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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.
COVID-19 Company Directors & Shareholders
COVID-19 IR35 & Off-payroll working
COVID-19 Insolvency & Directors
COVID-19 Statutory self-employment pay scheme
COVID-19 Landlords & tenants
COVID-19 Late payment interest rate
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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,
annual accounts and taxation, payroll or VAT you can
count on us at every step of your business’s journey. For
If you are looking for a Derby accountant then please contact us.
If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can support you through business registration and provide advice on all aspects of tax including:
◦ Accounts for HMRC ◦ Self assessment ◦ VAT returns ◦
◦ Payroll services ◦ Tax planning ◦
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
We are a member firm of the Association of Chartered Certified Accountants.
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time.
Self assessment: Taking
away the hassles of tax
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is tax efficient. We will advise you on how to structure your contract to minimise IR35 risk. We will ensure you claim all the expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns and provide you with clarity over your tax payments.
Included in the service • IRIS KashFlow + Snap • Annual accounts • Corporate tax return • Personal tax return • Payroll • Dividend administration • VAT returns • Contract reviews • Dealing with HMRC
VAT • is one of the most complex tax regimes imposed on business. We provide a cost effective service including assistance with registration & completing your returns.
Payroll • Administering your payroll can be time consuming. We provide a comprehensive payroll service.
Your Payroll Solution
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Provision of management accounts
For more about these services please contact us.
Keeping the Books
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Adrian Mooy & Co is a registered auditor with the Association of Chartered Certified Accountants.
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax, accounts preparation & tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively.
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
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.
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.
Understand your needs
Confirm your expectations
Build a relationship
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
Profit extraction in 2020/21 – What is the optimal salary?
A popular tax-efficient profit extraction strategy used by personal and family companies is to take a small salary and extract further profits as dividends. Where this approach is adopted, the starting point is to determine the optimal salary. While this will depend on personal circumstances and there is no excuse for not doing the sums, there are some general guidelines.
Where the director does not have the requisite 35 qualifying years to provide access to the full single tier state pension paying a salary at least equal to the lower earnings limit for Class 1 National Insurance purposes (set at £120 per week; £520 per month and £6,240 per year) will ensure that the year is a qualifying one.
Maximum salary that can be paid free of tax and National Insurance - The first question to consider is what is the maximum salary that can be paid free of income tax and employer’s and employee’s National Insurance. For 2020/21, the key numbers are:
• the personal allowance – set at £12,500;
• the primary threshold – set at £9,500 per year; and
• the secondary threshold –set at £8,788 per year.
Assuming the personal allowance has not been used elsewhere, the maximum salary that can be paid without triggering a tax or National Insurance liability is one equal to the secondary threshold of £8,788.
However, if the director is under 21, there is no secondary Class 1 liability until earnings exceed £50,000 and in this scenario, the maximum salary that can be paid free of tax and National Insurance is one equal to the primary threshold of £9,500 per month. The same is true where the director is over 21 but the employment allowance extinguishes any secondary Class 1 liability.
Is a higher salary tax-efficient? - Salary payments and any associated employer’s Class 1 National Insurance contributions are deductible for corporation tax purposes and there will therefore be an associated 19% reduction in the corporation tax bill. Where paying a higher salary triggers a National Insurance liability, this will be worth paying if it is more than offset by the corporation tax reduction. The sums differ depending on whether the employment allowance is available.
Employment allowance unavailable - In a personal company scenario, it is unlikely that the employment allowance is available as companies where the sole employee is also a director, as would be usual in a personal company do not qualify.
Where this is the case, assuming the director is over 21, a salary in excess of £8,744 will attract a secondary Class1 National Insurance liability. However, there is no primary Class 1 liability until the salary reaches the higher primary threshold, set at £9,500 for 2020/21. At 13.8%, the rate of employer’s National Insurance is less than the corporation tax rate – the corporation tax saving on the salary and employer’s National Insurance of £163 (19% (£756 x 1.138)) is more than the employer’s National Insurance on the additional salary of £104 (13.8% of £756), meaning it is tax efficient to pay a salary of £9,500. However, the employer’s NIC will need to be paid over to HMRC, incurring admin costs.
However, beyond this level, the combined effect of employer’s and employee’s National Insurance outweighs any corporation tax saving. The optimal salary in this case is therefore £9,500 a year.
Employment allowance available - In a family company scenario, the employment allowance may be available, making it possible to pay a salary of £9,500 free of tax and National Insurance. Paying an additional £3,000 to bring the salary up to the level of the personal allowance will trigger an employee Class 1 liability of £360 (12% of £3,000). However, the additional salary of £3,000 will reduce the corporation tax bill by £570 (19% of £3,000), making the additional salary worthwhile. However, once income tax at 20% is brought into the mix, this is no longer the case, meaning the optimal salary is one equal to the personal allowance of £12,500.
Switch to dividends - Once the optimal salary has been paid, it is tax efficient to extract further profits as dividends.
Relief for replacement domestic items
A landlord may provide domestic items in a property which is let out. This may include white goods, such as fridges, freezers and washing machines, and also furniture and furnishings where the property is let furnished. Fixtures, such as fitted bathrooms and kitchens are outside the scope of the relief.
