Adrian Mooy & Co
How can we help you?
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 highly tax efficient.
We are IR35 experts and will advise you on how to structure your next contract to minimise IR35 risk. We will ensure you claim all the tax deductible 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 ahead of deadlines and provide you with clarity over your future tax payments.
Free company incorporation and set up with HMRC if you are a new Contractor and sign up with us.
Included in this service:
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.
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 returns, accounts preparation and 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 to minimise your tax liabilities.
Services we offer include:
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 free 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
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Claim a deduction for work clothing
Many employees are required to wear a uniform for work. Even where there is no set uniform as such, many employees have clothes that they wear only to work and regard as ‘work clothes’.
So, to what extent, if any, are employees able to claim a deduction for work clothes? And, on the other side of the coin, is there a tax liability if the employee is provided with a uniform or protective clothing by their employer?
General rule for deductibility of expenses
As a general rule, a deduction is only available for employment expenses that are wholly, exclusively and necessarily incurred in the performance of the duties of the employment.
This is a hard test to meet, and one which, due to duality of purpose, clothing will fail. Even if an employee wears certain clothes for work, the clothes also provide ‘warmth and decency’.
Consequently, while an employee may be required to wear a suit and tie to work and only wears it for work, they have to wear something. Their job dictates the nature of what they wear, but as the clothing also provides warmth and decency the cost is not wholly and exclusively incurred, and as such no deduction will be permitted.
Specific industries: deduction for laundry costs, etc.
Although an employee cannot claim a general deduction for ‘work clothing’, if they work in certain industries for which a uniform of protective clothing is required, they may be able to get a fixed rate deduction for the repair and maintenance of work equipment, which includes special clothing.
The permissible fixed rate deductions are set out in a table which can be found in HMRC’s Employment Income Manual at EIM32712. For example, uniformed prison officers are allowed an annual deduction of £80. It should be noted that the same rates have applied since 2008/09.
Where the employee is required to wear a particular uniform, often featuring the employer’s logo, this may be provided by the employer for the employee to wear.
Where an employer provides a uniform or protective clothing to an employee for them to wear at work, generally, there is no tax liability for the employee, and nothing to report to HMRC. In this context, a ‘uniform’ is a set of clothing of a specialised nature which is recognisable as a uniform and which is intended to identify its wearer as having a particular occupation, for example, a nurse’s uniform or fire service uniform.
By contrast, providing employees with ordinary clothes that are the same but have no identifying feature, such as black trousers and a green shirt, does not satisfy the definition of a uniform, and as such would not be exempt from tax. However, permanently fixing a corporate badge or logo to an otherwise ordinary item of clothing may be sufficient to make it a ‘uniform’.
Employer-provided protective clothing is also exempt. This is genuinely protective clothing worn as a physical necessity because of the nature of the job. Examples may include overalls, boots and protective gloves.
Where the employer provides ‘ordinary’ clothes, this will trigger a taxable benefit, even if they are designed to confer a sense of corporate identity. A tax charge will also arise if uniforms or protective clothing are provided under a salary sacrifice arrangement.
Free fuel – is it worthwhile?
Where an employer meets the cost of fuel for private journeys in a company car, an additional benefit in kind charge arises in respect of the provision of the `free’ fuel (unless the employee makes good all the cost).
Working out the fuel benefit charge
The fuel benefit charge is found by multiplying the appropriate percentage (based on the level of the car’s CO2 emissions) used in working out the company car benefit charge, including the diesel supplement where appropriate, by the multiplier for the tax year in question.
For 2018/19, the multiplier is £23,400.
Tax cost of free fuel
For 2018/19, the appropriate percentage ranges from 13% for cars with CO2 emissions of 0 –50g/km to 37%. Consequently, the cash equivalent of the fuel benefit ranges from £3,042 (£23,400 @ 13%) to £8,658 (£23,400 @ 37%).
For a basic rate taxpayer, the tax cost of free fuel ranges from £608.40 (20% of £3,042) to £1,731.60 (20% of £8,658); for a higher rate taxpayer, the tax cost ranges from £1,216.80 (40% of £3,042) to £3,463.20 (40% of £8,658).
Is it worthwhile?
Free fuel is expensive. If it is paid in relation to a company car with a list price of less than £23,400, for 2018/19, more tax will be payable on the provision of `free’ fuel than on the provision of the car.
Whether the provision of fuel constitutes a perk will depend on how much private mileage the employee undertakes in the tax year, the cost of fuel, the appropriate percentage for the car and the rate at which the employee pays tax. In many cases, unless the appropriate percentage is low and private mileage is high, free fuel will not be much of a perk.
An employee has a company car with CO2 emissions of 145g/km. For 2018/19 the appropriate percentage is 30%. If fuel is provided for private motoring, the associated fuel benefit is £7,020, which if the employee is a higher rate taxpayer will cost him £2,808 in tax.
Assuming that petrol costs £127p per litre and the driver achieves 6 miles per litre, the driver would have to drive 13,266 private miles in the tax year to break even. This is the level at which the cost of fuel (13,266/6 x 127p) is the same as the tax on the fuel benefit.
