are now three types of loan repayment scheme: pre-September 2012 loans (Plan 1), post-September 2012 loans (Plan 2) and, since April 2019, postgraduate loans (PGL). Repayments are only required when the employee’s rate of pay exceeds the annual rate set by the government. The earnings trigger point for each is different, as is the rate of deduction.

    Even if you’re aware that a new employee has a student loan you’re only required to make deductions if you are notified in one of three ways: by a start notice ( SLP1 , SLP2 or PLG ) from HMRC, the employee indicates they have a loan on their starter checklist, or the employee gives you a P45 that indicates they are making loan repayments (in which case you should ask them to complete a starter checklist which asks what type of loan they have).

    April 2020 changes - Employees with graduate loans who began employment from September 2019 weren’t required to start repaying loans straightaway. Instead, repayments aren’t required until the beginning of the tax year after graduation or when they leave a course, if earlier.

    If you have newish employees falling into the category above, you should have recently received a start notice directing you to begin making deductions in April 2020.

    New rates for 2020/21 - While your payroll software will take care of calculating the student loan repayments (as long as you’ve indicated to it that they are required), if you’re asked by one of your employees how much the deductions will be in 2020/21, you can provide them with details from the table below.

    Plan type      Annual rate of pay      Deduction

          1                    £19,390                     9%

          2                    £26,575                     9%

        PGL                 £21,000                     6%

    What to do with combination loans? - Because Plan 1 loans were the only type until Plan 2 was introduced in April 2016 an employee may be liable to both types of repayment. All you need to do is set up your payroll to indicate a Plan 1 loan. The Student Loans Company (SLC) takes care of attributing the repayments between the two.

    End of the loan - If it appears to the SLC that an employee will finish repaying their loan within two years it will offer them the chance to switch from payroll deductions to direct debits.

    You’re only required to make student loan deductions if you are notified by HMRC on Forms SLP1, SLP2 or PGL, or on a P45 or a starter checklist produced by the employee. If the employee has Plan 1 and Plan 2 loans, you should enter them in your payroll software as Plan 1 only. New deduction rates apply from April 2020.

  • Property rental toolkit - 1

    Mistakes in completing self-assessment returns can prove costly. There is the risk that more tax will be paid than is necessary. If tax is understated and HMRC judges that reasonable care has not been taken, there is also the possibility of penalties. However, in seeking to avoid common errors there is help at hand in the form of HMRC’s toolkits.

    Toolkits are designed to help agents ensure that client returns are complete and correct. Each toolkit focuses on a particular area and draws attention to common errors which have come to HMRC’s attention. The toolkits each contain:

    • a checklist to identify key errors that often occur;
    • explanatory notes which identify underlying types of error, explain how to avoid them, and provide a brief outline of the tax treatment; and
    • links to relevant guidance, generally in the HMRC guidance manuals.

    The toolkits are updated each year to reflect changes in the relevant Finance Act. Although the toolkits are designed with agents in mind, their use is not limited to agents. They are a useful resource for anyone completing a tax return.

    Property rental toolkit - A person who owns a property or land and who receives income from that asset will generally be carrying on a property rental business, the profits of which are taxed. Where that person is an individual, the profits and losses from the property rental business need to be returned on the property pages of the self-assessment return. The property rental toolkit provides an awareness of common errors, allowing action to be taken to avoid them.

    Record keeping - The first risk area highlighted in the toolkit is that of record keeping. Without complete and accurate records, it is impossible to accurately compute profit; the calculation of profits relies on knowing the income from the property and also the allowable expenses. Failure to keep proper records may mean that:

    • receipts other than rental income are overlooked;
    • expenditure or relief are claimed incorrectly or overlooked; or
    • property disposals are overlooked.

    Property income receipts - All income (with the exception of capital receipts) should be taken into account in computing the profits of the property rental business. Receipts that are not rent but nevertheless represent income of the property rental business are commonly overlooked. It should also be remembered that property income can include payments in kind as well as cash receipts. This situation may arise if the landlord and tenant agree (say) that the tenant will decorate the property in lieu of one month’s rent. Income from casual or one-off letting (e.g. letting a field out for parking during a village show) will also constitute income from a property rental business. However, if this is the only income it may well fall within the property income allowance of £1,000, with the result that it does not need to be reported to HMRC.

