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Helping you keep more of your income
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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 assist in all aspects of self-employment, from choosing the best time to start the business, the best time for your year-end, support you through the initial business registration and provide advice on all aspects of tax.
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.
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
Management Accounting • Provision of management accounts
If you wish to know more about these services please contact us on 01332 202660.
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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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.
Tax-free allowances for trading and property income
New allowances were introduced from the 2017/18 tax year for trading and property income. The availability of these allowances means that those with low levels of trading or property income may not need to report this to HMRC.
The trading allowance is £1,000 for both the 2017/18 and 2018/19 tax years. If you have trading income of less than £1,000, you no longer need to report it to HMRC. This may be the case where a person sells items on eBay, or has a hobby-type business, such as cake making, DIY or crafts which generates only a small income.
Where the trading income is more than £1,000, the trader has the choice of either deducting the £1,000 allowance from income to arrive at the taxable profit, or computing profits in the usual way by deducting actual expenses. If actual expenses are less than £1,000, deducting the allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting the actual expenses will give a lower profit figure, and thus a lower tax bill.
If income is less than £1,000, but the individual makes a loss, they can elect for the allowance not to apply, calculate the loss in the usual way and include the details on their tax return. This will mean that benefit of the loss is not wasted. However, where the loss is small, the hassle of returning it on the tax return may be judged not to be worthwhile.
The property allowance is also set at £1,000 and works in much the same way as the trading allowance. It will benefit those who have a small amount of rental income, for example, from renting out their drive for parking during nearby sporting events.
However, the property allowance cannot be used as well as rent-a-room relief where a householder lets out one or more rooms in his or her home. Rent-a-room relief, which enables the householder to enjoy rental income of up to £7,500 tax-free, trumps the new allowance, but the new allowance can be claimed where rent-a-room relief is not available, i.e. where the let is not of a furnished room in the landlord’s home.
Juliet enjoys baking and makes cupcakes for parties. In 2017/18 she earns £653 from the sale of her cupcakes, more than covering her expenses.
As her trading income is less than £1,000, she does not need to report it to HMRC.
Robert collects sporting memorabilia. He sells items he does not want to keep on eBay. In 2017/18, his income from the sale of sporting memorabilia was £1826. His expenses were £791.
As his expenses are less than £1,000, it is beneficial for him to claim the trading allowance. His taxable profit is, therefore, £826 (£1,826 less the trading allowance of £1,000).
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.
Paying dividends – are they properly declared
For many personal and family companies, the most tax-efficient way to extract profits is to pay a small salary and to take anything in excess of this as a dividend. However, in order to benefit from the more favourable tax rates and lack of National Insurance attached to dividends, the dividend must be properly declared.
What does this mean?
Sufficient retained profits
The first point to note is that dividends are paid from retained profits. These are profits after tax which have not already been distributed. Dividends come out of retained profits and the retained profits must be sufficient to cover the full amount of the dividend.
If a dividend is paid when the company lacks sufficient retained profits to pay that dividend, it is an unlawful distribution and must be repaid.
Paid in proportion to shareholdings
Dividends must be paid in relation to shareholdings. So, if there are one hundred shares and a dividend of £5 per share is paid, a shareholder with 20 shares must receive £100 (20 x £5), a shareholder with 40 shares must receive £200 (40 x £5), and so on. It is not possible to tailor the payment to the shareholders so they receive a different amount per share. If it is desirable to pay dividends at different rates to different shareholders, an alphabet share structure should be employed.
The directors can declare an interim dividend. They must, however, consider the financial health of the company and ensure that the company has sufficient retained profits from which to pay the dividend. The decision to pay a dividend should be minuted.
A final dividend is recommended by the directors but must be approved by the shareholders in general meeting or by written resolution. They are normally paid at the end of the year. The resolution should be signed by the shareholders.
A dividend voucher should be given to shareholders each time a dividend is paid. This is effectively a receipt. The dividend voucher should show the name and registered address of the company, the name and address of the shareholder, the description of the shares, such as ordinary shares, the number of shares owned at the time the dividend was declared, the amount of the dividend paid, and the date. The voucher should be signed.
