Adrian Mooy & Co - Accountants Derby

Adrian Mooy & Co

Welcome to our home page. We are a small firm of Chartered Certified Accountants and tax advisors in Derby. We help businesses like yours grow and be more profitable.  For a friendly service covering audit, tax, accounts, self assessment, VAT & payroll please contact us.

 

How can we help you?

○  Quality checked firm - awarded the prestigious ACCA Quality Checked mark

We offer a traditional personal service and welcome new clients.

From start-up to exit and everything in-between - whether you’re  struggling with company formation, bookkeeping, or annual accounts and taxation, you can count on us at every step of  your business’s journey.

We specialise in cloud-based accounting solutions. With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button accounting is the future.

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

 

○  Cloud-based accounting solutions

○  Tax solutions to help you keep more of your income

Accountants Derby
Accountants Derby

○  Transparent affordable pricing

○  Free initial interview

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Tax Planning for individuals

Tax Planning for Individuals

Successful individual tax planning requires careful attention across a wide range of areas and time frames.

Tax Planning for small business

Tax Planning for Small Business

Effective tax-saving strategies for small businesses operating in a tough economic climate.

Contractors and Freelancers

Contractors & Freelancers

Invoicing your contracting work through a limited company is highly tax efficient.

  • Here are some tips for saving your company corporation tax and extracting money from your company tax efficiently. Why pay more than you need to? Company owners - Saving tax

  • The approach of a company’s year end is an important time to look at tax saving. Action has to be taken by that date, otherwise the opportunities could be lost. Company tax saving

Services

Web-based accounting

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

 

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

 

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

Accountants Derby

Xero makes keeping your accounts up to date easier.

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

 

Arrow indicating direction of process flow

Our Process

Understand your needs

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

Continuous improvement

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

Build a relationship

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

Confirm your expectations

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

Actively communicate

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

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

Testimonials

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

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Business expenses

Being savvy with your expenses is a large part of running a successful business, regardless of its size. Claiming expenses is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your tax payments. By claiming every allowable expense you’re making sure you don’t pay a penny more in tax than you have to.

 

For more information about exactly what expenses you can claim, see our helpsheets.

Accountants Derby

Helpsheets

  • Should Landlords Incorporate? - Part 1

    Issues to bear in mind for buy-to-let landlords thinking about incorporating of their property business.

    A BTL investor should only incorporate his or her business if there is good reason to do so. Before the new rules restricting tax relief for finance costs on residential property, many landlords would not have been better off by incorporating. Since April 2016 a new, more punitive regime for taxing dividend income means that incorporation is even less beneficial.

    Example: Sole proprietor vs company - Joe owns several properties, but has no other sources of income. His net property profits are £40,000. In 2016/17, his personal tax position will be:

    2016 / 2017
    £
    £
    Rental Income
    40,000
    40,000
    Less: P Allce
    11,000
    40,000
    29,000
    £
    Taxed at:
    20%
    £
    Tax
    (5,800)
    Net Income
    34,200

    If he had instead put his properties into a company, the company would first have to pay corporation tax on its profits:

    2016/2017
    £
    £
    Rental Income
    40,000
    40,000
    Less: Salary
    (8,000)
    (8,000)
    32,000
    Taxed at:
    20%
    £
    Tax
    (6,400)
    Net Income
    25,600
    Continued in Part 2 ...
  • Should Landlords Incorporate? - Part 2

    But this is only half the story; although it is Joe's company, he has so far drawn out only £8,000 salary and the rest of the company’s profits are locked up in the company’s bank account - those funds are not yet his. He therefore pays a dividend out of the company to put the funds at his personal disposal.

    2016 / 2017
    £
    £
    Company Funds
    payable as dividends:
    25,600
    25,600
    Balance of Personal Allce
    3,000
    Taxable
    22,600
    Taxed at:
    New Dividend
    5,000
    -
    "Allowance" 0%
    Ordinary
    17,600
    1,320
    Div Rate 7.5 %
    22,600
    Total Income Tax on dividends:
    1,320
    24,280
    Dividend income after tax:
    Add: salary already taken (as above)
    8,000
    Net income
    32,280
    Net income without company (above):
    34,200
    Lost by running portfolio through company
    1,920

    The real problem is that, by 2020/21, Joe will be getting only 20% tax relief on his mortgage lnterest if he continues to hold the property personally, while the corporate alternative would not be caught. Suppose that Joe's net rental income of £40,000 is after having paid £32,000 in mortgage interest, and move forwards to 2020/21, where all of his mortgage interest will be subject to the new tax relief restriction:

    2020 / 2021
    £
    £
    Rental Income
    40,000
    40,000
    Disallow: Interest
    (32,000)
    72,000
    Less: P Allce
    (12,500)
    Deemed taxable:
    59,500
    Basic Rate 20%
    37,500
    7,500
    Higher Rate 40%
    22,000
    8,800
    59,500
    Mortgage Interest adjustment
    (6,400)
    (9,900)
    Net income
    30,100
    Continued in Part 3 ...
  • Should Landlords Incorporate? - Part 3

    Joe stands to lose £4,100 by 2020/21 if he continues to run his business personally, even though personal tax-free bands and allowances have risen significantly by then (the government has committed to increase the personal allowance to £12,500 and the higher rate threshold to £50,000).

