- A tax-saving tip for incorporating your business 19th July 2021
Your accountant has suggested transferring your business to a limited company to save tax and NI. While you’re leaving the red tape up to her are there any steps you can take to make the transfer even more tax efficient?
Incorporating your business
Despite anti-avoidance measures sole traders and partnerships can save tax and NI by transferring their businesses to a company. An unincorporated business that’s transferred to a company is treated as if it permanently ceased. This means that special tax rules for calculating taxable profits apply. One of these says that the equipment owned by the business is treated as if it were sold at market value and acquired by the company at the same price. This usually results in adjustments to the tax deductions, i.e. capital allowances (CAs) previously claimed by the old business. The hassle of valuing equipment and making adjustments to CAs can be avoided if the sole trader/partnership and the company jointly elect to treat the equipment as sold and acquired at the tax value instead of the market value.
Another special rule applies when a business is incorporated. It says that a business is not entitled to the AIA on assets transferred to it. This means the business can’t claim CAs for the whole £90,000 expenditure on the vans all at once. Instead, it gets a CAs “writing down allowance”. This spreads the tax deduction over many years.
£90,000 CAs received by the unincorporated business), for the transfer of the vans to the new business. For relatively little effort the CAs trap, which substantially delays tax relief for the vans, has been avoided.
- Tighter rules for holiday home business rates 19th April 2021
Business rates. In England, owners of holiday accommodation are liable to business rates rather than council tax. This applies where the landlord intends to let the property on commercial terms for 140 days or more in the financial year. At first sight, this might not seem much of a financial advantage but for many landlords being liable to business rates allows them to claim small business rates relief (which can’t be claimed for council tax) and so escape rate charges completely.
New conditions. The government will introduce rules to tighten the conditions for holiday accommodation. They will focus on ensuring relief is only given for genuine holiday lets, perhaps by making checks on the number of days the properties are actually let. We’ll keep you informed as more details of the proposals are published.
- Tax and self-employment income support payments 29th March 2021
Further grants . Before Budget 2021 the Chancellor had already announced third and fourth instalments of the Self-Employment Income Support Scheme (SEISS) payments for sole traders, and members of partnerships, whose income had been hit by the pandemic. The Budget brought the welcome news that there will be a fifth payment.
Wider application. While the same general conditions which apply to the first three payments also apply to the fourth and fifth grants, you can only claim the latter two if you submitted your 2019/20 self-assessment return by midnight on 2 March 2021. The good news is that you can claim the new SEISS payments if you started self-employment or became a business partner between 6 April 2019 and 5 April 2020.
Taxing SEISS. Existing legislation says that regardless of which accounting period you include your SEISS payments, they are taxable for 2020/21. This legislation is being amended because of the timing of the fourth and fifth grants, so that apart from payments received after a business has ceased, all SEISS payments are taxable for the year of receipt.
- Remuneration strategies for the old and new tax years 24th March 2021
If you have control over the salary and dividends you receive from your company, this time of year is important for tax and NI planning. Especially this year if profits have been adversely affected by the pandemic. What factors should you consider for maximum tax efficiency?
As a general rule, for director shareholders a small salary topped up by dividends out of company profits is the way to go for maximum tax efficiency. Your salary should be pitched below the level at which NI contributions begin, but at least equal to the NI lower earnings limit (LEL). This is a key target figure for tax efficiency even if your company’s profits have been hit by the pandemic.
Salary, NI and state benefits
When considering how much salary to take there are two limits to watch. The first is the LEL. Up to that point neither you nor your company pay NI, but you get the NI credits that count towards your state pension and other benefits. The second is the primary earnings threshold (PET), which is the point at which you start paying NI. In between these two limits is the secondary earnings threshold (SET) which is the starting point for your company to pay NI.
If you only have one source of earnings, or you aren’t paying NI on other earnings you have, the optimum level of salary to take from your company is between the LEL – which for 2021/22 (and 2020/21) is £6,240 – and the PET – which is £9,568 for 2021/22 (£9,504 for 2020/21). If you haven’t paid yourself a salary in 2020/21, or it’s less than the SET, you have until midnight on 5 April 2021 to do so to ensure you get NI credits for the whole year.
If your company’s profits have fallen or it’s registered a loss you need to take care when deciding whether and how much to pay in dividends. You need to consider both the tax year and your company’s financial year. Remember that your company can only declare and pay you dividends if it has accumulated profits. This means if it has little or no profits, whether to pay dividends or not to maximise tax efficiency is academic as your company must have enough profits to cover the dividend you want to pay. If its income has fallen off there are increased tax and other risks to paying dividends.
If dividends are paid in excess of your company’s profits, the excess is unlawful, and you and the other shareholder’s may have to repay some or all of what was received. Until they are repaid HMRC will treat the excess dividends as a loan to the director shareholders which potentially triggers a corporation tax charge.
If your company has sufficient accumulated profits to more than cover any losses in the current year, you can think about how much dividend to pay in addition to your salary in order to achieve maximum tax efficiency . This can be a tricky balancing act if there are two or more director shareholders whose taxable income differs significantly. Notwithstanding that, the target is to pay a dividend that brings your total taxable income for 2020/21 up to the basic rate threshold of £50,000. Up to this level you’ll only pay 7.5% tax on dividends. At this stage it’s too early to worry about dividend levels for 2021/22.
Generally, for 2020/21 set a salary at least equal to the NI lower limit of £6,240 but no more than the primary earnings threshold of £9,504. You have until 5 April to bring your salary up to this level. When considering salary, dividends and other income together, £50,000 is the most tax efficient.
- Tax and business interruption policies 01st February 2021
A Supreme Court ruling means that many traders who lost income because of coronavirus will receive a payout on their business interruption insurance policies. How and when should this be reported for tax purposes?