The tax system has rules governing relief for the cost of domestic items.
Replacement not initial cost - There is no relief for the initial cost in kitting out the property with domestic items. Instead, relief is given when the items are replaced. As long as the associated conditions are met, the landlord can deduct the cost of the replacement domestic item when working out the profits of the property rental business.
Conditions - Condition A is that the person or company is carrying on a property business that includes the letting of residential property.
Condition B is that an old domestic item that has been provided for use in the residential let has been replaced with the purchase of a new domestic item. The new item must have been provided for the exclusive use of the tenant and the old item must no longer be available to them.
Condition C is that expenditure on the new item must not be prohibited by the wholly and exclusively rule but would otherwise be prohibited by the capital expenditure rule. The wholly and exclusively rule limits deductibility of expenditure to that incurred wholly and exclusively for the purposes of the business. The prohibition on deduction under the capital expenditure rules (whether those applying to the cash basis where this is used or the accrual basis otherwise) prevents a deduction being given twice for the same expenditure.
Condition D is that capital allowances must not have been claimed in respect of expenditure on the new domestic item.
Excluded lets - The relief is not available for replacement domestic items in the commercial letting of furnished holiday accommodation, or in a room let in the landlord’s home where rent-a-room relief is claimed.
Amount of the relief - Where the replacement is on a like-for-like basis, a deduction can be claimed for the full cost of the replacement item. The item does not need to be the exact same model and HMRC do allow for an element of technological innovation. The test is whether the replacement is equivalent rather than superior to the original.
Where the item is replaced with a superior item, either of a better quality or an enhanced product (for example, if a fridge is replaced with a fridge/freezer), the deduction is capped at the cost of an equivalent item.
A deduction is allowed for any incidental costs, such as delivery costs or costs of disposing of the old item. Any proceeds from the sale of the old item must also be taken into account when computing the profits of the property rental business.
In a part-exchange situation, the deduction is the amount that the landlord pays in addition to the trade-in allowance for the old item.
Example - Tim replaces the washing machine in a buy-to let property with a washer-drier costing £400. An equivalent washing machine would cost £250. He also pays £20 delivery costs and £15 to dispose of the old machine.
Tim can claim a deduction of £285 (£250 + £20+ £15).
As the replacement is superior to the original, he is not able to deduct the enhancement element of the cost of the washer-drier, equal to £150.
Running a business from home
Small businesses can choose to be taxed on the basis of the cash that passes through their books, rather than undertaking the more complex accounting calculations designed for larger businesses. This is known as the ‘cash basis’, and where a business opts to use it, it will also be possible for that business to use certain simplified arrangements for claiming expenditure in working out taxable profits for income tax purposes. Flat rate expenses can be claimed for business costs for vehicles, working from home, and living at the business premises.
Working from home - Where a business owner runs the business from home they will be able to claim flat rate expenses for business use of the property. This means that it will not be necessary to work out the proportion of personal and business use, for example, how much of their utility bills relate to business use. Instead a monthly deduction will be allowable provided certain criteria are satisfied. The current rates are as follows:
Number of hours worked per month Applicable amount
25 or more £10.00
51 or more £18.00
101 or more £26.00
HMRC's view is that ‘number of hours worked’ means hours spent wholly and exclusively on ‘core business activities’ in the home with core business activities comprising the provision of goods and/or services, the maintenance of business records and marketing and obtaining new business.
Example - John worked 60 hours from home for a period of 10 months, and worked 110 hours during two particular months. He can claim the following amount against his income for tax purposes:
10 months x £18.00 = £180.00
2 months x £26.00 = £52.00
Total amount claimed = £232.00 - Living at the business premises
Some businesses use their business premises as their home, for example, hotels and guesthouses. Where a premise is used for both business and private use, the business owner may, instead of making the standard deduction outlined above, make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:
Number of relevant occupants Applicable amount
3 or more £650
A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.
Example - Sandy runs a guesthouse and also lives there all year round with her husband. Her overall business expenses are £10,000. She can claim a flat rate deduction for private use as follows:
12 months x £500 per month = £6,000
Expenses claimed against income £10,000 - £6,000 = £4,000
Where a person claims a flat rate deduction, they are still able to claim a separate deduction for fixed costs such as council tax, insurance and mortgage interest.
Expenses checker - You don’t have to use simplified expenses. You can decide if it suits your business. HMRC provide a simplified expenses checker, which can be used to compare what you can claim using simplified expenses with what you can claim by working out the actual costs. The checker can be found online at https://www.gov.uk/simplified-expenses-checker.
Claims - Anyone wishing to utilise the simplified expenses regime should ensure that they keep records of business miles for vehicles, the number of hours worked at home, and details of people living at the business premises over the year. At the end of the year, work out how much can be claimed and include these amounts of your self-assessment tax return.
Rental expenses – when can you claim relief
Landlords incur various expenses when letting out a property. These may be directly related to the property itself, such as repairs and maintenance, or in relation to finding tenants and managing the let. To ensure that tax is not paid unnecessarily, it is important that the landlord claims relief for all allowable expenses.
