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61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
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01332 202660

Blog

Annual investment allowances

Adrian Mooy - Saturday, April 04, 2020
 
From January 2019, businesses considering investing more than £200,000 in plant and machinery may benefit from a change to the capital allowances rules, which should allow them to obtain tax relief at a much earlier time.

 

Broadly, business profits, after any adjustments for tax purposes (for example depreciation of fixed assets), are reduced by capital allowances to arrive at taxable profit. Since capital allowances are treated as a trading expense of a particular accounting period, they can potentially increase a loss, or turn a profit into a loss for tax purposes. This in turn, will have an impact on the amount of tax payable by a business - so where a business is considering expenditure on qualifying items, it may be beneficial to undertake some upfront planning.

 

Annual investment allowance

 

The annual investment allowance (AIA) for capital allowances purposes is a 100% allowance for qualifying expenditure on machinery and plant. Put simply, this means that a business buying a piece of equipment that qualifies for the AIA can deduct 100% of the cost of that asset from the business’s profit before calculating how much tax is due on that profit.

 

VAT-registered businesses claim the AIA on the total cost of the asset less any VAT that can be reclaimed on that asset. Non-VAT-registered businesses can claim the AIA on the total cost of the asset.

 

The AIA was set at its current level of £200,000 from 1 January 2016, but it was announced in the 2018 Autumn Budget that, subject to enactment, the limit will be increased to £1,000,000 from January 2019. This measure is designed to stimulate business investment in the economy by providing an increased incentive for businesses to invest in plant or machinery. However, the increase will only be available for a limited time. Under current proposals, the AIA limit will revert to its current level from 1 January 2021. Businesses considering making significant investments in, say, the next five years, may wish to consider bringing their purchase forward, so as to benefit from the increased AIA limit and obtain immediate tax relief on their investment.

 

Where a business spends more than the annual AIA limit, any additional qualifying expenditure will still attract relief under the normal capital allowances regime, but this will result in relief being spread over several years, rather than in one go.

 

It is worth remembering that connected companies are only entitled to one AIA between them.

 

Transitional rules

 

The legislation includes a series of transitional rules, which can be complex. It is worth seeking guidance where expenditure on qualifying AIA items is being considered and the business has a chargeable period that spans either of:

 

 • the operative date of the increase to £1,000,000 on 1 January 2019, or
 • the operative date of the reversion to £200,000 on 1 January 2021.

 

Running a business from home

Adrian Mooy - Saturday, April 04, 2020
 
Small businesses can choose to be taxed on the basis of the cash that passes through their books, rather than undertaking the more complex accounting calculations designed for larger businesses. This is known as the ‘cash basis’, and where a business opts to use it, it will also be possible for that business to use certain simplified arrangements for claiming expenditure in working out taxable profits for income tax purposes. Flat rate expenses can be claimed for business costs for vehicles, working from home, and living at the business premises.

 

Working from home

 

Where a business owner runs the business from home they will be able to claim flat rate expenses for business use of the property. This means that it will not be necessary to work out the proportion of personal and business use, for example, how much of their utility bills relate to business use. Instead a monthly deduction will be allowable provided certain criteria are satisfied. The current rates are as follows:

 

Number of hours worked per month   Applicable amount
25 or more                                          £10.00
51 or more                                          £18.00
101 or more                                        £26.00

 

HMRC's view is that ‘number of hours worked’ means hours spent wholly and exclusively on ‘core business activities’ in the home with core business activities comprising the provision of goods and/or services, the maintenance of business records and marketing and obtaining new business.

 

Example

 

John worked 60 hours from home for a period of 10 months, and worked 110 hours during two particular months. He can claim the following amount against his income for tax purposes:

 

10 months x £18.00 = £180.00
2 months x £26.00 = £52.00
Total amount claimed = £232.00

 

Living at the business premises

 

Some businesses use their business premises as their home, for example, hotels and guesthouses. Where a premise is used for both business and private use, the business owner may, instead of making the standard deduction outlined above, make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:

 

Number of relevant occupants  Applicable amount
1                                                £350
2                                                £500
3 or more                                   £650

 

A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.
 
Example

 

Sandy runs a guesthouse and also lives there all year round with her husband. Her overall business expenses are £10,000. She can claim a flat rate deduction for private use as follows:

 

12 months x £500 per month = £6,000
Expenses claimed against income £10,000 - £6,000 = £4,000
Where a person claims a flat rate deduction, they are still able to claim a separate deduction for fixed costs such as council tax, insurance and mortgage interest.