If private mileage is less than 13,266 miles per year, it would be cheaper for the employee to give up free fuel and pay for the petrol himself. If the private mileage is higher, the free fuel will be a perk as the tax paid on the benefit will be less than the cost of the fuel.
It is advisable to do the sums to see if free fuel is actually worthwhile.
If a cash alternative is available, this may be preferable, particularly if private mileage is low. However, be aware that the alternative valuation rules may bite if a cash alternative if offered.
Dividend income – How is it taxed in 2018/19?
The taxation of dividend income was reformed from 6 April 2016. Since that date, dividends are paid gross – there is no longer any associated tax credit – and all taxpayers receive a dividend allowance. Dividends not sheltered by the dividend allowance, or any available personal allowance, are taxed at the appropriate dividend rate of tax.
The ‘dividend allowance’ is available to all taxpayers, regardless of the rate at which they pay tax and unlike the savings allowance the amount of the dividend allowance is the same regardless of the tax bracket into which the recipient falls. Where the allowance is not otherwise utilised, it allows for tax-efficient extraction of profits from a family company.
Although termed an ‘allowance’ the dividend is really a zero-rate band, with dividends covered by the allowance being taxed at a rate of 0% (the ‘dividend nil rate’). Significantly, dividends covered by the allowance form part of band earnings.
The dividend allowance is set at £2,000 for 2018/19; a reduction of £3,000 from the £5,000 dividend allowance that applied for the two previous tax years. Assuming dividends of at least £5,000 are paid in 2017/18 and 2018/19, the reduction in the dividend tax allowance will increase the tax payable by £225 for basic rate taxpayers, by £975 for higher rate taxpayers and by £1,143 for additional rate taxpayers.
Top slice of income
Dividend income is treated as the top slice of income. This determines which band it falls in, and the rate at which it is taxed.
Dividend tax rates
Dividend income has its own tax rates. Dividend income is taxed at 7.5% (the ‘dividend ordinary rate’) to the extent that it falls in the basic rate band, at 32.5% (the ‘dividend higher rate’) to the extent that it falls in the higher rate band, and at 38.1% (the ‘dividend additional rate’) to the extent that it falls in the additional rate band.
For 2018/19, the basic rate band covers the first £34,500 of taxable income. The additional rate band applies to taxable income in excess of £150,000. The bands are UK wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.
If the personal allowance has not been fully used elsewhere, bearing in mind dividend income has the last call, any unused portion of the allowance can be set against dividend income. The personal allowance is £11,850 for 2018/19, although it is reduced by £1 for every £2 by which income exceeds £100,000.
In 2018/19, Frances receives a salary of £25,000 and dividends of £30,000. Her personal allowance of £11,850 and the first £13,150 of her basic rate band is used by her salary, on which she pays tax of £2,630.
The first £2,000 of her dividends is covered by the dividend allowance and is tax-free. However, the allowance uses up £2,000 of her basic rate band, leaving £19,350 available (£34,500 - £13,150 - £2,000). The next £19,350 of dividends is taxed at the dividend ordinary rate of 7.5% and the remaining £8,650 (£30,000 - £2000 - £19,350) is taxed at the dividend higher rate of 32.5%.
The tax payable on her dividends is therefore £4,262.50 ((£2,000 @ 0%) + (£19,350 @ 7.5%) + (£8,650 @ 32.5%)).
Having an alphabet share structure in a family company allows dividends to be paid to family members to take advantage of their dividend allowance to extract profits tax-free.
Tax code changes for 2018/19
Tax codes are the lynchpin of the PAYE system – unless the tax code is correct, the PAYE system will not deduct the right amount of tax from an employee’s pay.
The tax code determines how much pay an employee may receive before they pay any tax. The most straightforward scenario is that the person receives the personal allowance for that year. The code is then the personal allowance for the year with the last digit omitted and an `L’ suffix. So, for 2017/18, the personal allowance is £11,500 and the associated tax code is 1150L. This is also the emergency tax code.
Other codes - Employees’ situations vary and consequently different codes are needed to accommodate that. If an employee has more than one job, his or her allowances may be used up in job 1, leaving all the pay for job 2 to taxed. The 0T code – no allowances – accommodates this. A person may also have an 0T code if their personal allowance has been fully abated (at £123,000 for 2017/18 and £123,700 for 2018/19). An employee may have all his or her pay taxed at the basic rate, for which the relevant code is BR, or at the higher rate (code D0), or the additional rate (code D1). Code NT indicates that no tax is to be deducted.
Scottish taxpayers have an S prefix, indicating the Scottish rates of tax should be used.
Marriage allowance - Where one partner in a marriage or civil partnership is unable to use their personal allowance, they can transfer 10% of their personal allowance to their spouse or civil partner, as long as the recipient is not a higher or additional rate taxpayer. The person surrendering 10% of their allowance has a code with a `N’ suffix, whereas the recipient has an `M’ suffix’.
Adjustments - Tax underpayments or the tax due on benefits in kind may be collected through the PAYE system. The tax code is based on the net amount of the allowances less deductions. So, for example, if in 2017/18 a person had a personal allowance of £11,850 and a company car with a cash equivalent of £5,000, the net allowance due is £6,500 and the associated tax code would be 650L.
Where deductions exceed allowances, a person has a K prefix code – in this scenario, they do not have any free pay and are treated as if they have received additional taxable pay.