Court ruling. On 18 January 2021 the Supreme Court ruled that insurance companies must pay out on business interruption insurance policies which included clauses for loss of income resulting from notifiable diseases (coronavirus) and enforced closure of business premises. This raises questions about the tax treatment of the payouts and how they interact with government support grants.
Taxable or not? We’ve seen reports suggesting that only if a business received tax relief for the policy premiums would it be taxed on any payouts. Whilst this is true for some types of insurance, it’s not the case for business interruption insurance where the payout is for loss of profits or turnover. The money received should be treated for income and corporation tax purposes in the same way as trading income.
Tax timing. Insurance proceeds are taxable income for the accounts in which they are recorded. In turn, this depends on whether accounts are prepared using generally accepted accounting principles. If so, the insurance proceeds should be included in the accounting period for which the profit/turnover was lost. However, if a payout wasn’t “virtually certain” it ought to be reported in the accounts covering the date when it became so. As the right to coronavirus-related payouts was contested by insurance companies it’s reasonable, in most cases, to include them in your accounts which cover the date of the Supreme Court ruling. Check this with your accountant.
Government grants. Most insurers gave an undertaking in September 2020 that they would not deduct government coronavirus support grants from business interruption payouts. Further, payouts don’t count as income for the purpose of working out entitlement to government grants.
- Self-assessment late filing penalties cancelled 27th January 2021
HMRC has today announced that self-assessment taxpayers will not receive a late filing penalty. What does this mean?
The initial late filing penalty of £100 will not be charged, as long as the tax return is filed online by 28 February 2021.
Taxpayers still need to pay their self-assessment tax bill by 31 January 2021 to avoid being charged late payment interest. Interest will be charged from 1 February on any outstanding liabilities at a rate of 2.6% per annum.
- Tax and coronavirus grants received after a business ceases 11th January 2021
Many businesses have closed because of the pandemic despite government coronavirus grants. Special tax rules apply to these payments if they are received after a business stops trading. What do business owners need to know?
A sole trader, partner or company that was eligible for a CSP (coronavirus support payments (CSPs)) but received it after their trade or property business ceased is not required to repay it. However, they must follow the special rules for calculating the tax on it.
The legislation says any part of a CSP that isn’t “referable” to the carrying on of the business is taxable as a “post-cessation receipt”. This rule overrides the normal accounting practices which determine the financial period for which a CSP should be recorded as income. The position is made more complicated for Self-Employment Income Support Scheme (SEISS) payments by another rule which says they are always taxable for 2020/21.
Fortunately, as it stands, the effect of both the special post-cessation and the SEISS rules produce the same outcome, i.e. they both cause the payment to be taxable for 2020/21. However, our understanding is that the post-cessation rule trumps that for the SEISS. This might be important when working out the tax on it.
Choose your tax year
Where the post-cessation receipts rule applies to a CSP (SEISS or other) it’s taxable for the tax year in which it is received. So, because most if not all CSPs were paid in 2020/21 they are wholly taxable for that year. However, the general rules for post-cessation receipts, not just those in respect of CSPs, allow you to elect for the payment to be treated as if it had been received on the last day that your business traded. Expenses you incurred in obtaining the post-cessation amount are tax deductible from it. In practice, it seems unlikely that there would be any such expenses for a CSP.
Example. John’s business ceased trading at the end of May 2020. His final accounts cover the period from 1 November 2019 to 31 May 2020. They show a profit for tax purposes of £3,000. John received a coronavirus grant of £4,000 in July 2020. It’s taxable for 2020/21 under the post-cessation receipts rule. However, John can elect to treat it as if it was received on 31 May 2020. The effect of this is that the profit is increased to £7,000 (£3,000 +£4,000). £5,000 of this is taxable in 2019/20 and £2,000 in 2020/21.
John should review his tax position for 2019/20 and 2020/21 and check whether an election to carry back the post-cessation receipt will reduce or increase his tax bill. As 2020/21 doesn’t end until 5 April 2021 he can wait until after that date to make his review which will mean he can properly assess the effect of an election. He has up to six years in which to make an election.
Companies that receive a CSP for a business which has ceased and which counts as a post-cessation receipt can also make an election to treat it as income received on the last day of trading.
Coronavirus grants received after a business ceases are taxable as post-cessation receipts and so taxable for the tax year in which they are received. However, an election can be made to tax the payment as if it had been received on the date the business ceased. This could reduce the tax payable on the grant payment.
- HMRC tightens CIS rules 04th January 2021
New rules will apply from April 2021 to make the Construction Industry Scheme (CIS) tougher. As a contractor or subcontractor in the industry what do you need to know?
Tax changes. 2021 is shaping up to be a tough year for the construction industry. In addition to the VAT reverse charge rules which take effect on 1 March 2021, the Construction Industry Scheme (CIS) will include new penalties and safeguards against errors. These will apply from April 2021.
HMRC corrections. HMRC will have the power to amend any CIS deductions (set-offs) you claim against the tax payable through your real time information (RTI) employer submissions. It will make an amendment if you fail to provide evidence to back up your entitlement to a set-off when asked by HMRC.
If HMRC makes an amendment to correct an error, it will have the power to refuse subsequent claims for set-offs in the same tax year. That means you’ll have to wait until after the end of the tax year before you can claim the set-off against your direct tax (income or corporation tax) liability.
Cost of materials. This change strengthens the rule regarding the calculation of CIS deductions. In arriving at the amount of pay to which the 20% or 30% deduction applies you can only take into account the cost of materials purchased by the subcontractor which they used solely for the contract for which you’re making the payment.
