Helping you grow your business
Helping you keep more of your income
We understand your needs
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.
We provide a range of compliance services for sole traders:
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.
Our compliance services include:
We are a member firm of the Association of Chartered Certified Accountants and our rigorous internal procedures mean that clients can be confident that their accounts have been prepared in line with the Association’s standards of and the Companies Act 2006.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
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 our expertise and the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time. We have considerable experience in dealing with HMRC and are also experienced in representing our clients should they be subject to a tax enquiry or investigation.
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 • Value added tax is one of the most complex and onerous tax regimes imposed on business. We provide an efficient cost effective VAT service which includes assistance with VAT registration and help with completing your VAT return.
Payroll • Administering your payroll can be time consuming and the task is made all the more difficult by the growing complexity of taxation and employment legislation. 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.
We can work with you to:
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.
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
MAKE AN APPOINTMENT
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:
If he had instead put his properties into a company, the company would first have to pay corporation tax on its profits:
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.
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:
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:
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.
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.
Qualifying as a furnished holiday let has a number of benefits:
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.
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.
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.
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.
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.
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 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).
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.
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.
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:
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.
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)).
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.
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 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:
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.
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.
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%)).
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:
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:
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.
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.
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.
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.
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?
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:
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.
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 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.
Corporation Tax Losses - New Regime - Part 1
Corporation Tax Losses - New Regime - Part 2
MAKE AN APPOINTMENT
Whether it is answering questions, making an appointment, or pointing you in the right direction, we look forward to hearing from you.
You can mail us
Adrian Mooy & Co Ltd - 61 Friar Gate Derby DE1 1DJ -
Adrian Mooy & Co Ltd is registered to carry out audit work in the UK by The Association of Chartered Certified Accountants.
Details about our audit registration can be viewed at www.auditregister.org.uk under number 8011438.
© Copyright 2017 Adrian Mooy & Co Ltd