2018/19 updating - Tax codes need to be updated each year to reflect changes in allowances. The personal allowance is increased to £11,850. Where the employer does not receive a form P9(T) or an electronic notice of coding for an employee, the following changes should be made to update an employee’s tax code for the 2018/19 tax year:
Any week one or month one markings should not be carried forward.
Codes BR, SBR, D0, SD0, D1, SD1 and NT can be carried forward to 2018/19.
The emergency code for 2018/19 is 1185L.
If a new code has been notified on form P9(T) or electronically, that should be used instead.
The updated codes should be used from 6 April 2018 onwards.
Employment allowance – have you claimed it?
The employment allowance is a National Insurance allowance which is available to qualifying employers. The allowance reduces employers’ (secondary) Class 1 National Insurance by up to the £3,000.
The allowance is set at £3,000 or, if lower, the employers’ secondary Class 1 bill for the tax year.
Who can claim?
Most employers, whether a company or an unincorporated business, are able to claim the employment allowance if they are paying employers’ Class 1 National Insurance contributions. However, if there is more than one PAYE scheme, a claim can only be made for one of them.
Who can’t claim?
The main exclusion is for companies, such as personal companies, where the sole employee is also a director. However, the allowance can be preserved if the sole employee is not also a director, or if the business has more than one employee.
Remember to claim
The employment allowance is not given automatically and must be claimed. This is done via the payroll software through RTI. Although, ideally, the claim should be made at the start of the tax year, it can be made at any time in the year.
Using the allowance
The allowance is set against the employers’ Class 1 National Insurance liability for the tax year until it is used up, reducing the amount that the employer needs to pay over to HMRC.
If the employers’ NIC bill for the year is less than £3,000, the unused amount cannot be carried forward or set against other liabilities. The allowance is capped at the employers’ Class 1 NIC bill for the year. It cannot be set against Class 1A or Class 1B liabilities, or against employees’ NIC.
Private lettings relief
Lettings relief potentially shelters some of the gain from capital gains tax on the disposal of a property which has been an only or main residence at some point during the period of ownership and which has also been let out.
Where a residence has been occupied as an only or main home, private residence relief exempts from capital gains tax not only the period for which the property was so occupied, but also the last 18 months of ownership. Where the property is let, to the extent that the letting falls outside the last 18 months of ownership, private residence relief is not available for that period. However, lettings relief may be.
Availability of lettings relief
Lettings relief is available where a gain arises on the disposal of a property which:
• at some time has been the individual’s only or main residence;
• during the period of ownership, all or part of the property has been let as residential accommodation; and
• a chargeable gain arises as a result of the letting.
Amount of the relief
The amount of the relief is the lowest of the following three amounts:
1. the amount of private residence relief;
2. £40,000; and
3. the amount of the chargeable gain arising as a result of the letting.
Rose buys a cottage on 1 January 2012 for £200,000 and lives in it as her only or main residence until 30 June 2015. She then moves in with her boyfriend and lets the cottage out. The cottage is sold for £350,000 on 30 June 2018.
The gain on the sale of the property is £150,000.
The property is owned for 6 years and 6 months (78 months).
She lived in it as her main residence for 3 years and 6 months (42 months).
Private residence relief is available for the period in which she occupied the property as her main residence and the final 18 months – a total of 60 months (42 months + 18 months).
The gain eligible for private residence relief is 60/78 x £150,000 = £115,385.
The gain attributable to the let period is the remainder of the gain, i.e. £34,615 (£150,000 - £115,385).
Lettings relief is the lower of:
1. £115,385 (gain eligible for private residence relief);
2. £40,000; and
3. £34,615 (gain attributable to the letting).
As a result of the lettings relief, the full gain is exempt from tax; £115,385 being sheltered by private residence relief and the remaining £34,615 being sheltered by lettings relief.
Living in a let property as a main residence for a period of time can be very beneficial. Not only does it shelter any gain for the period for which it was occupied as such, it also shelters the gain for the last 18 months and brings lettings relief to the table.
Is the VAT flat rate scheme for me?
The VAT flat rate scheme (FRS) is a simplified VAT scheme that enables VAT registered business to work out how much VAT they need to pay over to HMRC by applying a flat-rate percentage to their VAT-inclusive turnover. However, VAT cannot be reclaimed on purchases (with an exception for certain capital assets over £2,000). The flat rate percentage depends on the business sector in which they operate, and also whether they are classed as a `limited cost business’ and has an `allowance’ built in for VAT on purchases.
Who can join the FRS? - A trader wishing to join the FRS must have VAT-exclusive turnover of £150,000 or less. An application to join the scheme can be made online, or by post (on form VAT600 FRS). Once in the scheme, a trader can remain in it unless, on the anniversary of joining, their turnover was £230,000 or more in the last 12 months, or is expected to be in the next 12 months. A trader must also leave the FRS if they expect their total income in the next 30 days to top £230,000.
What is the flat rate percentage? - The flat rate percentage depends on the sector in which the business operates. The percentages are available on the Gov.uk website. A discount of 1% is given for the first year that the trader is in the scheme.
Where the trader is a limited cost business, the flat rate percentage is 16.5%.