Gross payment penalties. The new rules widen the scope of penalties in respect of applications for gross payment status. HMRC will be able to charge a variable penalty where a company or individual provides, or encourages someone else to provide, incorrect information or documents to HMRC to help the application to be paid without CIS deductions.
- Is gym membership tax deductible? 08th December 2020
A colleague told you that a recent ruling by a Tribunal means that you might be entitled to claim a tax deduction for your gym membership. This contradicts HMRC’s long-standing guidance. Who is right?
Wholly and exclusively tax deductions
You probably know that tax rules don’t allow a deduction for expenses which aren’t “wholly and exclusively” for the purpose of your business. The effect of the rule is that unless every penny of an expense is incurred for a business purpose the wholly and exclusively test is failed and none of it is tax deductible.
Duality of purpose
Naturally, some expenses have more than one purpose by their very nature. The clearest example is food. In the case of Caillebotte v Quinn 1975 Q, a carpenter, claimed the cost of his lunches while at work. The court said the purpose of eating meals was primarily to meet Q’s needs as a human being, not just to keep him fit for work. The wholly and exclusively test was not met. Trap. If an expense doesn’t pass the wholly and exclusively test none of it is deductible, even if there’s a significant business motive. Tip. If the business part of an expense can be isolated and passes the wholly and exclusively test, a tax deduction is allowed for that part, e.g. the cost of business calls on your personal phone bill.
Apportioning an expense
For the tip above to apply you must be able to show HMRC that a quantifiable part of the expenses meets the wholly and exclusively condition. This is not easy; a good example of the practical difficultly is illustrated by the court’s ruling in Prince v Mapp 1969 . P was a professional guitarist who claimed the cost of surgery on his hand. Without the operation he could not have earned a living from playing. The court ruled the expense was not deductible because P played guitar for personal enjoyment as well as professionally and the cost could not be divided.
The odds were against the taxpayer in Osborne v HMRC 2020. O was a “saturation diver”, which is physically dangerous and demanding. O’s special training reflected this. He trained not just to be physically fit but to minimise skeletal damage and prolong his career. As you would expect HMRC wheeled out its tried and tested “duality of purpose” argument, i.e. O’s wish to be fit has a personal motive as well as a business one.
The First-tier Tribunal approached the issue from a different angle. Based on past judgments it said “an incidental or unavoidable private advantage” doesn’t necessarily rule out an exclusive business purpose. In reality O’s only purpose for the special training was to enable him to do his job: the training was “dictated by his occupation as a matter of physical necessity” . The two to three-hour daily fitness regime far exceeded any personal physical need for fitness. The personal advantage O gained from such a tough regime was therefore incidental. Tip. If expenditure is of a recognisably special character that’s directly related to the requirements of your job, it is probably tax deductible. You must be able to show a clear business need and that any personal gain is an unavoidable side effect.
In theory a deduction is possible but the conditions are tough. You must be able to show that your job requires a special training regime, not just general fitness and pass the wholly and exclusively test. Any personal advantage you gain must be merely an incidental and unavoidable side effect.
- Employment allowance trouble 28th September 2020
Problems with HMRC’s NI system are impacting employers who are receiving incorrect demands. What’s the issue and how should you respond if you receive a bill from HMRC?
EA problem factors. Changes to the employment allowance (EA) rules and other factors seem to have caused problems with claims. Not only was the EA increased to £4,000 in April 2020, changes were made to the conditions which must be met for employers to qualify and claim it. What’s more some employers were better off delaying their claim for the EA because of Coronavirus Job Retention Scheme (CJRS) payments.
Delayed EA claims. Until 31 July employers receiving CJRS payments received a credit for the corresponding employers’ NI liability that would otherwise arise when they paid their furloughed employees. However, if the employer claimed the EA it would reduce its employers’ NI in preference to the CJRS NI credit, meaning it would be using the EA to cover a liability that it wouldn’t have to pay anyway. This generally only affected employers with a few employees on their books of which at least one was furlouged. Many such employers delayed their EA claims and now find themselves with unexpected demands from HMRC.
Software issues. Whilst HMRC has confirmed that it was perfectly OK to defer EA claims, some payroll software, including its own “Basic PAYE tools”, was unable to cope. HMRC’s internal systems also struggled, hence the flurry of incorrect demands. Some employers have received letters or phone calls from HMRC wrongly accusing them of deliberately underpaying their PAYE tax and NI for April to June. Tip. If you’re receiving incorrect demands because of the situation described above, don’t panic. HMRC is working on a solution. As long as you can show that your calculations of PAYE tax and NI are correct it will not pursue payment of the demands.
Changes to the employment allowance and how it interacts with the Coronavirus Job Retention Scheme have caused HMRC’s system to incorrectly show underpayments of PAYE and NI. HMRC is working on a solution but until then don’t pay any incorrect demands.
- Tax declaration deadline approaching 10th September 2020
Last year HMRC removed you from the self-assessment (SA) system even though you have tax to pay in January. Can you now safely assume HMRC will tell you if you owe more tax?
Ever since self-assessment (SA) was introduced 25 years ago HMRC has been trying to move people out of it and wrest more control of the assessment process for itself. This resulted in the introduction of informal assessments ( P800s ) and simple assessments which HMRC can use to collect tax from those outside of SA. It’s happy to use these even though it often means it has to estimate income details. This isn’t ideal as you need to contact HMRC and go through an appeals process to overturn incorrect figures. Worse still, the system leaves you at risk.
HMRC’s assessment systems can only deal with predictable tax liabilities. If your financial circumstances change or you have a windfall it won’t know and can’t therefore assess the tax. This leaves you open to a fine for failing to notify a tax liability. You might be in the same predicament if HMRC overlooks you in its annual review to identify those it needs to send assessments to.