General rule - The general rule is that a deduction is allowed for revenue expenses that are incurred wholly and exclusively for the purposes of the property rental business. Relief for capital expenditure depends on whether the cash basis or the accruals basis is used. Under the default cash basis, capital expenditure can be deducted unless a deduction is specifically prohibited, as is the case for land, property and cars.
Common expenses - Although the exact expenses will vary from let to let, the following is a list of common expenses which a landlord may incur and which may be deducted in computing profits as long as the wholly and exclusively rule is met:
• general maintenance and repairs to the property (but not improvements);
• water rates;
• council tax;
• gas and electricity;
• insurance (such as landlord’s insurance for buildings and landlord’s contents);
• cleaning costs;
• gardening costs;
• letting agents’ fees;
• property management fees;
• legal fees for lets of less than a year or for renewing a lease of less than 50 years’
• accountant’s fees;
• office costs, such as stationery, paper, printing and postage;
• advertising costs;
• phone calls; and
• rent where the property is sub-let.
Relief is not available if the tenant incurs the expense rather than the landlord (as may be the case with council tax and utilities, for example).
Vehicle costs - Where the landlord uses his or her own car for the purposes of the property rental business, a deduction can be claimed on a mileage basis using the simplified expenses system. The rate for cars and goods vehicles is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter.
Interest and other finance costs - Relief can be claimed for interest costs where the property was funded with borrowings, but not for any capital repayments on the mortgage. Interest costs are allowable on borrowings up to the cost of the property when first let. The mortgage does not need to be secured on the let property.
For 2020/21 relief for interest and associated finance costs is given fully as a tax reduction at the basic rate. For 2019/20, 25% of the costs were deductible in computing profits, with relief for the remaining 75% being given as a tax reduction at the basic rate.
Keep records - To ensure that deductions for expenses are not overlooked, the landlord should keep a record of all expenses incurred in relation to the let, together with receipts and invoices. Failing to claim allowable deductions means that tax will be paid unnecessarily.
Auto-enrolment threshold changes for 2020/21
The government has set the bands and thresholds for workplace pensions. These apply for paydays on or after 6 April 2020. For employees between 22 and 74 where you pay at the rate of:
• £6,240 per year, they are entitled to join your workplace pension and contribute to it but they do not have to.
• Between £6,241 and £10,000 per year, they can choose to join your workplace pension. If they do, both you and they must contribute to it.
• More than £10,000 per year, you must auto-enrol them in your workplace pension and both you and they must contribute.
From April 2020 you will only have to contribute to an employee’s workplace pension if they join your scheme and you pay them at the rate of £6,240 or more per year.
Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme (CJRS) enables employers who are unable to maintain their workforce due to the COVID-19 pandemic to furlough their staff and claim a grant of 80% of the employee’s wages to a maximum of £2,500 a month. Employers are also able to claim the associated employer’s National Insurance contributions on the amount claimed, and also the minimum pension contributions that they are required to make under auto-enrolment. The full amount of the grant must be paid over to the furloughed employee, and the employee pays PAYE tax and National Insurance in the usual way. Employers can choose to top up the amount paid to employees to maintain their usual salary but are under no obligation to do so. The money received by the employer is taxable income and is taken into account computing their taxable profits.
Claims can be made by employers who have furloughed staff as a result of the COVID-19 pandemic, as long as they:
• created and started a PAYE payroll scheme on or before 19 March 2020;
• are enrolled for PAYE online; and
• have a UK bank account.
Claims can only be made in respect of furloughed employees. The scheme does not apply to staff who have had their hours and pay reduced. Furloughed employees cannot do any work for the employer while furloughed, although they may be able to work for a different unconnected employer if their contract permits this or work in a self-employed capacity.
Only furloughed employees who were on the payroll on or before 19 March 2020 and in respect of whom a PAYE submission had been made by this date are within the scope of the scheme. Employees who were on the payroll as at 28 February 2020 and who were made redundant after that date and before 19 March 2020 can be included in the scheme if the employer re-employs them and furloughs them. The employee does not need to be re-employed by 19 March to be eligible for furlough.
The option to furlough an employee is available regardless of what type of contract an employee is on. Thus the scheme can be used to furlough employees on full or part-time contacts and also those on flexible or zero-hours contracts.
Amount of the claim
Employers can claim 80% of a furloughed employee’s wages to a maximum of £2,500 a month. The calculation of the amount which can be claimed will depend on how the employee is paid and whether their pay varies. The claim will be based on the employee’s ‘wages’, which are the regular payments which the employer makes to the employee. It will include non-discretionary overtime, fees and commission, but no discretionary payments. Payments in kind are also excluded.
The employer can also claim the associated employer’s National Insurance and minimum pension contributions on the amount of the grant.
HMRC have produced a calculator which can be used to work out the amount which can be claimed in respect of a furloughed employee.
Claims should be made online via the online portal. Employers should receive the money within six working days.
Dealing with directors’ loans
For accounting purposes, cash transactions between a director and a personal or family company are recorded through the director’s account. At the end of an accounting period, if the director owes the company money (i.e. the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators)), there will be tax consequences to consider.