 

Expenses checker

 

You don’t have to use simplified expenses. You can decide if it suits your business. HMRC provide a simplified expenses checker, which can be used to compare what you can claim using simplified expenses with what you can claim by working out the actual costs. The checker can be found online at https://www.gov.uk/simplified-expenses-checker.

 

Claims

 

Anyone wishing to utilise the simplified expenses regime should ensure that they keep records of business miles for vehicles, the number of hours worked at home, and details of people living at the business premises over the year. At the end of the year, work out how much can be claimed and include these amounts of your self-assessment tax return.

 

Take advantage of interest-free loans

Adrian Mooy - Friday, April 03, 2020
 
Employers can offer employees a tax-free cheap or interest-free loan of up to £10,000 per year.

 

Subject to a few conditions, as long as the total amount outstanding on all loans from an employer to an employee does not exceed £10,000 at any time in the tax year, then the loans are ignored for the purposes of the rules on beneficial loans for both income tax and national insurance contributions purposes.
 
Conditions

 

No taxable benefit-in-kind will arise where:

 

 • the loan has been made on commercial terms by employers who lend to the general public; or

 

 • the total of all loans made to an employee does not exceed £10,000 at any time in the tax year.

 

It is important to remember that this is an all or nothing exception. If, however briefly, the loan balance rises above £10,000 at any time in the tax year, then the exception will not be available and the benefit-in-kind will be taxed in full.

 

Example

 

In March 2020, Jim (a higher-rate- 40% taxpayer) needs to renew his annual season ticket to travel to work, which costs £8,200. To pay for this out of his take-home pay he would need to earn gross pay of £14,138 (£14,138 less tax at 40% (£5,655) and Class 1 NICs at 2% (£283)).

 

If his employer gives him an interest-free loan of £8,200 to enable him to buy the season ticket, it only costs Jim the £8,200 he borrows and subsequently repays to his employer. Providing the total of all beneficial loans made to Jim by his employer is less than £10,000, no taxable benefit arises, so the cost of the benefit is nil.

 

In addition, since the loan is not salary, his employer will not have to pay secondary Class 1 NICs on the amount borrowed.

 

Individual loans

 

No taxable benefit arises in respect of loans, however large, if the loan is made by an individual and it can be shown that it was made in the normal course of his/her domestic, family or personal relationships (for example, where the owners of a business make a loan to a son or daughter). HMRC are however, likely to take a close look at cases where such a claim is made.

 

Tax staff dealing with the tax affairs of an employer will liaise with staff dealing with the business accounts of that employer before agreeing that this exemption applies. If the loan is shown as an asset in the accounts of the employer’s business, HMRC will be less inclined to accept that this was made in the course of a private relationship.

 

This exemption can only apply where the lender is an individual. It cannot, therefore, apply where a loan is made by a company, even where that company is controlled by somebody with the relevant personal relationship. However, certain loans can be chargeable under the employment-related loan rules where they are made by an individual having a material interest in a close company. In these cases, where the loan is made by the individual with the material interest, the exemption for loans made in the course of personal relationships can still be available.

 

Similarly, no tax charge can arise if an employee is able to demonstrate that he has derived no benefit from a loan made to a relative of his. This exemption applies to the charge in respect of a loan and also applies where a debt is released or written off.

 

Loans to directors

 

Loans to directors are prohibited under the Companies Act 2006, though loans not exceeding £10,000 are permitted and larger loans may now be made with approval of the members.

 

Auto enrolment threshold changes for 2020/21

Adrian Mooy - Wednesday, April 01, 2020
 
New thresholds
 
The government has set the bands and thresholds for workplace pensions. These apply for paydays on or after 6 April 2020. For employees between 22 and 74 where you pay at the rate of:

 

 • £6,240 per year, they are entitled to join your workplace pension and contribute to it but they do not have to.

 

 • Between £6,241 and £10,000 per year, they can choose to join your workplace pension. If they do, both you and they must contribute to it.

 

 • More than £10,000 per year, you must auto-enrol them in your workplace pension and both you and they must contribute.

 

From April 2020 you will only have to contribute to an employee’s workplace pension if they join your scheme and you pay them at the rate of £6,240 or more per year.

 

An informal company wind-up

Adrian Mooy - Friday, March 20, 2020
 
Capital or income

 

Usually, when a company distributes its profits to its shareholders they are liable to income tax on the payments they receive. However, a special rule means that distributions made in the course of winding up a company are taxed as capital instead. This provides tax-saving opportunities.
 