Failure to notify penalty
If you owe income or capital gains tax and fail to notify HMRC of this within six months of the end of the tax year, i.e. 5 October, a penalty applies. This can be up to 100% of the tax liability not reported. In practice, unless you deliberately chose not to tell HMRC the penalty will be reduced to as little as 10% of the tax. HMRC actively imposes this penalty, sometimes running roughshod over the rules which contain get-out clauses.
HMRC isn’t entitled to penalise you where any unreported tax liabilities relate to:
• income which was subject to PAYE tax, even if not enough tax was deducted, say because your code number was wrong
• income of the type that the PAYE regulations allow HMRC to include in your tax code, e.g. benefits in kind, expenses and state pension
• dividends covered by the dividend nil rate band, i.e. where the total you receive is no more than £2,000 (for 2019/20 and 2020/21)
• income from which income tax has been deducted. For example, loan interest paid to you by a company. However, if the tax liability occurs solely because you’re a higher rate taxpayer a penalty can apply.
If you have a tax liability to report to HMRC it’s not enough say that. You must provide sufficient information to allow it to confirm the liability; essentially the same information you would provide in your tax return had HMRC left you in the SA system.
Missed the deadline
If HMRC hasn’t asked you to complete a SA tax return for 2019/20 and you’re reading this after 5 October 2020, don’t panic. You can still avoid a penalty if you act quickly. Call HMRC, ideally before 31 October, explain your situation and ask it to issue you with an SA tax return. As long as you submit this no later than the usual SA deadline (31 January 2021) you won’t face a penalty.
- CORONAVIRUS – GRANT INCOME 09th June 2020
Tax treatment of local authority grants
Under the coronavirus special measures, local authorities can help businesses with Small Business Grant Fund (SBGF) and Retail, Hospitality and Leisure Grant Fund (RHLGF) payments. If your business receives such a grant must it pay tax on it?
Qualifying for a grant
One of the first business sectors to be hit by the lockdown was the leisure industry, quickly followed by retail. They were offered help through a central government-funded scheme administered by local authorities, the Retail, Hospitality and Leisure Grant Fund (RHLGF). For small businesses not qualifying for the RHLGF an alternative local authority grant is available, the Small Business Grant Fund (SBGF). There are few conditions that need to be met to qualify for either, but businesses receiving them need to understand the tax consequences.
Taxable or potentially taxable?
Many business owners, individuals and companies have been confused by the language that’s been used to explain the tax treatment of RHLGF and SBGF payments. The phrase “potentially taxable” has been bandied about in official and other guidance, while some information simply says that payments are taxable. So which is correct? The answer is both, but the position is simpler than this answer suggests.
Capital and income
While some types of lump sum payment count as “capital” and may or may not be taxable, depending on why they are paid, RHLGF and SBGF payments are “business income” for tax purposes and must be recorded as such in your business records. In effect, they are treated in the same way as sales income. This isn’t an underhand plan conjured up by the government to claw back some of the SGBF and RHLGF payments through the tax system; the tax position for similar types of payment is well established and HMRC’s Business Income Manual contains examples of court rulings going back many years. The phrase “potentially taxable” is used because although the grant payments are taxable, the income might not result in a tax bill.
Example. Jane owns a hair salon and nail bar. She shut the doors on her business in mid March 2020 and doesn’t reopen them again until September. Her financial year runs from 1 April to 31 March. In April 2020 she received a grant of £10,000. Because of the loss of trade her accounts for the year to 31 March 2021 show a loss of £15,000 (it would have been £25,000 but for the grant). While the grant is taxable income it does no more than reduce her losses. Therefore there is no tax to pay on the grant income.
Unlike direct tax, there’s no specific HMRC guidance on how businesses should treat the RHLGF and SBGF grant payments for VAT purposes. However, the general rules for VAT say that it only applies if a payment is in return for a supply of goods or services. Therefore, grant income, which doesn’t require the recipient to do anything to receive it, is outside the scope of VAT.
Tip. Make sure your bookkeeper records the grant income as “outside the scope of VAT” and not as “exempt” as the latter can adversely affect the amount of VAT your business can reclaim for purchases.
Grant payments under the SBGF and RHLGF are taxable and must be recorded as business income in your records. Consequently, you will pay tax on it if your business accounts for the period in which the grant is received show a profit. Where your accounts show a loss or your profits are covered by tax reliefs, tax is not payable.
- Can you delay tax by changing your accounting date? 04th May 2020
A business associate recently told you that his accountant changed his financial account period in order to delay tax liability. Is this something worth considering for your company?
We’ve previously explained that altering the length of an accounting period won’t change the dates when income tax is due on business profits but can change the amount of tax payable. However, that’s the position for income tax; accounting periods for corporation tax (CT) are subject to very different rules.
Before you can consider the CT consequences of altering the accounting date you need to check that it’s permitted by company law. This only allows you to change the date to which you prepare your accounts, known as the accounting reference date (ARD), if the deadline for submission hasn’t passed (normally nine months from the ARD). Further rules mean that you can shorten the year as many times as you like but can only lengthen it to a maximum of 18 months once every five years.
CT due date
If you successfully change your company’s ARD, it’s automatically effective for CT purposes and this can change the date on which the tax on profits is payable. CT is payable nine months and a day after the ARD but only if the new accounting period is for a year or less. A change of ARD can therefore accelerate the due date for CT but not delay it.
CT accounting periods
Confusingly, when HMRC talks about accounting periods it’s referring to CT accounting periods which can differ from actual accounting periods if the latter is for longer than a year.
While the tricky CT rules prevent companies delaying CT payments by changing their accounting date, there can still be a tax advantage. For example, where a director or shareholder borrows or increases their borrowing from the company. Bringing forward the ARD to a date when the borrowing was at a lower level reduces the amount of CT the company might otherwise have to pay.