A tax charge will arise under the Corporation Tax Act 2009, s 455 where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge is the liability of the company and is calculated as 32.5% of the amount of the loan. The rate of the charge is equivalent to the higher dividend rate.
Kim is the sole director of her personal company K Ltd. The company’s financial year end is 31 March.
On 31 March 2020, Kim’s loan account is overdrawn by £20,000 and it remains overdrawn by this amount on 1 January 2021 (the date on which corporation tax for the period is due). The company must pay a tax charge under s 455 of £6,500 (£20,000 @ 32.5%).
Can the charge be avoided?
Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:
• the director can pay funds into the company to clear the loan;
• the company can declare a dividend to clear the loan balance;
• the director’s salary can be credited to the account to clear the loan balance; or
• the company can pay a bonus to clear the loan balance.
It should be noted however, that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.
Two further points are also worth highlighting here:
• Clearing the loan may not always be beneficial and paying the s 455 charge may be preferable. For example, if the tax on a dividend or bonus credited to clear the loan is more than the section 455 charge.
• Once the loan is cleared, the s 455 tax is repayable. This happens nine months and one day after the end of the tax year in which the loan is cleared.
It should also be noted that anti-avoidance rules apply to prevent the director clearing a loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.
In summary, the section 455 tax is essentially a holding tax payable by the company. The rules apply all shareholders, even if they are not directors. The charge is specifically designed to be equal to the higher rate tax on a dividend to deter shareholders from taking money from a company when it isn’t owed to them.
30-days reporting for CGT
Certain changes regarding payment of CGT took effect from April 2020 which align the position of UK residents with that of non-UK residents. Broadly, from 6 April 2020, a UK resident who sells a residential property in the UK will have 30 days to tell HMRC and pay any capital gains tax (CGT) owed. Failure to notify HMRC within 30 days of completing a sale may result in penalty and interest charges.
A CGT report and accompanying payment of tax may be required where the taxpayer sells or otherwise dispose of:
• a property that they have not used as their main home;
• a holiday home;
• a property which has been let out for people to live in;
• a property that has been inherited and not used as a main home.
There is no requirement to make a report make a payment of tax when:
• a legally binding contract for the sale was made before 6 April 2020;
• the individual satisfies the for Private Residence Relief (generally a main residence);
• the sale was made to a spouse or civil partner;
• the gains (including any other chargeable residential property gains in the same tax year) are within the tax free allowance known as the annual exempt amount (£12,300 in 2020/21);
• the property is sold for a loss; or
• the property is outside the UK.
Calculation - Subject to certain exceptions, where there has been a disposal of a residential property, payment on account of the CGT will be due on the filing date for the return, which is generally within 30 days of the day after the date the property sale is completed.
The payment on account required is the amount of CGT notionally chargeable at the filing date. This is the tax that would be due if, under the normal rules for calculating chargeable gains for a tax year, the tax year ended at the time the disposal is completed.
In calculating the amount, any unused allowable losses for capital gains purposes incurred by the time the disposal is completed can be used. Available reliefs and the annual exempt amount are applied in the normal way.
The amount of CGT payable on account is the amount after applying the applicable rate of tax to the net gain.
Multiple disposals - Where there is more than one residential property disposal in the same tax year, the amount of CGT notionally chargeable must be calculated after each disposal.
This is, however, done by taking into account that all of the gains (or losses) on those disposals are taken into consideration and any new losses that have arisen on disposals of other assets can also be used.
Where there has been a previous return and payment on account for the tax year and the amount notionally chargeable contained in a later return is more than the amount of tax already paid on account, the difference is payable to HMRC.
Provisional figures - Since the 30-day payment window can make it difficult for some people to provide exact figures, HMRC allow for certain estimates and assumptions to be made. The taxpayer can make a correction once the exact figures are known. If the resulting amount is higher than the amount previously paid, the difference becomes payable to HMRC and interest may be due. No penalty will however, be charged. If the amount is lower, the difference becomes repayable along with repayment interest from HMRC.
HMRC are currently developing a new online service to allow taxpayers to report and pay any CGT owed.
Tax charge on company vans
If the employer also pays for petrol for private journeys in a company van, a separate van fuel scale charge arises.
Business use only - If the van is only used for business journeys, there is no tax to pay and no employer’s Class 1A National Insurance. This would be the case if, say, an employee drove to the employer’s premises in his or her own vehicle, picked up the van and drove the van for work purposes, returning it to the employer’s premises at the end of the day. Journeys to a temporary workplace also count as business journeys and where this is the case, the employee can start the van journey from home.
Unrestricted private use - Private use is use of the van other than business use. When the employee has unrestricted private use of a van, a tax charge arises. The amount that is charged to tax is £3,490 for 2020/21 and £3,430 for 2019/20 where the van is not an electric van. Consequently, a higher rate taxpayer will pay £1,396 in tax for 2020/21 and a basic rate taxpayer will pay £698.
The employer also pays Class 1A National Insurance on the van and fuel charge.