Getting it wrong
The cost of getting it wrong can be high. Unless a dividend is properly declared, it is not a dividend and HMRC may seek to tax it as a salary payment instead – with the associated National Insurance and higher rates of tax. At best, it would be regarded as a loan to the director/shareholder, which would have to be repaid and may trigger a section 455 charge and a benefit in kind charge on the loan.
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.
Cash basis for landlords
Since 6 April 2017, the cash basis has been the default basis for qualifying landlords running an unincorporated property business.
Cash basis v accruals basis - The cash basis is easier for a non-accountant to understand, as it simply takes account of money in and money out. Income is recognised when it is received, and expenditure is taken into account when it is paid.
By contrast, Generally Accepted Accounting Practice (GAAP) requires accounts to be prepared under the accruals basis. This matches income and expenditure to the accounting period to which it relates, recognising income when invoiced and expenditure when billed, and necessitating the need to take account of debtors, creditors, prepayments, and accruals.
Qualifying for the cash basis - The cash basis is only eligible to landlords operating an unincorporated property business who are able to answer `no’ to all the following questions:
If the landlord is able to answer `yes’ to any of the above, the accounts must continue to be prepared under the accruals basis.
Default basis –- election needed - Unlike traders, landlords do not need to elect to use the cash basis. If the answer to all five of the above questions is `no’, the cash basis applies by default. By contrast, an unincorporated landlord who is within the cash basis must elect if they wish to prepare accounts under the accruals basis.
Multiple businesses - The cash basis tests are applied separately to each unincorporated property business. There is no requirement that the same basis must be used for all businesses.
Moving to the cash basis - When entering the cash basis, opening debtors are not counted as income when the money is received, and opening creditors are not treated as expenditure when paid. Likewise, if the landlord moves back to the accruals basis, some adjustments are needed to prevent double counting as a result of the timing differences between the bases.
Capital expenditure - The rules for deducting capital expenditure under the cash basis have also been simplified, and in most cases, the landlord can simply deduct the amount of capital expenditure from income when working out profits. Certain assets do not qualify for this treatment – the list includes land, cars, non-depreciating assets, and capital expenditure on education and training.
The usual rules for the replacement of domestic appliances apply equally under the cash basis.
Mileage allowances - Landlords using a car or other vehicle in their property business can claim a fixed deduction based on mileage, as long as capital allowances have not been claimed for the vehicle or, for a vehicle other than a car, the cost has been deducted under the new capital expenditure rules. The usual rate of 45p per mile for cars and vans for the first 10,000 business miles and 25p per mile thereafter, and 24p per mile for motorcycles, is applicable.
Interest - The normal rules governing deduction of interest apply equally under the cash basis.
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.
Taxation of Savings – what can you have tax-free?
There is no one answer to the amount of savings income and, for 2017/18, the answer can range from £0 to £18,650, depending on personal circumstance.
When looking at tax-free savings, there are a number of elements to take into account:
Savings income, such as bank and building society interest, is now paid gross without tax deducted.
Personal allowance - If a person has no other income (or only dividend income in addition to savings income), or their other income is less than £11,500, some or all of the personal allowance (set at £11,500 for 2017/18) will be available to shelter savings income.
Marriage allowance - Where the marriage allowance is claimed, this increases the potential tax-free income by £1,150 in 2017/18.
Savings allowance - In addition to the personal allowance, individuals who pay tax at the basic or higher rate are also entitled to a savings allowance. The amount of the allowance depends on the individual’s marginal rate of tax and is set at £1,000 a year for basic rate taxpayers and at £500 a year for higher rate taxpayers. There is no savings allowance for additional rate taxpayers.
Savings starting rate - Savers with little in the way of other taxable income can also benefit from a 0% savings starting rate on savings of up to £5,000, in addition to savings sheltered by the personal and savings allowance. However, the savings starting rate is quite complicated in that the starting rate limit is reduced by taxable non-savings income. So, if a person has taxable non-savings income of £2,000, the savings starting rate of 0% is available on savings income of £3,000, as the £5,000 limit is reduced by the taxable non-savings income of £2,000 to £3,000. Likewise, if a person has taxable non-savings income of more than £5,000, the savings starting rate limit is reduced to nil.