While you can extend your company’s accounting period so that it lasts up to 18 months, corporation tax periods can’t be longer than a year. This means you can’t delay the due date for payment of tax. However, there can be tax advantages to changing an accounting period, e.g. where you start or increase borrowing from your company.
- NATIONAL INSURANCE 09th March 2020
Return of the two-tier NI threshold
New rates. The government has announced the rates and thresholds for NI contributions for 2020/21. There’s nothing startling about them with one important exception; there will be two NI earnings thresholds (ETs). While in 2017 the government committed to aligning the ETs for employers and employees to simplify employment taxes, from 6 April 2020 they will diverge again, this time by a significant amount. Employers will start to pay for NI on workers’ salaries which exceed the rate of £8,788 per year, while the workers won’t start to pay until their salaries exceed the rate of £9,500 per year. As a company owner manager be aware of the different ETs when working out the most tax-efficient salary to take from your business.
From 6 April 2020 employers will be liable to NI on salaries they pay if they exceed the rate of £8,788 per year while the trigger point for directors is £9,500. Make sure you take account of the different thresholds when working out the most tax/NI efficient salary to take.
- Missed the filing deadline – is a penalty avoidable? 11th February 2020
If you missed the 31 January deadline for self-assessment HMRC will fine you £100 and more if you continue to delay. It will cancel the penalty if you have a reasonable excuse but if you don’t have one is there another way to dodge a fine?
Must you file a tax return?
It’s a common misunderstanding that if you owe tax you’re required to submit a tax return. The correct position is that you only need to file a self-assessment return if you’re asked to do so by HMRC. It does this by issuing a “notice to file”. However, to prevent you and any individual from dodging tax simply by not declaring income, you’re required to notify HMRC within a time limit if you believe you owe tax but haven’t received a notice to file – it’s then up to HMRC to issue one. If it doesn’t do so you won’t be penalised for not submitting a tax return by the normal deadline.
Notice to file received
Once issued, there is no appeal procedure against a notice to file even if you have no income, gains or other tax liability to declare. This position was recently confirmed by the Upper Tribunal (UT) in HMRC v David Goldsmith 2019
Trap. If you receive a notice to file but don’t submit a return within the time limit the initial penalty is £100. However, even if you don’t owe any tax this can rise to £1,600.
Appealing a penalty
You can appeal against a penalty but HMRC will only cancel it if you have a reasonable excuse such as you or a close member of your family being seriously ill and this was a significant factor in you missing the deadline
Tip. HMRC has the power to withdraw a notice to file. If it does so any penalties for late filing will be withdrawn. This option is only open to HMRC if you haven’t yet submitted the tax return in question and is entirely at HMRC’s discretion.
HMRC will usually agree to withdraw a notice to file a tax return if for a year you don’t meet its criteria for being within self-assessment. This can apply in far broader circumstances than you might think. For example, you can be a director, have annual income of up to £100,000, including savings and investment income of up to £10,000, and be entitled to claim expenses linked to your job of up to £2,500. There are, as you would expect, circumstances in which HMRC insists on self-assessment. For example, if you have income from self-employment or you or your partner receive child benefit and one of you has annual income exceeding £50,000.
Tip 1. For a definitive opinion on whether self-assessment applies to you, use HMRC’s online tool. Keep a copy of the result.
Tip 2. If you’ve missed the deadline for submitting one or more tax returns, still haven’t sent them to HMRC and don’t meet the conditions for being in self-assessment, then don’t submit the form(s). Instead write to HMRC and ask it to withdraw the notice(s) to file. Include a copy of the result produced by HMRC’s online tool showing that self-assessment isn’t applicable.
If you don’t meet criteria for self-assessment for a year and haven’t yet submitted the corresponding tax return you can ask HMRC to withdraw the requirement to submit one. It has the discretion to refuse your request but if it agrees it will also cancel the late filing penalties. Use HMRC’s online tool to check if self-assessment applies.
- When is providing food and drink to customers deductible? 07th January 2020
Income tax, corporation tax and VAT legislation each contain a similar rule which blocks a tax deduction for “business entertainment” costs. This includes hospitality of any sort.
A common example is where a business provides food and drink for an individual, say a customer. However, not all such supplies are business entertainment.
Tip. The exception to the rule is staff entertainment. This cost is always tax deductible because it’s part of the cost of employing workers. However, there are usually tax consequences for the employees who are entertained.
Part of the business
The cost of food and drink is, of course, a deductible expense where it’s part of your business to provide it, e.g. restaurants, cafés, etc. The food is provided in the course of the business and not supplementary to it and is clearly not hospitality. The trouble is the further removed from catering your business is the more problematic claiming a tax deduction for this type of cost becomes.
Not part of the business
At the other end of the spectrum is, say, a manufacturing company which wines and dines its customers to keep them sweet. It’s done to promote the business but clearly is not part of it. Providing hospitality is the motive. In between this situation and the one set out above are businesses such as our subscriber’s.
Our subscriber puts on lifestyle courses and seminars. These last between two hours and a full day (around eight hours including breaks). She provides tea and biscuits for those on short courses. For those who attend for a full day there’s a lunch. HMRC didn’t object to the tax deduction claimed for the light refreshments but it did for the lunches, on the grounds that it was hospitality.
Tip. In practice HMRC has always accepted that the cost of light refreshments (tea, soft drinks biscuits, etc.) at a business meeting or event is tax deductible in all circumstances except where the motive is hospitality, e.g. taking a prospective client for a drink at a café or pub.