Example. Owen and Jane are equal shareholders of Acom Ltd. Both are higher rate taxpayers. They decide to close the business and appoint a liquidator to wind up the company. All distributions of profit left in Acom from this point are capital meaning that Owen and Jane can deduct any unused part of their capital gains tax (CGT) annual exemption (£12,000 for 2019/20) and pay tax on the balance at a maximum of 20%. Assuming Acom has £98,000 to distribute in total, Owen and Jane would each be liable to CGT on £49,000. If their CGT exemptions are available in full they would each have to pay tax of up to £7,400 (£49,000 - £12,000) x 20%) but it would be less if they were entitled to entrepreneurs’ relief (ER).

 

By comparison, if Acom distributed its profits before starting the winding up process, Owen and Jane would each be liable to income tax of at least £15,925 (£49,000 x 32.5%). By comparison the CGT bill is less than half that, but there’s still room for further tax saving.

 

Winding up costs

 

Usually, the tax advantage of capital distributions is only available when you appoint a liquidator to wind up your company. The trouble is a liquidator’s fees can be high and, depending on the value of your company, might significantly eat into or even outweigh the tax saving achieved.
Rather than paying a liquidator to wind up your company you could do it yourself informally by notifying Companies House of your intention. However, CGT treatment will only apply if the amounts available to distribute are no more than £25,000 - any more than that and the whole of any distribution is taxed as income.

 

Reduce the distributable amount

 

If your company’s net value is more than £25,000 you’ll need to reduce it before you can use the informal winding up tax break. That will require you to make distributions from your company on which you’ll have to pay income tax. Despite this you can still save on tax and costs. You’ll need to crunch the numbers to see if it’s worthwhile.

 

Example. Shaun is a higher rate taxpayer and the only shareholder of Bcom Ltd. It has distributable reserves of £35,000. Shaun could formally liquidate Bcom so that what he receives, after paying the liquidator’s fees of, say, £3,000, is liable to CGT. This would leave him with £28,000 after tax. If instead he paid a dividend of £10,000 and then applied to Companies House to dissolve the company, he would net £29,150. Not a massive tax saving but Shaun also avoids the time and red tape that goes with a formal liquidation.

 

Reduce the value of your company to £25,000 by making distributions to shareholders and informally winding up the company. This will save the cost of a liquidator’s fees. Plus, each shareholder can use their annual capital gains tax exemption to reduce the amount on which they pay tax on their share of the final £25,000 distributed from the company.

 

Preparing for year-end PAYE

Adrian Mooy - Thursday, March 19, 2020

HMRC has issued its last-minute advice for employers about submitting their final PAYE reports for 2019/20 and preparing for 2020/21.

 

End of year.

 

As usual, this time of year is a busy one for employers. There are several routine but important actions you need to take plus one or two new ones for 2020/21.

 

PAYE reports.

 

When you run your last payroll for 2019/20 you must use the final submission indicator in the full payment submission (FPS) to notify HMRC or it will assume there’s more to come and bombard you with reminders. If your software won’t accept the final report indicator on an FPS, submit an employer payment summary (EPS) with the indicator ticked instead. If you simply forgot to use the indicator, send an EPS with the indicator ticked to show that you didn’t pay anyone in the final pay period and use the final submission indicator. The deadline for your final FPS or EPS for 2019/20 is 19 April. If you find a mistake in your 2019/20 figures, there are different ways to correct it depending on the software you use.

 

Updating codes for 2020/21.

 

HMRC has just completed the issue of P9 notice of coding email and paper notifications of new tax codes which you must apply for your employees. The codes have been calculated using 2019/20 rates and thresholds because those for 2020/21 will not be definite until any changes announced in the Budget are made. If this is the case, you’ll receive a P6b notice with detail of the new codes which you should implement on the next payroll run.

 

Other changes.

 

Changes to the employment allowance mean that entitlement will not be automatically carried forward to 2020/21 and you must include a claim through your payroll software. Don’t forget to download and install the updated payroll app from your software provider or HMRC’s “Basic PAYE Tools”. Finally, check that your employees’ pay is at least equal to the new national minimum/living wage rates which apply from 6 April.

 

Make sure the “final submission” indicator is used for your last payroll run for 2019/20 by 19 April, you claim the employment allowance for 2020/21 and your employees’ pay is at least equal to the new national minimum wage rates.

Leasing assets to your company

Adrian Mooy - Monday, March 16, 2020
 
Over the last decade, the emergence of the sharing economy has meant that millions of people worldwide are now able to earn supplemental income from personal assets. Companies like Airbnb have expanded beyond short-term rentals; it is now possible to book local tours, classes, photoshoots, and other bespoke experiences. While this opens up a world of opportunities, any business should be structured properly to ensure tax efficiency.

 

Individual or company ownership?