Case study 1: maximum tax-free savings - Elsie is retired and her only income is savings income, which in 2017/18 is £20,000. Her husband has income of £8,000 and Elsie benefits from the marriage allowance of £1,150. The first £11,500 of her savings income is covered by her personal allowance of £11,500 and the next £1,150 by the marriage allowance, leaving £7,350, of which £1,000 is covered by the personal savings allowance for basic rate taxpayers. This leaves savings income of £6,350. As she has no taxable non-savings income, she is entitled to the savings starting rate of 0% on savings equal to the saving starting rate limit of £5,000. Consequently, she is able to enjoy £18,650 (£11,500 + £1,150 + £1,000 + £5,000) of her savings tax-free and is taxed at the basic rate of 20% on her remaining savings of £1,350 – giving her a tax bill of £270.
Case study 2: reduced starting rate limit - In 2017/18, Arthur has a pension of £14,000 and savings income of £6,000. His personal allowance is set against his pension, leaving him with taxable non-savings income of £2,500. He is entitled to the saving personal allowance of £1,000, which is set against £1,000 of his savings income. As he has taxable non-savings income of less than £5,000, the savings starting rate is reduced by his taxable non-savings income of £2,500 to £2,500. £2,500 of his savings income is eligible for the 0% savings starting rate. He, therefore, receives savings income of £3,500 tax-free. The remaining £2,500 of his savings income is taxed at 20%, as is the excess of his pension over his personal allowance of £2,500. His tax bill for £2017/18 is, therefore, £1,000 (£5,000 @ 20%).
Case study 3: higher rate taxpayer - Wendy has a salary of £50,000 and savings income of £5,000 in 2017/18. Her personal allowance is set against her salary. She is entitled to the personal savings allowance of £500 available to higher rate taxpayers, but she is not eligible for the savings starting rate as her taxable non-savings income (£38,500, being £50,000 - £11,500) is more than £5,000. She receives tax-free savings income of £500.
As the case studies show, the amount of savings income a person may receive can vary considerably depending on what other income they have and the rate at which they pay tax.
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.
Working out your dividend tax bill
Dividends are a special case when it comes to tax and have their own rates and rules. The taxation of dividends was radically reformed from 6 April 2016 and the rules outlined below apply to a dividend paid on or after that date.
The first step to working out tax on dividend income is to determine the amount of that income. From 6 April 2016, this is simply the dividends actually received in the tax year. There is no longer any need to gross up as dividends no longer come with an associated tax credit.
The first £5,000 of dividend income is tax-free. All individuals, regardless of whether they are a non-taxpayer, a basic rate taxpayer, a higher rate taxpayer, or an additional rate taxpayer, are entitled to a dividend allowance of £5,000.
Although referred to as an allowance, the dividend allowance works as a nil rate band in that dividends falling within the allowance are taxed at a notional zero rate (so received tax-free). However, it counts as earnings and will use up part of the basic or higher rate band, as applicable.
The Government plans to reduce this allowance to £2,000 from 6 April 2018.
Rate of tax
Once the dividend allowance has been used up, the rate at which dividends are taxed depends on the tax band in which they fall. If the individual has some or all of his or her personal allowance available, this can be set against dividend income before any tax is payable. Where the taxpayer has other sources of income, dividends are treated as the top slice. It is important to remember this to ensure that dividends are taxed at the correct rate.
Dividends are taxed at the dividend rates of tax, rather than the standard income tax rates. For 2017/18, dividend tax rates are as follows:
The dividend ordinary rate applies to dividend income falling within the basic rate band, which for 2017/18 is the first £33,500 of taxable income. This applies to Scottish taxpayers too, rather than the Scottish basic rate band.
The dividend higher rate applies where taxable dividend income sits in the band between £45,001 and £150,000 and the dividend higher rate applies where dividend income falls in the additional rate band (taxable income above £150,000).