All part of the service
Our subscriber’s response to HMRC’s argument is that she provides lunch as part of the courses she runs. While not directly connected with the services she is selling, the lunches are part and parcel of what she charges for. In essence when customers pay for a seminar they are also paying for the food and drink. This is our subscriber’s intention and it would be difficult for HMRC to successfully dispute it if the case went to tribunal.
Tip. To put the matter beyond doubt, where you provide food and drink which is more substantial than light refreshment as part of what you’re selling, mention it in your advertising and invoices. It doesn’t change the facts but it does make them clearer.
- VAT 04th November 2019
Separating from your spouse (for VAT purposes)
You and your spouse run separate businesses, each trading below the VAT registration limit. The trouble is HMRC can argue that the businesses should be treated as one. What did a recent First-tier Tribunal have to say about this?
VAT registration can be unattractive
Avoiding VAT registration can be advantageous where you sell to the general public or you don’t make many purchases on which you pay VAT (input tax). By keeping your turnover below the VAT registration limit you can make your prices more competitive compared with those who are registered. One way to avoid registration and so gain this advantage is to run parts of your business separately. Naturally, HMRC doesn’t like this.
One business or two?
HMRC is always on the lookout for cases where businesses have been kept separate artificially. It has the power to issue a notice that treats them as a single entity for VAT (but not other tax) purposes. This can mean that the “single” business needs to register and thereby lose the no-VAT advantage it had over its competitors.
Divide and rule
HMRC considers financial, commercial and organisational links before issuing an aggregation notice. It did this in the case of CJ Caton and HMRC (2018) . CJ Caton (C) ran a café and his wife (KC), an adjacent restaurant. Given the similar nature of their businesses and their close proximity HMRC was confident it was correct in issuing an aggregation notice. C and KC took a different view and asked the Tribunal to cancel the notice from its inception.
The key factors
C and CK’s businesses had different opening hours and separate tills. They put in separate orders for supplies but used the same supplier and ordered at the same time. Each business had its own staff. Originally, the premises were separate but alterations gave customers access to the same toilets and the café and restaurant shared a washing up area. There were two leases but both in Cs name. KC’s restaurant had an alcohol licence in C’s name. KC’s restaurant sold “specials” through C’s café. KC didn’t have a bank account so card takings went in C’s bank.
HMRC accepts there can be closer than usual links between genuinely separate businesses where they are run by spouses without the need to aggregate them. But it argued that in this case the links were too close. In particular there was only one website for the two businesses and HMRC pointed to the TripAdvisor site where C had responded to comments as the “owner” of both.
Tip. HMRC officers check reviews and similar websites for VAT and other tax purposes. Therefore avoid having a common online presence for your separate businesses.
Decision and advice
The Tribunal ruled in favour of C and KC saying that the evidence “strongly” indicated two separate businesses and not a single entity. The victory was welcome but it cost C and KC a lot in professional fees and hassle from HMRC. They could have avoided this by being more rigorous in maintaining their independence especially when it came to their online activity. Forewarned is forearmed!
While HMRC accepts that two or more businesses run by the same couple can have more links than if they were operated by unconnected individuals, there’s still a risk they can be aggregated for VAT purposes. To avoid this keep those aspects you can control as separate as possible, e.g. websites, record keeping, etc.
- What does a soft landing for MTD digital links mean? 11th March 2019
Making tax digital for VAT legislation requires you to have “digital links” between your financial data and the quarterly VAT reports. What changes might you need to make to your record keeping to achieve this?
Why digital links?
VAT law offers no explanation of what it means by “digital links”, nevertheless all VAT-registered businesses will be required use them in their bookkeeping processes. HMRC says digital links are “connections that allow details to automatically be transferred from the point a transaction is made until it is included as part of your quarterly report.”HMRC hopes digital links will make VAT reports more accurate and less open to accidental or deliberate errors.
No manual links
Manual links aren’t acceptable under Making Tax Digital for (MTDfV). For example, “Noting down details from an invoice in one ledger and using that handwritten information to manually update …” your software is a no no. However, this doesn’t mean you have to create invoices, delivery notes or other primary business records electronically. Paper documents are acceptable, despite what current TV ads for bookkeeping software imply, it’s what you do with the data on them which matters, i.e. how the information gets from an invoice to your VAT return.
What is a digital link?
Sticking with the example of an invoice, it’s OK to enter the data manually into a bookkeeping app or a spreadsheet, e.g. Excel, but from there the data must flow automatically to your quarterly VAT return. Tip. If you use a bookkeeping app which HMRC has approved for MTDfV, you can be certain that the data will digitally link when you press the button to produce and send your VAT return.
You might need to transfer your raw bookkeeping data to another person to work on, say your accountant. Sending the data by e-mail, saving it to a USB drive or any other electronic storage and handing it to your accountant are all acceptable.
If you use spreadsheets instead of an HMRC-approved bookkeeping app, the data must still link digitally. For example, a cell which shows the total of other cells, or another app, by using a formula is OK, but manually cutting and pasting from one or more cells to another isn’t.
Tip. Whether you use an app or spreadsheets, you’re allowed to make manual adjustments to your data if necessary. For example, if your business is partially exempt you’re allowed to manually work out the fraction of VAT you can reclaim.
For the first twelve months that MTDfV applies to you, at least, HMRC won’t enforce digital linking. This means you can wholly or partly use manual bookkeeping. However, as your VAT return data must be submitted electronically at some stage in your record keeping, you’ll need to use digital links. Tip. Our advice is to ignore the soft landing period and get to grips with digital links for all your data as soon as possible to avoid last minute changes when the soft landing ends.
- HMRC’s new self-assessment tool 14th December 2018
HMRC has launched an online tool which allows you to check if you need to submit a tax return for 2017/18. It’s easy to access, simple to use but very misleading. What’s the full story?