What is a limited cost business? - A limited cost business is one where the ‘spend’ on `relevant goods’ is either:
• less than 2% of the VAT flat rate turnover; or
• more than 2% of VAT flat rate turnover but less than £1,000 a year.
If the period is less than one year, the £1,000 threshold is proportionately reduced (so £250 per quarter).
What counts as ‘relevant goods’ is set out in VAT Notice 733. It includes things like stationery, gas and electricity used in the business, stock, food used in meals sold to customers, fuel used by a taxi business and suchlike. It does not include services, such as accountancy and legal fees, downloadable software, rent, postage, and fuel other than where the business is in the transport sector.
Working out the VAT to pay - One of the main advantages of the FRS is that working out the VAT to pay to HMRC is easy. It is simply a case of multiplying the VAT-inclusive turnover for the quarter by the flat-rate percentage for the business sector.
Example - Paul runs a toy shop and has done for a number of years. For a particular VAT quarter, his VAT-inclusive turnover is £22,000. His flat rate percentage for his sector is 7.5% (retail not listed elsewhere). He is not a limited cost business.
For the VAT quarter he must pay VAT of £1,650 over to HMRC (£22,000 @ 7.5%).
Advantages - The main advantage is one of simplicity. The trader does not need to keep a record of VAT on purchases. The 1% discount in the first year may generate a welcome bonus.
Disadvantages - It may be more costly being in the scheme, particularly for limited cost businesses, who get virtually no relief for any VAT they incur. The flat rate percentage for a limited cost business is 16.5% of VAT-inclusive turnover, which is equivalent to 19.8% of VAT-exclusive turnover; consequently a limited cost business pays over virtually all the VAT charged to customers to HMRC.
Is it for me? - To decide whether the VAT FRS is for you compare what you will pay under the scheme with that payable under normal rules, and factor in the added convenience of the scheme. Then weigh it up.
No Minimum Period of Occupation Needed for Main Residence
Main residence relief (private residence relief) protects homeowners from any gains arising on their only or main home. However, there are conditions to be met for the relief to be available. One of the major ones is that the property is at some time during the period of ownership occupied as the owner’s only or main home. Where this is the case, the period of occupation as a main home is sheltered from capital gains tax, as is the final 18 months of ownership, regardless of whether the property is occupied as a main home for that final period.
Living in a property for a period of time is worthwhile to secure main residence relief, not least because doing so has the added benefit of sheltering any gain that arises in the last 18 months of ownership.
But, how long does the property have to be occupied as a main residence to trigger the protective effects of the relief?
Quality not quantity
A recent decision by the First-tier tax tribunal confirmed that there is no minimum period of residence that is needed to secure main residence relief – what matters is that there has been a period of residence as the only or main home.
The case in question concerned a taxpayer who ran a property development company and who purchased a property in which he intended to live in as a main home. The property was initially purchased through the company, but the taxpayer intended to obtain a mortgage to buy it from the company. He lived in the property for a period of two and a half months whilst trying to sort out his finances. As a result of the financial crash, he was only able to secure a buy-to-let mortgage, the terms of which precluded him living in the property. The property was let to a friend, but the taxpayer moved in briefly following the friend’s death and undertook some decorating with a view to moving back in with his family. Due to health problems, this did not happen and the property was sold, realising a gain.
The Tribunal found that the taxpayer had lived in the property as a main home, albeit for a short period. It was the quality of occupation, not the quantity, that was important. Consequently, main residence relief was available.
Where a person owns a second home, living in it as a main residence, even if only for a short period, can be beneficial. This will protect not only the gain relating to the period of occupation from capital gains tax but also the last 18 months.
Partner note: TCGA 1992, s. 222; Stephen Bailey v HMRC TC06085.
Are your workers employees?
Employee status continues to be in the spotlight. The Government are consulting on proposals to address non-compliance with the off-payroll working rules in the private sector. Earlier in the year they consulted on employment status, including the possibility of introducing a statutory employment status test.
It is important that the status of workers is correctly assessed as this will affect the tax and National Insurance that the worker pays, and consequently the state benefits to which they may be entitled, and also the extent to which they are able to benefit from employment rights. It will also determine whether the engager must operate PAYE and pay employer’s National Insurance contributions.
Current approach - While change is likely, under the current rules there is no single test that determines whether a worker is an employee or is self-employed. Rather it is a case of looking at the characteristics of the engagement and standing back and seeing whether the picture that emerges is one of employment or self-employment.
Employee v self-employed - An employee works under a contract of service whereas a self-employed person enters into a contract for service.
The following summarises some of the key indicators of employment and self-employment.
The employer is obliged to provide work and the worker is obliged to do it.
The worker must work regularly unless on leave.
The worker is required to work a minimum number of hours at set times.
The worker must do the job personally.
The worker is supervised and told what work to do.
The worker is entitled to paid holiday.
The worker is entitled to join the workplace pension scheme.
The worker receives employment-type benefits.
The worker is given the tools and equipment needed to do the job.
The employer deducts PAYE and NI contributions from the employee’s pay.
The worker is `part and parcel’ of the organisation.
The worker is included in company social events, such as the staff Christmas party.
The worker is in business on their own account.
The worker bears the financial risk.