Restricted private use - There is no tax charge if the restricted private use condition is met. There are two tests that must be satisfied for this to be the case – the commuter use requirement and the business travel requirement.
The commuter use requirement stipulates that the terms on which the van is made available to the employee prohibit private use other than for home to work travel and the van is not used otherwise for private travel. Insignificant private use, such as stopping to buy a newspaper on the way to work, is ignored in determining whether this condition is met.
The business travel requirement stipulates that the van is mainly available to the employee for the purposes of the employee’s business travel.
Where the restricted private use condition is met, there is no tax to pay, and also no fuel benefit if the employer pays the cost of the fuel for home to work travel.
Zero-emission vans - For 2020/21, zero-emission vans are charged at 80% of the full charge, i.e. £2,792 (80% of £3,490). For 2019/20, the charge was 60% of the full charge, i.e. £2,058 (60% of £3,430).
At the time of the March 2020 Budget, the Government announced that legislation is to be introduced to reduce the van benefit charge to zero for zero-emission vans with effect from 6 April 2021.
Pool vans - No charge arises in respect of a van that meets the conditions for a pool van. To qualify, the van must be:
• available for use and used by more than one employee;
• available to each employee because they need it to do their job;
• not ordinarily used by one employee to the exclusion of others;
• not normally kept at or near and employee’s home;
• used only for business journeys (although limited private use is allowed if incidental to the business use).
Pool vans do not need to be reported to HMRC.
ER but not as we know it
The Spring Budget 2020 announced a significant restriction on future availability of entrepreneurs’ relief (ER) for individuals who dispose of all or part of their business, individuals who dispose of shares in their personal company, and trustees who dispose of business assets.
Broadly, the lifetime limit of £10m is to be reduced to £1m for disposals on or after 11 March 2020. The measure also provides that the lifetime limit must take into account the value of ER claimed in respect of qualifying gains in the past. The relevant legislation is included in Finance Bill 2019-21, so is currently subject to enactment.
Qualifying gains within the lifetime allowance are charged at the rate of 10%. Gains in excess of this limit are charged at the rate of 20% rate. For disposals between 6 April 2011 and 10 March 2020, the lifetime limit on gains qualifying for ER is £10 million. The £10 million limit is a lifetime threshold and claims may be made against it on more than one occasion. Finance Bill 2019-21 also includes provisions to rename ER as ‘business asset disposal relief’ from 2020-21 onwards.
Selling all or part of a business - To qualify for business asset disposals relief, both of the following must apply:
• the individual must be a sole trader or business partner
• the individual must have owned the business for at least two years before the date they sell it
The same conditions apply if the business is closing rather than being sold. The business assets must be disposed of within three years to qualify for relief.
Selling shares or securities - To qualify, both of the following must apply for at least two years before the shares are sold:
• the individual is an employee or office holder of the company (or one in the same group)
• the company’s main activities are in trading (rather than non-trading activities like investment) or it’s the holding company of a trading group.
There are other rules depending on whether or not the shares are from an Enterprise Management Incentive (EMI). Broadly, if the shares are from an EMI, the investor must have both:
• bought the shares after 5 April 2013
• been given the option to buy them at least one year before selling them
If the shares are not from an EMI, for at least two years before the shares are sold, the business must be a "personal company". This means that the investor has at least 5% of both the shares and the voting rights in the company. The investor must also be entitled to at least 5% of either:
• profits that are available for distribution and assets on winding up the company
• disposal proceeds if the company is sold
If the number of shares held falls below 5% because the company has issued more shares, the investor may still be able to claim business asset disposals relief. The investor should elect to be treated as if they had sold and re-bought the shares immediately before the new shares were issued. This will create a gain on which ER can be claimed.
The investor can also elect to postpone paying tax on that gain until they come to sell the shares. This is usually done via the self-assessment tax return. If the company stops being a trading company, ER can still be claimed if the shares are sold within three years.
Selling assets previously lent to the business - To qualify, both of the following must apply:
• the investor sold at least 5% of their part of a business partnership or their shares in a personal company
• they owned the assets but let their business partnership or personal company use them for at least one year up to the date they sold the business or shares - or the date the business closed.
is always changing, and entrepreneur’s relief is no exception. The £10 million lifetime limit is to be reduced to £1m for disposals on or after 11 March 2020 – read the latest update here.
Furnished holiday lettings & the Covid-19 pandemic
Lets that qualify as furnished holiday lettings (FHL) enjoy special tax rules compared to other types of let, allowing landlords to benefit from certain capital gains tax reliefs for traders and to claim plant and machinery capital allowances for items such as furniture, fixtures and equipment. Profits from an FHL business also count as earnings for pension purposes.
To qualify as an FHL the property must be in the UK or (for the time being at least) in the EEA. It must also be let furnished and meet various occupancy conditions.
Occupancy conditions - To qualify as an FHL, all three occupancy conditions must be met. Where the let is continuing, the tests are applied on a tax-year basis; for a new let, the must be met for the first 12 months of letting.
Test 1 – Pattern of occupancy condition
This test is met if the total of all lettings that exceed 31 days is not more than 155 days in the year.