Tax return required? HMRC’s latest online tool, launched on 28 November 2018, aims to help individuals decide if they need to complete a self-assessment tax return for 2017/18. As the normal submission deadline is 31 January 2019, it seems like a sensible idea. The trouble is if you follow its guidance you can easily land yourself in hot water with HMRC, plus receive a £100 fine.
Notice to file. At no point does the tool tell you that if you have already received a notice to complete a tax return you must do so even if the tool indicates that it’s not necessary. HMRC’s notice will usually have been sent to you in April 2018 via your online personal tax account or in the post. Check your records and if you’ve received a notice you’ll need to complete and submit your self-assessment return online by no later than 31 January or you’ll be fined.
Note. If HMRC sent you a notice to complete a tax return for 2017/18 after 31 October, the deadline for submitting it (on paper or online) is three months from the day after the notice was issued.
Misleading. If you haven’t received a notice to submit a self-assessment tax return for 2017/18, but think you owe tax and haven’t told HMRC about it, its tool might indicate that you don’t need to submit a self-assessment return. This is because it uses broad criteria to make its decision. It’s possible to owe thousands in tax and for the tool to say you don’t need to do anything. This is dangerous advice and should be ignored.
- BUDGET 2018 – the small print 16th November 2018
As usual, the more interesting Budget changes didn’t feature in the Chancellor’s speech but in the documents produced by HMRC. What important changes might you have overlooked?
Hidden agenda. These days the Budget speech is more of a media show than an explanation of changes to government finances. Several important changes were hidden in the fine print and we’ve summarised a few of them that you might have missed.
Capital allowances. There’s bad news relating to the capital allowances deductions for several types of asset, including thermal insulation of buildings and integral features. The rate of writing down allowances will reduce from 8% to 6% from 1 April 2019 for corporation tax and 6 April 2019 for income tax.
Private residence relief. The Chancellor announced two unexpected and unwelcome changes to private residence relief which apply when you sell your home for more than you paid for it. Both will come into force from 6 April 2020. The changes are:
o the exemption which applies to gains attributable to the final 18 months you own your home will only apply to the final nine months
o lettings relief, which currently exempts up to an extra £40,000 of gain if you let your home at any time, will only be available where you occupied the property at the same time as the tenant.
HMRC to consult. Hopefully this will prevent any unfair loss of tax relief for those affected by the new restrictions. We’ll report on the consultation when HMRC makes it available.
Relief. There is to be a brand new tax relief for expenditure on construction, improvement and renovation of commercial buildings contracted for on or after 29 October 2019. The finer details will be hammered out through consultation – we’ll keep you informed. However, we can tell you that the “structures and buildings allowance” will be given as an annual deduction on a straight-line basis at the rate of 2% of the qualifying expenditure.
- Change to VAT on service charges 02nd October 2018
From 1 November 2018 property service companies will no longer be able to use HMRC’s concession to exempt certain types of supply. As a landlord how might this affect you?
Service charges. If as a landlord you’re responsible for the upkeep of common areas, e.g. hallways, gardens, drives, etc., of a building or an estate which contains more than one dwelling, e.g. a block of flats, you’ll probably add a service charge to rents to cover your costs. HMRC’s view is that the services you provide are part of the charge for letting the properties. As letting residential accommodation is exempt so is the service charges you levy. HMRC says that in some situations the exemption is being misapplied.
HMRC’s concession. HMRC has issued a statement clarifying when a service charge is exempt and when it’s not (If the common areas you’re responsible for maintaining also include dwellings owned by freeholders, you can exempt the service charge to your tenants but should apply standard rate VAT to that for the freeholders. However, HMRC applies a concession that means you can also exempt the service charge for the freeholders. If you use the concession to exempt service charges you aren’t entitled or may need to restrict the VAT you reclaim on related costs.
- MTD VAT 11th September 2018
Vague legislation. For VAT periods which start on or after 1 April 2019 you’ll be required to use HMRC’s Making Tax Digital for VAT (MTDfV).The legislation was published in early 2018, but details about how it will work in practice were not forthcoming. Not a moment too soon, HMRC has gone some way to rectify this by publishing a new VAT Notice 700/22
Key dates. The Notice confirms that MTDfV will apply for all businesses where their turnover exceeded the registration limit, which is set to remain at £85,000, in the previous twelve months. This means that even where your business is VAT registered and has turnover below the registration limit, you won’t need to file your returns through MTDfV.
Tip. As MTDfV is only a little over six months away, if you think that it will apply to you we recommend that you read HMRC’s new Notice sooner rather than later.
HMRC has a new notice about Making Tax Digital for VAT which will apply to all businesses with a turnover of £85,000 or more from 1 April 2019. All business with turnover around this mark should read the notice without delay.
- EMPLOYMENT STATUS 02nd July 2018
Pimlico Plumbers status decision
The Supreme Court has upheld earlier decisions confirming an individual’s claim that he was a “worker” and not self-employed. What are the tax and NI consequences of this ruling?
Employment status. The long-running battle between Gary Smith (GS) and a well known plumbing firm (Pimlico Plumbers Ltd and another v Smith 2018) about his employment status finally came to an end on 13 June 2018 when the Supreme Court ruled that he was a “worker” and not self-employed, as Pimlico claimed.
Worker or employee. The worker status is a little short of being an employee, but conveys many employment rights such as the minimum wage, holiday and sick pay. The worker status has been around for quite a while, but has come to the fore recently because of the growing concern over workers in the so-called “gig economy”, such as Uber drivers.
Tax and NI. The difference between a worker and an employee is significant for PAYE tax and Class 1 NI purposes. The legislation specifically refers to income of “employees” and “employed earners” and not “workers”. This means that as the law stands HMRC can’t go after businesses which use the services of individuals under worker contracts.