The worker is generally paid a price for the job, regardless of how long it takes.
The worker does not have to do the work personally and can send a substitute.
The worker can decide when and how to do the job.
The worker does not get paid while on holiday.
The worker decides what jobs to take on.
The worker is responsible for correcting unsatisfactory work and bears the cost of this.
The worker provides the tools and equipment needed to do the job.
Marginal cases - It will often be clear cut as to whether a worker is employed or self-employed and the characteristics of the engagement will fall securely into one camp or the other. However, this will not always be the case; in marginal cases, the worker may exhibit characteristics of each. In such case, HMRC produce a ‘Check Employment Status Tool’ (CEST), which can be used to help reach a decision.
How to choose your main residence to maximise relief
Private residence relief (also known as main residence relief) takes the gain arising on the disposal of a person’s main or only residence out of the charge to capital gains tax. This relief means that in the majority of cases, any gain arising when a person sells their home is tax-free.
However, as with any relief, there are conditions. Relief is available for a property that is, or has been at some point, the individual’s only or main home. Where the property meets this criteria throughout the period of ownership (and assuming it has not been used partially for business), the whole gain arising on the disposal of the residence is tax-free. Where the property has not been the main residence throughout, the gain is apportioned. However, as long as it has been the home at some point, the gain relating to the last 18 months of ownership is exempt. If the property has been let at any time, letting relief may further reduce the chargeable gain.
More than one home
For the purposes of the relief a person can only have one main residence at any one time. Where a person has more than one residence, they can choose which one is the main one – this can be useful in mitigating future tax bills.
A property can only be a main residence if it is in fact a residence. Broadly, this is a property which someone occupies as their home. A property which is let, such as a buy to let property, does not count as it is not occupied by the taxpayer as his or her home. However, a city flat in which a taxpayer spends the week, and a family home elsewhere would both count as residences, as would a property in this country in which a person spends the summer and a property abroad in which they spend their winter.
Choosing the main residence
A person can elect which of their residences is their main residence by writing to HMRC. The deadline is two years from the date on which the combination of residence changes. In a simple case where a person acquires a second home, this will be two years from the date on which the second home was acquired.
If no election is made, the home which is the main home is a question of fact – and will be the home that the person spends most of their time, where their family is based etc.
Where a person has more than one residence it is beneficial for each of them to be the main residence at some point. At the very least, this will shelter the gain relating to the period of occupation as a main residence and the last 18 months. Where a property has been let, making it the main residence for a period also opens up the opportunity of letting relief to further reduce the gain. The period as a main residence can be after the period of letting.
Flipping the main residence can be very beneficial – however, the property must be occupied as a residence. The election can only be made on paper and all owners must sign.
Mileage allowances – what is tax-free
Employees are often required to undertake business journeys by car, be it their own car or a company car, and may receive mileage allowance payments from their employer. Up to certain limits, mileage payments can be made tax-free. The amount that can be paid tax-free depends on whether the car is the employee’s own car or a company car.
Employee’s own car
Where an employee uses his or her own car for work, under the approved mileage allowance payments (AMAP) scheme, payments can be made tax-free up to the approved amount. The rates for cars (and vans) are set at 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for any subsequent business miles. A rate of 24p per mile applies to motorcycles and a rate of 20p per mile applies to bicycles.
Jack frequently uses his car for work and in the 2017/18 tax year he undertakes 13,420 business miles.
Under the AMAP scheme, the approved amount is £5,355 ((10,000 miles @ 45p per mile) + (3,420 miles @ 25p per mile)).
Amounts up to the approved amount can be paid tax-free and do not need to be reported to HMRC.
Where the mileage allowance paid is more than the approved amount, the excess over the approved amount is taxable and must be reported to HMRC on form P11D in section E.
The facts are as in example 1 above. Jack is paid a mileage allowance by his employer of 50p per mile.
The amount paid of £6,710 (13,420 miles @ 50p per mile) is more than the approved amount of £5,355, therefore the excess over the approved amount (£1,355) is taxable and must be reported on Jack’s P11D (unless his employer has opted to payroll the benefit).
Where the mileage allowance paid is less than the approved amount, the employee can claim tax relief for the shortfall, either in his or her tax return or on form P87.
For NIC, the 45p per mile rate is used for all business miles in the tax year, not just the first 10,000 miles.
Beware salary sacrifice
The value of tax exemption is lost if the mileage payments are made under a salary sacrifice or other optional remuneration arrangement, and instead the employee is taxed on the amount of salary foregone where this is higher.
Where an employee has a company car, the AMAP scheme does not apply. However, mileage payments can still be made tax-free, but at the lower advisory fuel rates. These are updated quarterly and the rate which can be paid tax-free depends on the engine size of the car and fuel type. The rates are available on the Gov.uk website at www.gov.uk/government/publications/advisory-fuel-rate.
As with the AMAP rates, where the amount paid is in excess of the advisory rate, the excess is taxable.
Rewarding staff suggestions in a tax-free manner
Staff suggestion schemes reward employees where a suggestion saves money. The tax system allows suggestion scheme awards to be made tax-free. The tax exemption recognises two types of award:
Encouragement awards - An encouragement award is an award other than a financial benefit award for a suggestion with intrinsic merit or showing special effort.