    We already have a rough idea of how Joe would fare with a corporate property portfolio, because companies will not be affected by the new BTL finance restrictions. On the basis that companies remain static, then Joe would still be £1,920 worse off in a company in 2020/21 than with a personal portfolio now in 2016/17, but that would nevertheless be £2,180 better than sticking with personal ownership all the way through to 2020/21.

    Companies will be more tax-efficient by 2020/21 because the main rate of corporation tax is set to fall to 17%, increasing Joe's saving to more than £3,100.

    Many career landlords are dealing with much larger numbers, and the savings will be much more substantial. The key consideration is how much the artificial tax cost of disallowing interest, etc., exceeds the compensating 20% tax relief. If we look instead at an alternative where Joe's mortgage interest is only £12,000, the results are quite different:

    2020 / 2021
    £
    £
    Rental Income
    40,000
    40,000
    Disallow: Interest
    (12,000)
    52,000
    Less: P Allce
    (12,500)
    Deemed taxable:
    39,500
    Basic Rate 20%
    37,500
    7,500
    Higher Rate 40%
    2,000
    800
    39,500
    Mortgage Interest adjustment
    (2,400)
    (5,900)
    Net income
    34,100

    In this scenario, the new mortgage interest regime will end up costing Joe only a very small amount annually, even when fully implemented in 2020/21. He would be much better off sticking with direct ownership, rather than incorporating his business.

    Other things to consider are the possible effects on student loans, child benefit and the forfeiture of personal allowance for those with larger portfolios.

  • Property development – are you trading?

    For many, buying a property, doing it up and selling it for a profit is an attractive proposition. However, it will not always be clearcut when the line between simply investing in property and trading is crossed. From a tax perspective, the distinction is important as the tax consequences are not the same.

    Which tax? - Assuming the goal of selling the property for more than it cost to buy and do up is realised, for tax purposes, it is important to determine whether that surplus is a chargeable gain liable to capital gains tax or a trading profit liable to income tax.

    A gain in an investment property is taxed as chargeable gain (and conversely, if the property market fell and the property was sold at a loss, the loss would be an allowable loss). To the extent that it would remain available, any gains in excess of the annual exempt amount would be charged at the residential property rates of capital gains tax, which for 2017/18 are 18% where the taxpayer is a basic rate taxpayer and 28% where the taxpayer is a higher or additional rate taxpayer.

    By contrast, a property developer who is trading and running an unincorporated business would be taxed at his or her marginal rate of tax once the personal allowance has been utilised – 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 45% for an additional rate taxpayer.

    Investment vs trading – a question of intention

    The starting point for determining whether the taxpayer is investing in property or trading is the original intention when buying the property.

    Scenario 1 - Ben buys a run-down property as a long-term investment with a view to doing it up and then renting it out. Following a change in his personal circumstances, he sells the property shortly after completing the renovations, realising a gain of £30,000. His intention was to hold the property as an investment and this has not changed as a result of the sale. The gain is, therefore, chargeable to capital gains tax.

    Scenario 2 - Bill also buys a run-down property, but he sees it as an opportunity to make a quick profit. He renovates the property and sells it once the renovations are complete. He makes a profit of £30,000 which he invests in another property that he also does up and sells, this time realising a profit of £50,000.

    Unlike Ben, Bill is trading. His intention is to buy and sell property to make a profit. The profit is charged to income tax as trading income.

    Determining intention will not always be clear cut. HMRC will consider factors such as how long the taxpayer owned the property, whether the sale and purchase is a one-off or one of series of transactions, whether the property has been rented out, whether it was acquired for personal enjoyment and whether there is a connection with the existing trade. This will provide a picture that determines whether the taxpayer is investing in or trading in property.

    To ensure that the unwary do not get caught by unintended tax consequences, the question of whether the taxpayer is making an investment or trading should be determined at the outset.

  • Letting out your holiday home

    If you have a holiday home and decide to let it out, you may be able to benefit from the slightly more generous tax rules that apply to furnished holiday lettings as compared to other types of let, such as a residential let.

     

    To qualify as a furnished holiday let, the property must be furnished and must be in the UK or the EEA. It must also be let on a commercial basis and pass all three occupancy tests.

     

    Test 1 – pattern of occupation

    Test 1 is not met if the total of all lettings that exceed 31 continuous days is more than 155 days in the year. So, for example, if there are lets of 63 days, 32 days, 35 days and 34 days (totalling 164 days), the test is not met and the property is not a furnished holiday letting. A normal holiday letting pattern of one or two week lets will pass the test.

     

    Test 2 – availability conditions

    The property must be available for letting for at least 210 days in the tax year. Days when the landlord stays in the property do not count.