Test 2 – The availability condition
The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property).
Test 3 – The letting condition
The property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days are not counted unless the let exceeds 31 days as a result of unforeseen circumstances. Lets to family or friends on a non-commercial basis are also ignored.
Impact of Coronavirus - The hospitality and leisure sectors have been hard hit by the Covid-19 pandemic and the lockdown means that many landlords with holiday lets will fail to meet the letting condition in 2020/21. However, all is not lost and there are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a period of grace election.
Averaging election - An averaging election can be used where a landlord has more than one holiday let and one or more of the properties does not meet the letting condition. Instead of applying this test on a property by property basis, it can be applied by reference to the average rate of occupancy across all properties let as FHLs. Thus, the test is treated as met if on average the holiday lets are let for 105 days in the tax year.
While, at the time of writing, it was unclear when all the restrictions may be lifted, an averaging election may help landlords with mixed portfolios including some winter holidays lets as well as those that are popular in the summer.
Period of grace election - A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to. The Coronavirus pandemic is a prime example of where this may be the case.
To make a period of grace election, the pattern of occupation and availability conditions must be met. Also, the letting condition must have been met in the year before the first year in which the landlord wishes to make a period of grace election. If the letting condition is not met again in the following year, a second period of grace election can be made. However, if the test is not met in year 4 after two period of grace elections, the property will no longer qualify as a furnished holiday letting.
The election provides a potential lifeline to landlords of holiday lets unable to meet the letting condition in 2020/21 as a result of the Covid-19 pandemic. It can be made either on the self-assessment tax return or separately (either with or without an averaging election). A period of grace election for 2020/21 must be made by 31 January 2023.
How to calculate statutory redundancy pay
While some help is available to employers through the Coronavirus Job Retention scheme to help them keep staff on during the COVID-19 pandemic, in some cases, it may not be possible to avoid making staff redundant.
Where staff are made redundant and have at least two years’ continuous service, they may be entitled to statutory redundancy pay.
To be eligible for statutory redundancy pay, an individual must:
• be an employee with a contract of employment;
• have at least two years’ continuous service;
• have been dismissed, laid off or put on short-time working.
Employees who take early retirement are not eligible for statutory redundancy pay.
How much does an employee get?
The amount of statutory redundancy pay to which an employee is entitled depends on the length of their service and their age.
An employee is entitled to:
• 1.5 weeks’ pay for each full year of employment after their 41st birthday;
• one weeks’ pay for each full year of employment after their 22nd birthday; and
• half a weeks’ pay for each full year of employment up to their 22nd birthday.
Service is counted backwards from the date of dismissal.
Cap on redundancy pay - Statutory redundancy pay payable to an employee is capped at 20 years’ service. Weekly pay is capped at £538 per week (rate from 6 April 2020). This means that the maximum amount of statutory redundancy pay is £16,140 (20 x 1.5 x £538).
Working out a week’s pay - Where an employee is paid an annual salary, a week’s pay will simply be the annual salary divided by 52. If an employee’s pay varies, the average weekly pay over a 12-week period is used.
Is statutory redundancy pay taxable? - Statutory redundancy pay is not taxable as earnings. It is treated as a termination payment and counts towards the £30,000 tax-free threshold.
Example - An employee is made redundant on 1 May 2020. They celebrated their 45th birthday on 1 February 2020. The employee started work in 1 January 2006 (aged 30).
The employee has an annual salary of £36,400.
The employee has 4 complete years of service from their 41ist birthday (1 February 2016 to 30 January 2020).
The employee has a further ten years complete years’ service after their 22nd birthday and before their 41st birthday.
The employee has an annual salary of £36,400. This is equivalent to weekly pay of £700 per week. As this is more than the maximum weekly pay for statutory redundancy pay purposes, the calculation is based on £538 per week.
The employee is entitled to statutory redundancy pay of £8,608 ((1.5 x 4 x £538) + (10 x £528).
Contractual redundancy pay - If the employer operates a contractual redundancy pay scheme, the employer can pay contractual redundancy pay instead, as long as the employee receives at least what they would be entitled to as statutory redundancy pay.
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.
Late or unpaid rent – calculation of taxable profits
As with other sectors, landlords may be adversely affected by the Covid-19 pandemic. Tenants suffering cashflow difficulties may be unable to pay their rent in full or on time. The impact that unpaid or late paid rent has on the calculation of taxable profits depends on whether the landlord prepares accounts on the cash basis or under the accruals basis.
Cash basis - The cash basis is the default basis of preparation for most landlords whose cash receipts for the tax year are £150,000 or less. Under the cash basis income is recognised when the money is received not when it is earned, and expenses are accounted for when the money is paid not when the expenses is incurred. Receipts are income of the period in which the money is received, and expenses are outgoings of the period in which they are paid. Consequently, there are no debtors or creditors.
This provides automatic relief where rent is not paid or is paid late, protecting the landlord from having to pay tax on money he or she has yet to receive.
Example 1 - Harry is a landlord and lets a flat for £800 a month, payable on 25th of each month. Due to the Covid-19 pandemic, his tenant does not pay the rent that was due on 25 March 2020. The tenant eventually pays £200 of the overdue rent in June 2020 and the remaining £600 in September 2020.