Financial benefit awards - This is for a suggestion relating to an improvement in efficiency which the employer adopts & expects will result in financial benefits.
Conditions - The tax exemption applies where an employer establishes a scheme for the making of suggestions which is open on the same terms to employees of the employer generally or to a particular description of them, eg. all employees at a site or department.
The following conditions must also be met:
• the suggestion relates to activities carried on by the employer,
• the suggestion is made by an employee who could not reasonably be expected to make it in the course of the duties of employment; and
• it is not made at a meeting which is held for the purpose of proposing suggestions.
Tax-free limit for encouragement awards - are capped at £25.
Tax-free limit for financial benefit awards - depends on the savings & number of awards.
The starting point is the suggestion maximum which is the financial benefit share or, if less, £5,000.
The financial benefit share is the greater of:
• 50% of the financial benefit that could reasonably be expected to result from the adoption of the benefit for the first year after its adoption; and
• 10% of the financial benefit that could be expected to result from its adoption in the first five years.
If no award has been made for the suggestion before, the tax-free limit is the suggestion maximum where one award is made or the appropriate proportion of the suggestion maximum if two awards are made on the same occasion to different people (for example 25% if an award is made at the same time to four people).
If further awards are made for the same suggestion, the tax-free limit is the remainder of the suggestion maximum if one such further award is made, or an appropriate proportion of the remainder of the suggestion maximum if two or more further awards are made.
Example - Two employees suggest replacing disposable cups with reusable cups. The suggestion will save £8,000 in year 1, and £10,000 pa thereafter. The financial benefit share is the greater of:
• £4,000 (50% of £8,000); and
• £4,800 (10% of £48,000 (savings in years 1 to 5 being £8,000 and 4 x £10,000))
As this is less than £5,000, the suggestion maximum is £4,800.
The maximum tax-free award that can be made to each employee is £2,400 (50% of £4,800).
Making Tax Digital for VAT – what records must be kept digitally
Making Tax Digital (MTD) for VAT starts from 1 April 2019. VAT-registered businesses whose turnover is above the VAT registration threshold of £85,000 will be required to comply with MTD for VAT from the start of their first VAT accounting period to begin on or after 1 April 2019.
Digital record-keeping obligations
Under MTD for VAT, businesses will be required to keep digital records and to file their VAT returns using functional compatible software. The following records must be kept digitally.
Designatory data - Business name - Address of the principal place of business - VAT registration number - A record of any VAT schemes used (such as the flat rate scheme)
Supplies made - for each supply made: - Date of supply - Value of the supply - Rate of VAT charged
Outputs value for the VAT period split between standard rate, reduced rate, zero rate and outside the scope supplies must also be recorded.
Multiple supplies made at the same time do not need to be recorded separately – record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.
Supplies received - for each supply received: - The date of supply - The value of the supply, including any VAT that cannot be reclaimed - The amount of input VAT to be reclaimed.
If there is more than one supply on the invoice, it is sufficient just to record the invoice totals.
Digital VAT account
The VAT account links the business records and the VAT return. The VAT account must be maintained digitally, and the following information should be recorded digitally:
In addition, to show the link between the input tax recorded in the business' records and that reclaimed on the VAT return, the following must be recorded digitally:
The information held in the Digital VAT account is used to complete the VAT return using `functional compatible software’. This is software, or a set of compatible software programmes, capable of:
Functional compatible software is used to maintain the mandatory digital records, calculate the return and submit it to HMRC via an API.
Getting ready - The clock is ticking and MTD for VAT is now less than a year away.
Overpaid tax? How to claim it back
There are various reasons why you may have paid more tax than you needed to for a tax year. For example, if you only worked at the start of the year, you may not have received all of your personal allowance. Alternatively, if your tax code was incorrect, maybe reflecting historic rather than current benefits in kind, more tax may have been deducted from your pay than you actually owed.
Tax overpaid through PAYE
After the end of the tax year HMRC perform a reconciliation, pulling together all the information that they have received from all sources to work out how much tax you should have paid for a tax year and looking at how much tax you actually paid. Where the two figures are not the same, HMRC will send out a P800 tax calculation or a PA302 simple assessment.
HMRC have started sending out P800 tax calculations and PA302 simple assessments for 2017/18. If you receive a calculation, it is important that you check it carefully – or ask your tax adviser to do so. HMRC do make mistakes!
If the calculation shows that you are due a refund, you can claim this online via your personal tax account (see www.gov.uk/check-income-tax-last-year). However, if you do not claim a refund within 45 days, HMRC will send you a cheque.
You can also claim a refund via your personal tax account if you have paid too much tax and HMRC have not sent a P800 calculation or PA302 simple assessment. If you are unsure whether you have paid too much, you can also check what you have paid online at www.gov.uk/check-income-tax-last-year.
If you are within self-assessment (for example, if you are self-employed or have other sources of income in addition to your job) and you have overpaid tax, HMRC will generally process the tax repayment once you have submitted your return. An overpayment may arise, for example, if your income is lower than the previous year and the payments on account exceed your liability for the year. In particular, if your income drops so that payments on account are not needed for the current year, a repayment may arise.