     

    Test 3 – the letting condition

    The property is let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days do not count (unless the let is extended beyond 31 days for unforeseen circumstances, such as the holidaymaker falling ill).

     

    Second bite at the cherry

    As far as test 3 is concerned, it may still be possible for the let to qualify as a furnished holiday letting even if it is not let for 105 days in the tax year by using the following elections:

    an averaging election; or

    a period of grace election.

    Both elections can be used to help a property qualify as a furnished holiday let.

     

    Averaging election

    This is useful where the landlord has more than one holiday let – the election allows test 3 to be met if, on average, the properties are let for at least 105 days in the tax year.

    So, if a landlord has three holiday cottages which are let, respectively, for 150 days, 98 days and 127 days in the tax year, on average, the properties are let for 125 days in the tax year (375 divided by 3) and test 3 is met. If the test is applied to each cottage individually, the one let for 98 days would not qualify – by making an averaging election, all properties qualify.

     

    Period of grace election

    A period of grace election can be made where there was a genuine intention to meet the letting condition, but this did not materialise. The election can be made initially where the letting condition was met in the previous tax year. A further period of grace election can be made the following year if the letting condition is again not met. However, if the letting condition is not met the following year, the property no longer qualifies as a furnished holiday let.

     

    Tax benefits

    Qualifying as a furnished holiday let has a number of benefits:

    • capital gains tax reliefs for trader – business asset rollover relief, entrepreneurs’ relief, relief for gifts of business assets, and relief for loans to traders – are available;
    • plant and machinery capital allowance is available for items such as furniture, fittings and equipment;
    • profits count as earnings for pension purposes.

     

    But, remember, furnished holiday lets form a separate property business and the profits must be worked out separately from other types of let.

  • Relief for early year losses

    Many businesses make losses in the early years as they struggle to become established. The tax system provides various ways for relieving losses generally, with additional help available where the loss is incurred in the early years.

    Option 1: relief for losses in early years of a trade - Unincorporated businesses with losses in the first four years of trade are able to carry the loss back against total income of the three years preceding the loss. The loss is set against income of the earliest year first – the individual does not get to choose the year against which the loss is relieved.

    This can be useful if, say, an individual has been employed and then starts a business making an initial loss, as carrying the loss back may generate a tax refund. However, if income in the preceding years is low, carrying the loss back may not be the best option if this leads to personal allowances being wasted.  The special relief for losses made in the early years of a trade is not available where a business prepares accounts under the cash basis.

    Option 2: sideways relief - A trading loss can be relieved against general income of the year of the loss and/or against general income of the year preceding the loss. The taxpayer can choose whether to relieve the loss against the general income of the current or the preceding year, and which is to take priority where a claim is to be made for both years. However, it is an all or nothing claim and it is not possible to tailor the claim to use only part of the loss so as to preserve personal allowances, for example.

    Where the individual does not have sufficient income to offset the loss in full, the relief may extend to capital gains.

    Where a loss is made in the early years of the trade, relief can be claimed under these provisions rather than under the special provisions outlined above for applying to losses in the early years. As with early years relief, sideways relief is not available where the accounts are prepared under the cash basis.

    Option 3: carry forward - Carrying the loss forward for relief against future profits from the same trade is essentially the default option and can be used if it is neither possible nor desirable to carry the loss back or sideways.

    Best option - In ascertaining the best use for a loss, the aim is generally to get relief at the best possible rate as early as possible. However, what is the best strategy will depend on an individual’s circumstances and the extent that other income is available to mop up a loss. For example, it may not be desirable to carry a loss back or sideways if that results in personal allowances being wasted – in which case carrying the loss forward will be preferable. However, going back or sideways when this triggers a tax refund will generally be advantageous. It is also necessary to be aware of the cap of reliefs, set at the higher of £50,000 and 25% of adjusted net income.

  • Company losses and what to do with them

    Although it is clearly preferable to make a profit rather than a loss, this is not always possible. Where a loss arises, from a tax perspective, decisions have to be made as to how that loss can be utilised and, where there is more than one option, which is the best possible use of the loss.

    Trading loss

    A trading loss is worked out in the same way as a trading profit by making the usual adjustments to the accounting profit or loss to arrive at the tax figures.

    There are various ways in which the loss can be relieved.

    Same accounting period

    It may be possible to relieve the loss in the same accounting period by setting it against other gains or income of that period. This may be the case if the company makes a trading loss but disposes of an asset or assets and has a gain chargeable to corporation tax, or if the company receives interest payments, which can mop up some or all of the loss.

    Carry back

    The trading loss can also be carried back and set against the profits of the preceding 12-month period. This can be a useful option, as it will generate a repayment of corporation tax previously paid – something that may provide a welcome cashflow boost to a struggling company. With falling corporation tax rates, carrying back rather than forward may give a higher rate of relief.

    Example

    ABC Ltd prepares accounts to 31 March each year. In the year to 31 March 2017, it realises a loss of £15,000. In the year to 31 March 2016, it made a profit of £12,000, on which corporation tax of £2,400 was paid.