Harry prepares the accounts for his rental property business on the cash basis, accounting for rental income only when the rent has been received. The rent due for March 2020 (falling in the 2019/20 tax year) is not received until June and September 2020 – which fall in the 2020/21 tax year. As a result, the rent for March is taken into account in computing Harry’s taxable profits for 2020/21 rather than 2019/20.
Accruals basis - Rental profit must be determined under the accruals basis in accordance with UK GAAP where the landlord is not eligible for the cash basis (for example, because rental receipts for the tax year are more than £150,000) or because the landlord elects for the cash basis not to apply. Under the accruals basis, rental income is taken into account in the period to which it relates, rather than when the rent is paid. Likewise, expenses are deducted when the expense is incurred not when the bill is paid, if different. There is no automatic relief if rent is not paid on time as under the cash basis.
Example 2 - Louisa has a number of rental properties and as her rental receipts exceed £150,000 a year, she prepares the accounts of her rental business under the accruals basis. One of her tenants fails to pay the rent of £2,000 for March 2020 which was due on 1 March 2020. The tenant eventually pays the late rent in September 2020.
As accounts are prepared under the accruals basis, the rent due for March 2020 is taken into account in working out the taxable profit for 2019/20, regardless of the fact that it was paid in 2020/21 rather than in 2019/20.
There is, however, relief available where the rent remains unpaid and is not recovered, as opposed to being paid late – a deduction is permitted for a debt which is genuinely bad or doubtful.
Claiming the NI employment allowance for 2020/21
The National Insurance employment allowance is available to eligible employers and can be set against the employer’s secondary Class 1 National Insurance liability. In the 2020 Budget, the Chancellor announced that the allowance would be increased to £4,000 for 2020/21. However, from 6 April 2020, it is only available to employers whose Class 1 National Insurance liability in the previous tax year was less than £100,000. Existing exclusions continue to apply, including that for companies where the sole employee is also a director -- meaning that personal companies rarely qualify.
If an employer has more than one PAYE scheme, the employment allowance can only be claimed in respect of one of the PAYE schemes.
Maximum amount of the allowance
For 2020/21, the National Insurance employment allowance is the lower of:
• the employer’s secondary Class 1 National Insurance liability for the year; and
Thus, where the secondary Class 1 National Insurance liability for the year is more than £4,000, the employment allowance is £4,000. It is set against the employer’s Class 1 National Insurance liability until it is used up. It cannot be set against Class 1A (payable on benefits in kind) or Class 1B (payable on items within a PAYE settlement agreement) liabilities – only secondary Class 1.
Remember to claim
The National Insurance employment allowance is not given automatically and must be claimed. A claim can be made through the employer’s payroll software; the claim is made in the Employment Payment summary by putting a ‘Yes’ in the Employment Allowance indicator field. It only needs to be claimed once for the tax year – once claimed it is available until the allowance has been used up. Any unused balance is carried forward to the next tax month.
The claim can be made at any time in the tax year, but it is advantageous to make the claim as soon as possible. If a claim is made too late to enable it to be fully offset against the employer’s secondary Class 1 National Insurance liability, the employer can either ask HMRC for a refund, providing that they do not owe anything to HMRC. Alternatively, the unused amount can be set against other tax bills which the employer has to pay – including VAT and corporation tax.
Employers eligible for the employment allowance should not only remember to claim it for 2020/21 – they should also check that they utilised the allowance in full in 2019/20.
FRS for VAT – Who is it for?
The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations, although some VAT experts would argue that the scheme is not simple to use.
Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more.
If the business incurs few expenses, and it operates in a sector with a relatively low FRS percentage, it will pay out less VAT to HMRC under the FRS than it would outside the scheme. Most VAT-registered business can use the FRS if it is expected that VAT taxable turnover in the next 12 months to be £150,000 or less. Certain other eligibility criteria apply.
The business must leave the scheme if:
• it is no longer eligible;
• on the anniversary of joining, turnover in the last 12 months was more than £230,000 (including VAT) - or if it is expected to be in the next 12 months;
• total income in the next 30 days alone is expected to be more than £230,000 (including VAT)
The VAT flat rate used usually depends on the business type.
Common percentages used by service-related businesses in recent years include:
• Accountancy and legal services 14.5%
• Computer or IT consultancy 14.5%
• Estate agents and property management 12%
• Management consultancy 14%
• Business services not listed elsewhere 12%
A 1% discount on the relevant flat rate is given in the first year as a VAT-registered business.
Since 1 April 2017, a flat 6.5% FRS rate has applied for businesses with limited costs (see below). Since the rate of 16.5% of gross turnover equates to 19.8% of the net, the result is that there will be almost no credit for VAT incurred on purchases.
A ‘limited cost’ business is defined as one whose VAT inclusive expenditure on goods is either:
• less than 2% of their VAT inclusive turnover in a prescribed accounting period;
• greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
‘Goods’ for these purposes must be used exclusively for the purpose of the business but exclude the following items:
• capital expenditure goods;
• food or drink for consumption by the flat rate business or its employees;
• vehicles, vehicle parts and fuel (except where the business is one that carries out transport services - for example, a taxi business - and uses its own or a leased vehicle to carry out those services).