When completing the self-assessment tax return, you can provide HMRC with details of the bank account to which you would like any repayment to be sent. You can also request that any repayment is made by cheque. Alternatively, if you owe HMRC money, such as for VAT or to repay overpaid tax credits, you can opt to offset the overpayment against the outstanding liabilities.
You can also trigger the repayment online via your personal tax account; by logging in and checking the tax position and asking that the overpayment be repaid.
If the repayment is not received in a few weeks, you may wish call HMRC to chase it up.
Do we need to register for VAT?
A business must register with HMRC for VAT if its VAT taxable turnover is more than the VAT registration threshold. This is currently £85,000 and will remain at this level until 31 March 2020. A business whose VAT taxable turnover is less than £85,000 can choose to register voluntarily, unless everything that is sold is exempt from VAT.
A business which makes taxable supplies for VAT purposes is liable to register if:
Exceeding the threshold temporarily
A business which temporarily goes over the VAT registration threshold, for example as a result of making a one-off high-value sale, may not have to register for VAT. This exception applies if the VAT registration threshold was exceeded in the previous 12 months, but the business can demonstrate that taxable supplies in the next 12 months will not exceed the de-registration threshold (currently £83,000).
What are taxable supplies?
The need to register for VAT is triggered by the level of the taxable turnover. Taxable turnover for VAT is the total value of all taxable supplies, including zero-rated supplies made in the UK or the Isle of Man, excluding:
Any land or buildings which are subject to an option to tax where the sale was not zero-rated must be included in taxable turnover.
A business that makes taxable supplies which are below the VAT threshold can choose to register for VAT voluntarily. This will allow the business to reclaim input VAT, although the business will also have to charge output VAT. Voluntary registration can be particularly beneficial for businesses that sell zero-rated goods; reclaiming the input VAT will often generate a useful VAT repayment.
High Income Child Benefit Charge
The High Income Child Benefit Charge is effectively a clawback of child benefit paid to ‘high income’ individuals and couples. The charge does not only apply to the recipient of child benefit or the parents of the child in respect of whom child benefit is paid - it can also affect the partner of someone who receives child benefit, even if the child is not theirs.
In the context of the High Income Child Benefit Charge, a person has a ‘high income’ if they have individual income over £50,000 in the tax year. For these purposes, the measure of income is ‘adjusted net income’. Broadly, this is your total taxable income before taking account of personal allowance and items like Gift Aid.
When does the charge apply?
If you have adjusted net income of at least £50,000, the High Income Child Benefit Charge will apply in the following situations:
• you are entitled to child benefit for at least a week in the tax year and you do not have a partner with higher adjusted net income; or
• your partner is entitled to child benefit for at least a week in the tax year and your income is more than your partner.
Thus, in a couple where only one person had adjusted net income of more than £50,000, the High Income Child Benefit Charge will apply to that person, even if they do not receive child benefit or the child is not theirs. Where both partners have adjusted net income in excess of £50,000, the charge is levied on the partner with the highest income. Where the recipient does not have a partner, they will be liable for the charge if their income is more than £50,000.
Amount of the charge
The charge is 1% of the child benefit received in the tax year for every £100 by which the adjusted net income of the person liable for the charge exceeds £50,000. So, for example, if adjusted income is £57,000, the High Income Child Benefit Charge is 70% of the child benefit received.
Where adjusted net income exceeds £60,000, the charge is equal to the full amount of the child benefit paid in the tax year.
No equity in taxation
In determining whether the charge applies, the income of the individual is considered in isolation to assess whether it exceeds the £50,000 trigger point. Thus, a couple earning £49,000 each (£98,000 in total) escape the charge, whereas a single parent earnings £60,000 must repay any child benefit in full.
Further, the person liable to pay the charge may not be the person who received it, and consequently they are being taxed on income received by their partner – something that is rather contrary to the principles of independent taxation.
Where the High Income Child Benefit Charge applies in full, the recipient can opt not to receive the child benefit rather than receive it and pay it back. This can be done online or by contacting the Child Benefit Office.
HMRC have produced a child benefit calculator, which can be used to see if the charge applies and, if so, the amount of the charge. The calculator can be found on the Gov.uk website at www.gov.uk/child-benefit-tax-calculator.
Buy-to-let landlords – relief for interest
With rising property costs and low interest rates, many people took out a mortgage to invest in a buy-to-let property. As long as property prices continued to rise and the tenants paid their rent, investors could make money from the rising market while the rent from the tenant paid off the mortgage – all the investor needed was the deposit and to convince the bank to lend them the money.
Fast forward a few years and the buy-to-let star is not burning quite so bright. Second and subsequent properties now attract a 3% stamp duty supplement – making them more expensive to buy – and relief for mortgage interest and other costs is being seriously reduced.
Interest relief – the new rules
Prior to 6 April 2016, the rules were simple. In calculating the profits of his or her property business, the landlord simply deducted the associated mortgage interest and finance costs.
New rules apply from 6 April 2017, with changes being phased in gradually over a four-year period so as to move from a system under which relief is given fully by deduction to one where relief is given as a basic rate tax reduction. This changes both the rate and mechanism of relief. The changes do not apply to property companies – only unincorporated businesses.