    The company elects to carry back £12,000 of the loss of £15,000 to set against the profits of the year to 31 March 2016, triggering a refund of the corporation tax paid of £2,400 (plus repayment supplement). The balance of the loss of £3,000 is available to carry forward.

    Carry forward

    The loss can also be carried forward and set against profits of future accounting periods from the same trade. This may be the only option if there has also been a loss in the previous accounting period so carry back is not possible.

    Terminal losses

    If the company stops trading, a claim for terminal loss relief may be possible. This allows a loss made in the final 12 months to be carried back against total profits of the previous three years. It is not possible to tailor how the loss is used – it must be set against the profits of a later year before an earlier year.

    Claims

    Claims for relief will normally be made in the corporation tax return, but can also be made by letter.

  • 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).

    2017/18

    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.

    Example

    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.

    Looking ahead

    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:

    • mortgage interest (or rent paid to a landlord)
    • council tax
    • insurance
    • repairs
    • cleaning
    • heat, light, and power
    • water
    • telephone and broadband (unless already/separately claimed as a business expense)

    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.

  • Mileage payments

    Employees often use their own cars for work, usually claiming expenses in the form of a mileage allowance to cover the costs. While it is up to the employer to decide how much to pay by way of mileage allowances, and indeed whether to pay a mileage allowance, it is the taxman who decides what can be paid tax-free.

    Approved rates

    The approved mileage allowance payments (AMAPs) system allows employers to make tax-free mileage payments to employees up to the `approved amount’. This is found by multiplying the business mileage for the year by the rate per mile for the vehicle in question. Approved rates are set not only for cars but for vans, motorcycles, and bicycles too.

    The approved rates are currently as follows:

    • Cars and vans - first 10,000 business miles: 45p per mile, thereafter 25p per mile
    • Motorcycles 24p per mile
    • Bikes 20p per mile

    For tax purposes, the rate for cars and vans drops from 45p per mile to 25p per mile once the employee has been paid for 10,000 business miles in the tax year. For National Insurance, the rules are different – the 45p rate can be paid NIC-free regardless of how many business miles the employee undertakes in the tax year.

    Example

    Ray is an employee. He uses his own car for business and in the 2017/18 tax year undertakes 14,755 miles in his own car.

    Under the AMAPs system, the tax-free `approved’ amount is £5,688.75 ((10,000 miles @ 45p) + (4,755 miles @ 25p)).

    Tax implications

    Paying mileage allowances at the taxman’s approved rates is the simplest option from a tax perspective – there are no tax consequences and the payments can be ignored by the employer and the employee.

    If the mileage payments made by the employer exceed the approved amount, the excess (the `taxable mileage profit’) is taxable and must be notified to HMRC on the employee’s P11D (in section E), unless the employer has opted to payroll the mileage profit.  So, if in the above example, Ray was paid 50p per mile, he would receive a mileage payment of £7,377.50 - £1,688.75 more than the approved amount. He would be taxed on the `profit’ of £1,688.75.

    Where the allowances paid by the employer are below the approved amount, or if the employer does not make mileage payments, the employee can claim tax relief for the difference between the amount actually received (if any) and the approved amount. The relief can be claimed either on the employee’s tax return or on form P87.

    Passenger payments

    Employees can also be paid a tax-free passenger payment of 5p per passenger per mile for each fellow employee to whom they give a lift, as long as the journey is a business journey for the driver and passengers alike.

     

  •  

  • Student Loan Repayments

    Changes to student loan collection from April 2016.

    Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HM Revenue and Customs (HMRC). Employers have an obligation to deduct student loan repayments in certain circumstances, and to account for such payments 'in like manner as income tax payable under the Taxes Acts'.

    With effect from 6 April 2016, there are two plan types for student loan repayments:

    • Plan 1 - with a 2016/17 threshold of £17,495 (£1,457/month or £336/week); and
    • Plan 2 - with a 2016/17 threshold of £21,000 (£1,750/month or £403/week).

    Plan 1 loans are pre-September 2012 income contingent student loans, and repayments will start when the £17,495 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £21,000 is reached. Previously, these have been repaid outside of the payroll directly to the SLC. From April 2016, they are to be calculated and repaid via deduction from an employer's payroll. So, employers and payrolls must now be capable of coping with both types of plans.

    Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:

    • a new employee's P45 shows deductions should continue - the employer will need to ascertain which plan type the employee has;
    • a new employee confirms they are repaying a student loan - again, the employer will need to confirm the plan type;
    • a new employee completes a starter checklist showing they have a student loan -the checklist will tell the employer which plan type to use; or
    • HMRC issues form SL1 (Start Notice), telling the employer which plan type to use.

    Operating issues

    Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.

    Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee's pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).

    Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.

  • Savings income – do you need to claim back tax?

    From 6 April 2016 onwards, bank and building society interest has been paid gross without the deduction of tax. However, previously basic rate tax was deducted at source unless you were a non-taxpayer who had registered to receive your interest gross.

    If you had savings income in 2015/16, your taxable income was low, and if you hadn’t registered to receive your income gross, you may be due a repayment.