Worker status? Like employee status, a worker is an individual who personally carries out work, i.e. not via a company or other intermediary. The same status tests of control, i.e. the right to send a substitute worker, and the obligation of the employer to provide work and the individual to do it, apply. If the last condition isn’t met, but the others are, the individual probably won’t be an employee, but is likely to be a worker.
- The big IR35 consultation 15th June 2018
HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?
Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35. This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.
Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.
Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.
No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.
When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments.
- MTD development on a go-slow 16th May 2018
HMRC’s CEO has announced that the MTD process for individuals is slowing down to free up resources for work on Brexit. How might this affect you?
No change, almost. According to HMRC’s CEO, the go-slow “means halting progress on simple assessment and real time tax code changes” . He added that this doesn’t mean no changes at all. Anything that frees resources for other work, namely Brexit, will go ahead, but no details of what this might involve were given.
New. Simple assessments were supposed to play a big part in Making Tax Digital (MTD), and HMRC’s initial claim was that it would be a “New way of collecting tax that will make life easier for millions of customers” within self-assessment. However, so far HMRC has only used them sparingly and so you’re unlikely to notice any change because of the go-slow. In practice, this probably means that if you’re currently within self-assessment you’ll remain in it for a while longer.
What about businesses? MTD for VAT is still on course for April 2019. And while HMRC admits that the introduction of a single online account for businesses will be delayed, there’s no suggestion that the April 2020 date for MTD for business will be put back… watch this space!
- New scale charges for VAT on fuel 14th May 2018
New rates. HMRC has released details of the flat rate charges (also known as the scale charges) for car fuel. If you’re VAT registered you can use the scale charges to work out the VAT payable where your business pays for fuel for private journeys, e.g. for your employees. You should use the new rates from the start of the first VAT return period that begins on or after 1 May 2018.
- Business records checks to go 05th December 2015
HMRC has decided to scrap its controversial business records checks. What implications might this have for your business?
Just checking! In 2011 HMRC started its business records checks (BRCs) claiming it wanted to help businesses identify shortcomings in their bookkeeping. It suggested that this was the root cause of many incorrect tax returns and so wanted to help businesses get it right.
Suspended. BRCs came under fire from the accountancy and taxation professions because it was seen as a backdoor way for HMRC to start investigations. To make matters worse, it soon became clear that its officers were inadequately trained to carry out the checks. Because of these problems BRCs were put on hold while HMRC refocused. They were subsequently restarted later in 2012.
Scrapped. On 20 October 2015 HMRC announced that it was scrapping BRCs, although checks that were already scheduled will go ahead. The reason given for the cancellation of the scheme is that it wasn’t cost effective and didn’t identify as many problems as expected.
What now? HMRC says that it will continue to strive to ensure businesses improve their record keeping where needed, although it doesn’t state how it will do this.
- Celebrity Tax Avoidance 02nd June 2015 Yet another TV celebrity is being criticised for using a tax-saving scheme. What’s involved, is it legitimate and might it be something worth considering?
BBC tax dodger. In March 2015 the press revealed that BBC presenter Jeremy Vine was using a tax-avoidance arrangement. As is often the case the reports were wide of the mark and, frankly, almost certainly inaccurate in their accusations.
What’s the plan? We can’t be sure what Mr Vine or his advisors had in mind, but what’s got the press hot under the collar is that his wife and daughter own shares in his company Jelly Vine Productions. What the reports we saw fail to mention is that several years back the Law Lords confirmed that share ownership by a spouse as a means of saving income tax was legitimate. Plus, as far as the daughter’s shares are concerned it’s unlikely these involve income tax avoidance but rather shrewd and entirely legitimate financial planning.
Spouse’s shares. Income received by Jelly Vine from Mr Vine’s activities could be diverted to his wife by paying her dividends on her shares in the company. If she pays tax at a lower rate than Mr Vine, income tax would be saved.
Daughter’s shares. Firstly, we can explain why we don’t think income tax avoidance is involved in the arrangement. Where a parent gives or buys shares in their company for their child who’s aged 18 or under, any income generated by those shares, i.e. dividends, will be taxed on the parent as if it were theirs. This is a well known anti-avoidance rule that Mr Vine’s advisors would be very familiar with.
Tax planning. The tax advantage Mr Vine’s advisors might have had in mind was to create a ready source of tax-efficient income when his daughter reaches 18.Shares in the presenter’s company are owned by his wife and daughter. This is entirely legitimate and is a safe way to shift income to a spouse and child, but only after the offspring reaches 18.
- Mortgages – proving your income 02nd June 2015
Proof of income. Anyone who has a mortgage will know that lenders require proof of income before they approve a loan. If you can’t quickly put your hands on the required documents it can lead to delays.
Documents. Directors and employees must usually provide a P60 for the last tax year, but if all or part of your income is from self-employment you’ll need a statement from your accountant. If you don’t have one or don’t want to incur the expense of them writing to the lender, you can instead provide details of income plus an HMRC statement known as an SA302 . This can take weeks to obtain.
Tip. In January 2015 HMRC created a new service for those who file their tax returns online. You can log in and print your own HMRC statement of income. It’s not an SA302 , but the Council of Mortgage Lenders recommends its members accept it in place of one.If you need to prove your income for the purposes of a mortgage, and all or part of it comes from self-employment, you can now print an HMRC statement using its online service. This will be accepted by most lenders instead of HMRC’s SA302, which can take weeks to obtain.
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“The information in this blog is provided ‘AS IS’ with no warranties, and confers no rights. Yes, we are accountants, but if we are not your accountant this article does not create a client relationship. This blog is technical/ tax information and should not be seen as advice. All circumstances are different – you should consult with an accountant/ tax adviser before you rely on this information.