In 2017/18, Fiona receives dividend income of £55,000. She also receives a salary of £8,000 from her family company. The tax payable on her dividends is worked out as follows:
Thus, Fiona must pay tax of £7,987.50 on her dividend of £55,000 ((£5,000 @ 0%) + (£3,500 @ 0%) + (£28,500 @ 7.5%) + (£18,000 @ 32.5%)).
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.
Extracting profits as dividends
Dividends provide an opportunity to extract profits in a tax-efficient manner. As a rule of thumb, it is generally tax-effective to take a salary equal to the primary and secondary threshold for National Insurance purposes or the personal allowance (set at £11,850 for 2018/19), depending on whether the employment allowance is available (or the recipient is under 21). Thereafter, it is tax efficient, where possible, to extract any further profits as dividends.
However, it is not as straightforward as deciding to pay a dividend rather than a salary and certain boxes must be ticked.
In order to pay a dividend:
Dividend rather than salary
Once the optimal salary has been paid, the tax hit on dividends is less than on salary. This is predominantly due to the fact that dividends do not attract National Insurance contributions, whereas a salary will attract employee’s and employer’s National Insurance contributions. Dividends are also taxed at a lower rate of tax than salary payments, and benefit from a tax-free dividend allowance. On the downside, dividends are paid from post-tax profits which have suffered a corporation tax deduction (at 19% for the financial year 2017 and 2018). Even allowing for that, the tax taken from paying dividends is lower.
All taxpayers, regardless of the rate at which they pay tax, are entitled to a dividend allowance. The allowance is £2,000 for 2018/19; reduced from £5,000 for 2016/17 and 2017/18.
The allowance is not an allowance as such, but rather a nil rate band which uses up part of the band in which it falls. Dividends, taxed as the top slice of income, are taxed at a zero rate to the extent that they are covered by the allowance.
Dividend tax rates
The dividend tax rates are lower than the usual income tax rates. Dividends are taxed at 7.5% to the extent that they fall within the basic rate band, 32.5% to the extent that they fall within the higher rate band and 38.1% to the extent that they fall within the additional rate band.
Tax-free income from renting out your drive
Your drive may not normally warrant a lot of attention— however, it may have the potential to generate a tax-free income. Parking near to town centres and stations is always limited, and parking is always needed for events. Owning a drive, field or land that can be utilised for parking provides the opportunity to earn some money; even better, it may be tax-free.
£1,000 property allowance
Two new allowances – each set at £1,000 – were introduced from 6 April 2017, one for trading income and one for property income. The allowances are available in addition to the personal allowance.
As far as the property allowance is concerned, if income from property is £1,000 or less in the tax year, there is no tax to pay and there is no need to tell HMRC about it. All very easy!
Gill lives near a park. During the summer, a number of events are held in the park, including open air concerts, sporting events, fayres and suchlike. Gill has a large drive which has parking for four cars. She provides parking during the summer for people attending events in the park, charging £10 per car.
During the 2018/19 tax year, Gill earns £420 from parking. She works full-time as a veterinary nurse and her personal allowance is fully used up against her wages. She has no other income from property or elsewhere.
As the income from letting out her drive is less than £1,000, the whole amount is tax-free and does not need to be reported to HMRC.
Note: If Gill had made a loss, it would have been beneficial not to claim the allowance, so the loss could be carried forward for offset against any future property income.
Property income of more than the allowance
Where property income exceeds £1,000 in the tax year, the taxpayer has two choices:
deduct the £1,000 allowance from the receipts and pay tax on the excess; or
work out the profit or loss in the normal way.
The most beneficial option will depend on the level of the expenses.
If receipts exceed expenses, but expenses are less than £1,000, the best result is to claim the property allowance and pay tax to the extent that income exceeds £1,000. If expenses are more than £1,000, the best result will be obtained by working out the profit in the usual way, deducting allowable expenses from receipts.
Richard owns a field near a stately home which he makes available to provide overflow parking for events at the stately home. In 2018/19, he earns £4,800 from parking receipts, and incurs expenses of £860.
If he calculates his profit in the usual way, his taxable profit is £3,940 (£4,800 - £860). However, if he claims the property allowance, his taxable profit falls to £3,800 (£4,800 - £1,000). Claiming the allowance is therefore beneficial.
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.
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