    Tax-free limits

    For 2015/16, the personal allowance was set at £10,600. To the extent that taxable non-savings income did not exceed the savings rate limit of £5,000, savings rate income was taxed at 0%. This meant that an individual could potentially receive up to £15,600 of savings income tax-free if they had no other income.

    Case study 1

    June is 74. In 2015/16, she receives a pension of £8,000 and bank and building society interest of £6,000 (gross) from which tax of £1,200 has been deducted.

    Her total income for the year is £14,000.

    Her pension of £8,000 is fully covered by her personal allowance of £10,600, leaving £2,600 of her personal allowance available to set against her savings income of £6,000.

    The remaining £3,400 of her savings income is taxed at the savings starting rate of 0%. She has no taxable non savings income, so the full £5,000 nil rate savings rate band is available to her.

    Therefore, no tax is due on June’s saving income of £6,000 and she is entitled to a repayment of the tax of £1,200 deducted at source.

    Case study 2

    Margaret is also 74. She receives a pension of £12,000 and building society interest of £6000 on which tax of £1,200 has been deducted.

    Her personal allowance of £10,600 is set against her pension, leaving her with £1,400 of taxable pension income. The savings starting rate band of £5,000 is reduced by the amount of her taxable non-savings income, reducing the amount of savings income eligible for the zero rate to £3,600.

    The first £3,600 of her savings income is tax-free. The remaining £2,400 is taxed at 20% - giving rise to a tax bill of £480. However, as £1,200 has been deducted at source, Margaret is entitled to a repayment of £720.

    Claiming the repayment

    The 2015/16 self-assessment tax return should have been filed by 31 January 2017. Where a tax return has been completed, the repayment can be claimed via the self-assessment system.

    Where there is no requirement to file a tax return, a repayment of tax on savings income can be claimed on form R40.

    Savings allowance from 6 April 2016

    In most cases, the need to claim a repayment of tax deducted from savings income will disappear from 6 April 2016. From that date, bank and building society interest is paid gross and basic rate and higher rate taxpayers are allowed a savings allowance allowing them to receive savings income tax-free up to the level of the allowance, regardless of whether they have taxable non-savings income. The allowance is set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers for both 2016/17 and 2017/18. The savings rate limit and starting rate for savings remain, respectively, at 0% and at £5,000.

  • 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.

     

    Dividend income

    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.

     

    Dividend allowance

    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:

    • dividend ordinary rate: 7.5%
    • dividend higher rate: 32.5%
    • dividend additional rate: 38.1%

    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).

     

    Case study

    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:

    • The first £5,000 is covered by the dividend allowance on which no tax is payable.
    • The personal allowance for 2017/18 is £11,500 of which £8,000 has been used against her salary, leaving £3,500 available. This shelters the next £3,500 of dividend income, which is received tax-free.
    • The basic rate band is £33,500, of which £5,000 has been used up by the dividend allowance, leaving £28,500 available. The next £28,500 of dividend income is taxed at the dividend ordinary rate of 7.5% -- a tax bill of £2,137.50.
    • The remaining dividend of £18,000 is taxed at the dividend higher rate of 32.5% -- a tax bill of £5,850.

    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%)).

     

  • Private Residence Relief for Landlords - Part 1

    With landlords facing capital gains tax (CGT) rates of 18% and/or 28% on the disposal of residential properties, this article considers the availability of private residence relief on disposals by landlords.

    Private residence relief is available to shelter the gain on disposal of a person’s only or main residence. Ownership of a property alone is not sufficient to qualify for the relief; there must also have been occupation of the property as a residence.

    If a let property does qualify for relief, this could add up to a valuable sum, as the following amounts potentially qualify:

    • periods of actual occupation;
    • the final 18 months of ownership (extended to 36 months in certain circumstances);
    • various periods of absence where the absence was followed by reoccupation (the requirement
    • for reoccupation may be relaxed in certain circumstances);
    • up to three years for any reason (TCGA 1992, s 223(3)(a));
    • any length of period of overseas employment (TCGA 1992, s 223(3)(b));
    • up to four years where the taxpayer could not occupy the property because of the location of their place of work or their spouse’s place of work, or because of conditions placed upon them by their employer or upon their spouse by the spouse’s employer (TCGA 1992, s 223(3)(c), (d)); and
    • letting relief equal to the lower of (TCGA 1992, s 223(4));
    • the amount of the gain attributable to letting;
    • the amount of private residence relief; and
    • £40,000.

    Ensuring the property is the taxpayer’s residence - to qualify for relief, the property must be the person’s only or main residence, which carries with it an expectation of occupation with permanence.

  • Private Residence Relief for Landlords - Part 2

    Example - Let property: How much relief?

    Fred bought a house on 1 July 2002 for £12S,000. He occupied the property until 30 September 2005, when he decided to go travelling. He returned to the property on 1 l\/lay 2006 and occupied it until 31 March 2009, when he bought another house jointly with his girlfriend, which they occupied together. He decided to let out his house, and it was let until he disposed of it for £294,697 on 30 June 2016.