What does this mean
Relief by deduction simply means deducting the amount of the interest, as for other expenses, in working out the profit or loss of the property business.
Where relief is given as a basic rate tax reduction, instead of deducting the interest in calculating profit, 20% of the interest is deducted from the tax calculated by reference to the profit (as determined without taking out interest for which relief is given as a tax reduction).
For 2017/18, a landlord can deduct in full 75% of his or her finance cost. The remainder is given as a basic rate tax reduction.
Freddie has a number of buy to let properties. In 2017/18, his rental income is £21,000, he pays mortgage interest of £5,000 and has other expenses of £3,000. He is a higher rate taxpayer.
Tax on his rental income is calculated as follows:
Rental income £21,000
Less: interest (75% of £5,000) (£3,750)
other expenses (£3,000)
Taxable profit £14,250
Tax @ 40% £5,700
Less: basic rate tax reduction
(20% (£5,000 x 25%)) (£250)
Tax payable £5,450
This compares to a tax bill of £5,200, which would have been payable had relief for the interest been given in full by deduction.
The pendulum swings gradually from relief by deduction to relief as a basic rate tax reduction. In 2018/19, relief for half of the interest and finance costs is by deduction and relief for the other half is as a basic rate tax deduction. In 2019/20, only 25% of the interest and finance costs are deductible, relief for the remaining 75% being given as a basic rate tax reduction. From 2020/21 onwards, relief is only available as a basic rate tax reduction.
Use of home as office
Use of home as office is a catch-all phrase to describe the costs that a self-employed businessperson has in running at least part of their business operations from home. It need not be an office as people may use a spare bedroom to hold stock for assembly and postage, or similar.
Many will have used the figures that HMRC has long published for employees’ ’homeworking expenses’ - initially £2 a week, then £3 a week, changing to £4 a week from 2012/13.
From 2013/14 onwards HMRC has adopted the following rates:
Hours of business use per month 25-50 flat rate per month £10
Hours of business use per month 51-100 flat rate per month £18
Hours of business use per month 101+ flat rate per month £26
So in HMRC’s eyes, I am entitled to a deduction of £120 a year for the use of home office space (or similar), but basically only so long as I spend at least 25 hours a month working from home. Working more than 25 hours a week - broadly full time - from home gets me the princely sum of £312 per year.
Working from home may be cheap, but it’s not that cheap.
The following guidance assumes that the claimant is not using the cash basis of assessment for tax purposes, as the rules work differently.
'Wholly and exclusively’ - Business expenses are allowed if incurred 'wholly and exclusively for the purposes of the trade'. This is a cardinal rule; however, there is a further point:
'Where an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade’ (ITTOIA 2005, s 34).
Applying these principles, I do not have to use a room in my house exclusively for my self-employment, just so long as when I am using it for business purposes, that is all it is being used for.
The costs you are allowed to claim - It is worth bearing in mind that HMRC does have guidance on how to make a more comprehensive claim for using one’s home in the business, in its Business Income manual however you may find it strange that almost all of the examples result in a claim of around £200 a year or less!
HMRC’s guidance nevertheless includes the following potentially allowable costs:
If you incur appreciable costs on the above then just £120 a year as a standard use of home deduction, or even £312 a year, is likely to make you feel more than a little aggrieved.
Paying family members
Many small businesses, whether incorporated or not, pay family members for working for the business. However, as a recent case shows, it is easy to make mistakes which can prove costly.
The case in question, Nicholson v HMRC (TC06293), concerned the payment of wages by a sole trader to his son while at university. Mr Nicholson was a central heating salesman, who was trying to build up an internet business. His son had worked for his father for many years, and when he went away to university, he continued to work for his father, ‘promoting the business through internet and leaflet distribution and computer work’.
He was paid at the rate of £10 per hour for 15 hours’ work a week. However, there was no evidence to support the payment of wages on this basis and payments were made partly in cash and partly through the provision of goods – Mr Nicholson bought his son food and drink to help him whilst at university and claimed a deduction in his business accounts for this as ‘wages’.
The First Tier Tax Tribunal disallowed a deduction for the wages paid to Mr Nicholson’s son. Although there was no dispute that his son worked in the business, there was no evidence to back up the claim that the payments had been made wholly and exclusively for the purposes of the trade. It was not possible to reconcile what had been paid as wages to the bank statements, and without contemporaneous records to support the payments, HMRC were unable to accept the sums claimed were ‘wages’ incurred as a business expense. The payments had a dual purpose – the underlying motive was the ‘personal and private’ motive of supporting his son while at university.
Avoiding the pitfalls
Had Mr Nicholson taken a different approach, he would have been able to claim a deduction for the wages paid to his son. The judge noted that had payment been made on a time recorded basis or using some other methodology to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied. If instead Mr Nicholson had made payments to his son’s bank account at the rate of £10 per hour for 15 hours’ work a week, leaving his son to buy food and drink etc. from the money he had earned working for his Dad, the outcome would have been different. The bank statements would provide evidence of what had been paid and this could be linked to the record of hours worked. Maintaining the link is key.
When paying family members, it is also important that the amount paid is reasonable in relation to the work done. The acid test is whether payment would be made to a person who was not a family member at the same rate. A deduction may also be denied if the wages paid are excessive.
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