(These exclusions are part of the test to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2%.)
FRS and MTD - With regards to record-keeping, HMRC confirm that for compliance with Making Tax Digital (MTD) for VAT obligations businesses using the FRS do not need to keep a digital record of:
• purchases unless they are capital expenditure goods on which input tax can be claimed;
• the relevant goods used to determine if the business needs to apply the limited cost business rate.
Not all software packages are configured to accommodate the FRS, and many will only permit sales to be recorded as standard rated, reduced rated, zero rated or exempt. Users should use one of the following methods to record sales:
• record the supply as one standard rated supply and one zero rated supply (i.e. have two entries for each supply); or
• record the sale at one rate and correct the VAT through an adjustment at the end of the period (as is suggested for cases where more than one supply is invoiced on a single invoice).
New-style lettings relief
Lettings relief provides additional relief for tax where a property that has been occupied as a main residence is let out. For disposals prior to 6 April 2020, relief was available where a property was let as long as that property had at some time been the owner’s only or main residence. However, availability of the relief is seriously curtailed in relation to disposals on or after 6 April 2020. From that date, relief is only available where the owner shares the property with the tenant.
Amount of the new-style relief
For disposals on or after 6 April 2020, lettings relief is available where:
• part of the property is the individual’s only or main residence and
• another part of that property is let out by the individual, otherwise than in the course of a trade or a business.
The gain relating to the let part is only chargeable to capital gains tax to the extent that it exceeds the lesser of:
• the amount of private residence relief; and
Spouses and civil partners can take advantage of the no gain/no loss rules to transfer the property or a share in it to each other without a loss of lettings relief. Where lettings relief would be available to a transferring spouse or civil partner for the period prior to the transfer, it remains available to the recipient.
Henry brought a three-bedroom house in 2015. He lived in the property for five years until it was sold in May 2020, realising a gain of £90,000. Throughout the time that he lived in the property, he let out two rooms. The let rooms comprised one-third of the property by floor area.
Two-third of the property was occupied as Henry’s main residence, and thus two-thirds of the gain qualifies for private residence relief. This equates to £60,000 (2/3 x £90,000).
The remaining gain of £30,000 is attributable to letting.
As Henry occupied the property with the tenants, he can claim lettings relief. Thus, the gain attributable to the letting is only chargeable to capital gains tax if, and to the extent, that it is greater than the lower of:
• 60,000 (the amount of the private residence relief); and
As the gain attributable to the letting is less than £40,000, lettings relief is available to shelter the full amount of the gain.
Consequently, the entire gain is free from capital gains tax
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.
What can be done with property rental losses?
During the COVID-19 pandemic, landlords may find that tenants are unable to pay their rent, and, when a let comes to an end, that they are unable to re-let the property, or have to accept lower rent. As a result, they may make a loss on their property rental business.
Calculating the loss
Any loss arising from the property rental business is calculated in the same way as profits. Where the cash basis is used, as will generally be the case being the default basis of preparation for most smaller landlords, the loss for the period will be the cash received by the property rental business less the cash paid out.
Automatic set off against properties in the same property rental business
As profits and losses are calculated for the property rental business as a whole, if there is more than one property in the rental business, a loss on one property is automatically set against any profit from other rental properties in the same business.
A landlord has three properties that he lets out. In 2019/20 he makes a loss of £3,000 on property A, a profit of £2,000 on property B and profits of £1,500 on property C.
The loss on property A is set against the profits on property B and C when calculating the overall result for the property business as a whole. Overall, the property business has a profits of £500 (-£3,000 + £2,000 + £1,500).
Utilising a loss
The general rule is that a loss on a property rental business can be carried forward and set against profits from the property rental business in the following year. If there is a loss in the next year or profits are not sufficient to fully utilise the loss, any unused part of the loss can be carried forward to the next year and so on until it can be used. There is no limit on the number of years for which the loss can be carried forward.
The same property business
Losses can only be set against the future profits of the same property business. If the landlord has more than one property business, for example a UK property business and an overseas property business, the losses from one cannot be set against the profits of another. Losses from a furnished holiday letting business can only be carried forward and set against profits of that business.
A landlord has a property rental business. In 2017/18 he makes a loss of £5,000, in 2018/19 he makes a profit of £4,000 and in 2019/20 he makes a profit of £3,000.
The loss of £5,000 is carried forward and £4,000 of it is set against the profits of 2018/19, reducing the profits for that year to nil. The balance of the loss of £1,000 which cannot be used is carried forward and set against of 2019/20, reducing the taxable profit for that year to £2,000.
Losses lost if property rental business ceases
If the property rental business ceases before the losses have been used up, the losses are lost. This remains the case if the landlord starts a new property business after a gap as the new business will be a different property rental business.
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Adrian Mooy & Co Ltd - 61 Friar Gate Derby DE1 1DJ -
Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd. Registered in England No. 05770414.
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