    The periods qualifying for relief are as follows:

    Period
    Relief?
    Reason
    1 July 2002 - 30
    Yes
    Occupied as
    September 2005
    main residence
    Period of absence
    of less than three
    1 October 2005 -
    Yes
    years and
    30 April 2006
    reoccupied as main
    residence (TCGA
    1992, s 223(3)(a))
    1 May 2006 - 31
    Yes
    Occupied as
    March 2009
    main residence
    1 January 2015 -
    Yes
    Final 18 months
    30 June 2016
    of ownership
    1 April
    2009 - 31
    Letting relief of
    Although let until
    30 June
    2016,the
    December 2014
    up to £40,000
    period from
    1
    January 2015 to 30
    June 2016 is
    relieved by the final
    period exemption.

    The property was owned for 14 years in total, with eight years and three months attracting private residence relief. The total gain was £169,697 and £100,000 of the gain (8.25/14 years x £169,697) qualifies for private residence relief.

    The gain attributable to letting is for a period of five years and nine months and is £69,697 (5.75/14 years x £169,697). As this exceeds the maximum amount of relief of £40,000, the amount of relief for the letting period is restricted to £40,000.

    This leaves Fred with a chargeable gain of £29,697.

  • Private Residence Relief for Landlords - Part 3

    Which property is the only or main residence? Where a person has more than one residence (which is different to owning more than one residential property), determining which property is the main residence can either be decided on the facts, or an election can be made to nominate which is the main residence (TCGA 1992, s 222(5)).

    Where an election is made, the property that is nominated does not have to factually be the 'main' residence, but it does have to be a dwelling house in use as the person’s residence (i.e. occupied on a permanent basis) for the election to be valid.

    Time limits apply for making an election. An election can be made within two years of whenever there is a new combination of residences. This happens when a person starts occupying a dwelling as a residence, or ceases occupying a property as their residence (which may be different to when the property is acquired or disposed of).

    An election can be varied at any time, and backdated for up to two years from the date that it was given. HMRC guidance states:

    ‘A variation will often be made when a disposal of a residence is in prospect or the disposal has already been made and the individual making the disposal wishes to secure the final period exemption.

    For example, where an individual with two residences validly nominates house A, they may vary that nomination to house B at any time. The variation can then be varied back to house A within a short space of time. This will enable the individual to obtain the benefit of the final period exemption on house B with a loss of only a small proportion of relief of on house A.’

    Ownership by husband and wife - for the purposes of private residence relief, a husband and wife may only have one residence. However, when it comes to letting relief, in the case of joint ownership by husband and wife each may have relief of up to £40,000.

  • Claiming tax relief for employment expenses

    In most cases, employees will be able to claim back any expenses that they incur in doing their job from their employer. However, where the employer will not reimburse the employee’s expenses, there may be tax relief to be had.

    Qualifying expenses

    Relief can only be claimed for qualifying expenses. These may be either qualifying travel expenses or expenses wholly, exclusively, and necessarily incurred in performing the duties of the employment. Any expense that meets this condition is eligible for relief, although those seeking to make a claim should be warned that this is a strict test.

    Travel expenses

    Employees may incur travel expenses as part of their job. While there is generally no deduction for the normal day to day costs of travelling between home and work (unless the employee is temporarily working at another location for less than two years), employees may be able to obtain tax relief for the cost of business journeys where this is not met by the employer. To qualify, the journey must be a business journey and not substantially the same as the normal home to work journey – for example, travelling to visit a supplier in another part of the country or attending a meeting during the day at a customer’s premises. A deduction may be claimed for the cost of public transport, parking, etc.

    A deduction may also be claimed for associated expenses on food, drink, and overnight accommodation.

    Business mileage

    Where the employee uses his or her own car for business travel and the employer does not meet the cost, the employee can claim a deduction based on 45p per mile for the first 10,000 business miles in the tax year, and 25p per mile thereafter. If the employer does pay a mileage allowance, but it is less than this, the employee can claim relief for the shortfall.

    Fees and subscriptions

    If the employee pays a subscription to an approved professional body and the employer does not meet the cost, the employee is entitled to the tax relief as long as membership is necessary or helpful to his or her job.

    Working at home

    Where the employee works at home, they may be able to claim relief for the additional costs incurred as a result, such as additional electricity and gas used. A claim of £4 a week does not need to be substantiated.

    Partial reimbursement

    If the employer meets some but not all of the cost, the deduction claimed must be reduced by the amount reimbursed by the employer.

    Making the claim

    Tax relief for employment expenses can be claimed via the self-assessment return where the employee needs to complete one. If the employee does not need to complete a tax return and the claim is not more than £2,500, it can be made on form P87.

  • Effective salary sacrifice arrangements

    A salary sacrifice arrangement is one where an employee gives up some of his or her cash salary in return for a non-cash benefit. Salary sacrifice arrangements used to be a popular way to take advantage of tax and National Insurance exemptions for benefits in kind. However, new valuation rules were introduced from 6 April 2018, removing most of the benefits for all but a handful of benefits in kind.