    Some types of lettings need to be considered separately. This includes profits and losses from overseas properties (which form a separate overseas property rental business) and also that from furnished holiday lettings. Properties which are let out rent-free or at below market rent should also be considered separately to ensure expenses are restricted appropriately. To avoid mistakes when computing the income from the property rental business, the following questions should be considered:

    1. Have all gross rents and other receipts from land and property been included as property income as appropriate?

    2. Have any deposits received been included as income as appropriate?

    3. If a jointly-owned property is let, has the profit or loss been divided up correctly?

    4. If there are overseas rental properties, have the profits or losses been treated correctly as income of an overseas property business?

    5. If there is commercial letting of furnished holiday accommodation in the UK or the EEA, have all the qualifying conditions been met?

    6. If surplus business premises have been let and the rent receivable treated as income of the business, have the associated conditions been met?

  • Property rental toolkit - 2

    Deductions and expenses - Deductions and expenses pose a significant risk area. There is the risk that the landlord will not claim a deduction for all allowable expenses, with the result that more tax will be paid than is necessary. On the other side of the coin is the risk that the landlord will claim a deduction for items which are not allowable, understating profits and running the risk of a penalty. Expenses are only deductible if they are incurred wholly and exclusively for the purposes of the business. Subject to the deductions for capital expenses permitted under the cash basis capital expenditure rules, they must be revenue rather than capital in nature. Distinguishing between capital and revenue expenditure is not always straightforward, and risks may arise.

    Risks also arise where the expense has a dual purpose and is partly private in nature and partly business in nature. A deduction for the business proportion is permitted where this can be separately identified and meets the wholly and exclusively test. Changes to the treatment of finance costs are being phased in with the method of relief switching from relief by deduction to relief as a basic rate tax reduction. Care should be taken to ensure that the split is correct for the tax year in question. Guidance on the rules can be found in HMRC’s Property Income manual at PIM2054.

    The following questions should be considered in relation to deductions and expenses:

    1. Have all items of expenditure on the improvement of an asset been treated correctly?

    2. Have any legal and other professional fees incurred in acquiring an asset been allocated appropriately?

    3. Has all expenditure on essential repairs to a newly-acquired property been treated correctly?

    4. If expenditure is incurred prior to the commencement of the property rental business has been claimed, have all of the conditions been met?

    5. Have capital repayments been excluded from loan interest and finance charges?

    6. Has the finance costs restriction been applied to mortgage interest and other finance costs incurred?

    7. Have any dual purpose expenses been apportioned in respect of any property used only partly for rental business?

    8. If a vehicle has been used by a landlord for non-business travel, including home to work, has only the business travel been claimed?

    9. Are all expenses claimed by the landlord for business trips wholly and exclusively for the purpose of the property rental business?

    10. Where wages and salary costs are being claimed, have employment taxes been applied appropriately?

    11. If there have been wages or salaries paid to relatives or connected parties, are the amounts commensurate with their duties?

    12. If a property has been let rent-free or at less than the normal market rate, has any expenditure been restricted accordingly?

    Relief and allowances - Overlooking reliefs and allowances can prove costly for the landlord. Reliefs that may be in point include:

    rent-a-room relief where a furnished room is let in the landlord’s home;

    the property allowance of £1,000, which can be deducted in place of actual expenses;

    replacement of domestic items relief;

    capital allowances on certain items owned by the landlord, such as tools, ladders, and motor vehicles, which are used in the property business; and

    mileage allowances in place of the actual costs of using a vehicle.

    Care should be taken when claiming reliefs that all the associated conditions are met.

    Losses - Rental losses from a property rental business can only be carried forward and set against future profits of the same property rental business. Likewise, losses arising on furnished holiday lettings can be carried forward and set against profits of the same business. Losses from one rental business cannot be utilised by another property business operated by the landlord at the same time in a different capacity. Care should be taken that losses are computed and utilised correctly. Overseas landlords Landlords living abroad should be aware of the rules under the non-resident landlord scheme.

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   Adrian Mooy & Co Ltd  -  61 Friar Gate   Derby   DE1 1DJ  -

adrian@adrianmooy.com

Adrian Mooy & Co - Accountants in Derby
61 Friar Gate Derby, Derbyshire DE1 1DJ
Phone: 01332 202660 Hours: Mon-Fri 9.00am - 5:00pm

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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd.  Registered in England No. 05770414.

Registered to carry out audit work in the UK by The Association of Chartered Certified Accountants.

Details of audit registration can be viewed at www.auditregister.org.uk under number 8011438.

Registered office: 61 Friar Gate, Derby, Derbyshire, DE1 1DJ

 

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