    So, where a salary sacrifice arrangement remains tax-effective, what steps should be taken to ensure the arrangement is acceptable to HMRC?

    Which benefits?

    Post 5 April 2017, where provision is made via a salary sacrifice arrangement, the tax and National Insurance exemptions associated with the following remain available:

    • payments into pension schemes;
    • employer-provided pension advice;
    • childcare vouchers, workplace nurseries and directly contracted employer-provided childcare; and
    • bicycles and cycling safety equipment, including cycle to work schemes.

    For all other benefits, with the exception of low-emission cars, the benefit is now valued at the higher of the salary foregone or cash alternative offered and the normal cash equivalent value (which will be zero where the benefit would otherwise be exempt). Transitional rules delay the start date of the new valuation rules for arrangements in place at 5 April 2017.

    Entering into a salary sacrifice for benefits not on the above list can still generate savings as the NIC liability will move from Class 1 to Class 1A, saving employee’s NIC. However, these may not be sufficient to justify the administration costs involved.

    Keeping it effective

    For HMRC to accept that a salary sacrifice arrangement is effective, the employee’s contract must be varied to show the lower salary and the benefit in kind taken in exchange. The employee must not simply be able to revert back to the higher salary at will – if this is the case, HMRC will disregard the salary sacrifice arrangement and tax employee by reference to the higher salary, losing the benefit of any exemption attaching to the benefit in kind. If the employee wants to opt out of the salary sacrifice, again, the terms of his or her contract should be changed to reflect the revised arrangement.

    Further, the actual arrangements must mirror the contractual position so that the employee actually receives the lower salary and the benefit in kind.

    Timing is important. The contract must be varied to reflect the salary sacrifice before the changes come into effect – if the contract is not varied until after the changes have been implemented, the employee will be taxable on the higher salary (even though he has not received it), as he remains contractually entitled to do so.

    Still useful

    Although the benefits of salary sacrifice arrangements are much reduced, they still have a role to play – but where used it is important that they are effective in HMRC’s eyes.

  • Dividends

    Dividends have lost some of their appeal thanks to the changes announced in the 2015 Summer Budget, and implemented from 6 April 2016. Basically, the effective income tax rate on dividends has increased by 7.5% across the bands, significantly narrowing the efficiency margin. However, where the alternative is a bonus subject to employees' and employers' National Insurance contributions (NICs), they are still relatively tax-efficient, and are likely to remain the preferred method of extracting profits (broadly above the personal allowance) for many family-owned companies.

     

    Beware of insufficient company reserves - The company may pay out as dividends only what it can afford to, when measured against its distributable profits - basically all the after-tax profits it has ever made since incorporation, after all previous dividends it has paid out.  It does not necessarily matter if a company is making losses, or has just made losses in the latest accounting period; what matters is whether there remains an overall distributable surplus.

     

    Get the balance right - Taxpayers often assume that they can vote dividends in the amounts they see fit, for various family shareholders. By default, dividends must be voted in proportion to shareholdings. This is arguably subject to the company’s Articles of Association, but it would be most unusual for the Articles to deviate from this standard.

     

    Dividend waivers - One of the ways to get around this is to 'waive' one’s entitlement to a proposed dividend by means of a dividend waiver, in respect of some or all of one’s shares. The waiver can be in respect of a future dividend, or several future dividends, or apply for a given period.

     

    Pitfalls with waivers - A waiver is a formal document: it is a legal deed of waiver so must be drawn up correctly, and must be signed and witnessed accordingly.  Waivers cannot be implemented retrospectively; they must be in place before entitlement to the dividend arises. They should not last for more than twelve months.

     

    Alphabet shares instead? - If waivers are likely to be a regular feature, then it may be better to issue a separate class of shares to the affected shareholder, that may well rank on an equal footing with the original class of shares, but effectively circumventing the presumption that all shares of a particular designation are equally entitled to a dividend. It is generally recommended that such shares rank on an equal footing so that they are demonstrably and significantly more than just a right to income.

     

    Pitfalls in relation to timing of dividends - A common pitfall with otherwise valid dividends is that the dividend paperwork must also be in order - and timeous.

     

    ln particular, interim dividends may be varied at any time up until they are actually paid, and if payment is effected by journal entry rather than with a money transfer (cheque, bank credit, etc.) HMRC’s position is that it is not effected until it is written up in the company’s books and accounting records. ln HMRC’s company taxation manual (at CTM15205), HMRC is quite clear that if the journals are written up later on, the dividend will be treated as paid on that later date - even if in a later income tax year.

     

    Conclusion: Despite the government’s best efforts, dividends remain a very important component of the profit extraction/remuneration strategy of most family companies. There are, however, numerous opportunities to go wrong, and it is important to work with your accountant to develop (and stick to) a compliant regime that works for your business.

     

  • Useful Links

  •  

  • Corporation Tax Losses - New Regime - Part 1

    Corporation Tax Losses - New Regime
    Corporation Tax losses are being radically reformed.
    However, there will now be restrictions on
    the proportion of brought forward losses that
    Summary of the changes
    may be relieved against current (and future)
    New losses will not be 'streamed' as they have been in
    profits. So, brought forward losses may not
    the past. Historically, trading losses could be set only
    reduce current year profits to nil, but only as to
    against future profits of the same trade, and not against
    50%. However, it must be emphasised that this
    (say) profits from other trades, or investment income.
    applies only to 'large' losses, running to
    Similar restrictions applied to some non-trading losses.
    millions of pounds. The vast majority of
    Such distinctions will largely be irrelevant for new
    family companies will be completely unaffected
    losses.
    by this restriction.
    Also, 'group relief' for losses will no longer have to be
    Please note that this draft legislation may change
    set off only in the period of the loss. Where a company
    prior to Royal Assent.
    (that is in a qualifying group of companies) makes
    losses, it has previously been able to surrender them to
    Losses arising from accounting periods beginning
    other companies in the group, for them to use against
    on or after 1 April 2017 may be carried forward
    their own profits. But there were strict rules that said
    against the company's total profits, rather than
    losses could be relieved in this way only against profits
    against the same income class as gave rise to
    made by those other companies during the same loss-
    the loss. This applies to
    making period. This restriction has also been removed
    so, in principle, losses arising under the new regime
    trading losses;
    may be carried forward, and then group relieved in later
    periods.
    property business losses (which broadly
    had this flexibility anyway);
    These changes amount to a significant boon to many
    companies. such as those:
    non-trading deficits on loan relationships,
    such as loan interest;
    which have more than one trade and (for
    example) one trade makes losses that it cannot
    management expenses; and
    always relieve fully in the year of loss;
    non-trading losses on intangible fixed
    assets.
    which have both trading and investment
    activities running alongside (or capital gains),
    Losses may basically be claimed in any order,
    and losses under the 'old' regime were
    and in any amount - again, a significant departure
    1
    sometimes too large to be fully offset against
    from the past.
    other income in the period of the loss; and
    There are numerous conditions, such as a trading
    in groups where a company makes a substantial
    loss may be carried forwards against total profits
    loss that it is unable to relieve across the rest of
    only if trade Is continuing & has not become
    the group in just the loss-making period.
    negligible (to prevent keeping
    trades ticking over to maintain
    losses for use against other income in future
    years). If the conditions are not satisfied, then the
    losses will be streamed as before.
  • Corporation Tax Losses - New Regime - Part 2

    Trading
    losses
    brought
    forward
    from
    Example: Loss relief restriction
    accounting periods commencing before 1 April
    2017 will still be streamed so, for example, an 'old'
    A Ltd is a singleton company in mainstream retail,
    trading loss will still have to be set against future
    with trading profits (net of in-year losses) of £14
    profits arising in the same trade.
    million and brought-forward trading losses of £20
    million. Under the 'old' regime, the losses brought
    Group relief
    forward would simply offset the current profits and
    The rules for group relief have likewise been
    leave £6 million losses against the next available
    relaxed, so that losses arising in accounting
    profits of that trade.
    periods beginning on or after 1 April 2017 may
    be group relieved in later accounting periods,
    Under the new regime, it will get:
    and not just against profits made in the rest of the
    group during the period in which the loss arose.
    100% loss relief against the first £5 million, but only
    50% loss relief against the balance of profits, of £9
    However, in the later period(s) following its
    million So, it will be able to relieve £9.5 million in profits,
    loss, a company must first use up those
    but £4.5 million profits will still be taxable in the year,
    brought forward 'new' losses against its own
    with £10.5 million in brought-forward losses still left to
    profits before surrendering its losses to other
    use.
    group members, and the claiming members must
    first use up their own losses brought forwards
    Conclusion
    before they can claim group relief on brought
    There is much to like in these changes. There will be
    forward
    losses
    from
    the
    surrendering
    far greater flexibility going forward than previously. But
    company. Unsurprisingly, there are several other
    the rules for dealing with 'old' pre-April 2017 losses, as
    conditions.
    well as 'new' losses, are quite involved.
    Restriction
    The new regime is much more permissive and
    The new regime imposes a 50% cap on using
    marks a major shift in the government's attitude
    losses brought forwards against profits in later
    towards corporate losses. For the vast majority of UK
    years. It will soon be possible for a company to
    companies, there is no real downside, as the de
    make profits but not to be able to relieve them in
    minimis threshold at which the restriction part of the
    fult despite substantially larger losses brought
    new regime starts to apply is £5 million. The
    forward. The government apparently wants to
    restriction will really affect only the very largest of
    ensure that large initial losses do not prevent big
    companies, groups, and multi-nationals - essentially,
    companies from paying tax for many years
    only those companies that might realistically expect to
    afterwards.
    have a future, after making losses of more than £5
    million.
    This restriction will apply only where a
    company's profits in a year exceed £5 million
    (although the threshold is shared amongst
    members of a group). It will also apply to pre-
    April
    2017 losses brought forward.

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