 

If an individual is already earning via self-employment or PAYE, they may seek to incorporate a new business - particularly if they are in the higher-rate tax bracket - in order to take advantage of favourable corporation tax rates and tax-planning options. Although there are many more advantages to incorporation, there are some circumstances where an individual may prefer - or require - to retain ownership of a personal asset, rather than transferring ownership to a limited company.

 

Unless the individual has already built up funds in an existing company from a related venture, a newly-formed company will have limited capital, preventing it from purchasing the asset outright. The transfer can be achieved through crediting a director’s loan account to represent the amount due to the director. In the case of an existing company, if the director has borrowed money and has not yet repaid it, this can offset the balance owed. In either case, an individual must raise an invoice to their company listing all items; the sale price must be in keeping with the market value at the time of sale.
 
With a wide range of possibilities, careful consideration is crucial. This would be especially true for the transfer of specialised or classic/ antique equipment, where asset values may appreciate over time. If the asset was purchased many years ago and current market value has appreciated beyond the purchase price, the sale could give rise to a capital gains tax (CGT) liability for the individual. In this scenario, a director’s loan is unfavourable as the individual has incurred a tax bill but has received no financial compensation for the sale; a transfer of funds should be made, if possible.

 

Renting assets to the company

 

An entirely legal alternative would be for the individual to rent their personal asset to their limited company for business use. To ensure the arrangement is legitimate, the individual should draw up a formal lease agreement with the company, treating the agreement as if they were leasing to another party. The agreement should detail the monthly cost of the lease, due dates for payment(s), the term of the lease, any requirements relating to insurance, and arrangements in the event of a missed payment. The rental fee must be reasonable and in line with rental rates for similar assets locally.

 

The individual would then declare the lease/ rental income via a self-assessment tax return. While retaining the ability to use the asset for personal use may be required, if it is instead used solely for business purposes this can reduce one’s overall tax liability by allowing the individual taxpayer to deduct several expense types from their rental profits. This could include insurance, interest, repairs/maintenance and/or general administrative costs, amongst others.

 

You may rent many asset types to your limited company; office space, machinery, equipment, vehicles, computers, property, etc. Certain assets may require special treatment, so you should always consult with a professional to ensure your arrangements are legitimate.

 

Rollover relief

Adrian Mooy - Friday, March 13, 2020
 
Rollover relief is a relief available for capital gains made on business assets sold by traders such as sole traders or partnerships and includes those in furnished holiday letting businesses. This article focuses on unincorporated businesses, but the relief is also available to companies. The relief can also be used for sales by individuals if the business asset is being used in a company in which they have at least 5% of the voting shares. If an individual has more than one trade (e.g. if they have two sole trader businesses) they can rollover a gain on one trade to a purchase of an asset in their other trade.

 

What does rollover relief do?

 

Rollover relief, sometimes called ‘replacement of business assets’ relief, is a form of deferral for capital gains tax (CGT) purposes. Rather than a trader having to pay CGT on a gain on the sale of a business asset immediately, if the original asset is replaced with another business asset to be used in the trade, it is possible for the gain to be deferred until such time as that replacement asset is sold.

 

Unlike gift relief, rollover relief does not change the identity of the taxpayer of the gain, but it does change the timing of the payment, which moves from the date of the sale of the original asset to the date of the sale of the replacement asset. The replacement needs to be acquired within one year before and three years after the sale of the original asset, although with the approval from HMRC this window could be extended.

 

Why is it required?

 

When a business is trading, it will need to upgrade or replace assets occasionally. It is not convenient or conducive to efficient business practice for the trader to incur a CGT charge every time they sell and replace their business property.

 

Rollover relief allows the trader to put the CGT liability out of mind until they sell an asset that they are not immediately replacing.

 

What qualifies?

 

Not all assets qualify for rollover relief. The detail is in the legislation, but the most common qualifying assets are land and buildings, aircraft, goodwill, and fixed plant and machinery.

 

If the trader were a farmer, for instance, they could claim rollover relief on a new milking parlour but not on a new combine harvester, which would be movable machinery. More unusual qualifying assets include space stations, satellites, and hovercrafts!

 

The replacement asset does not need to be the same type of asset as the original asset, so a building could be replaced with an aircraft and still be eligible.

 

Entrepreneurs relief

 

It may not be in the trader’s best interests to roll over the gain.

 

For example, if the current gain would be eligible for entrepreneurs’ relief, but any future gain would not be, it may be better to pay the gain at the time of the sale of the original asset.

 

Rollover relief requires a claim, so does not happen automatically. The claim must be made within four years of the end of the tax year in which either the gain arises on the original asset, or the replacement asset is purchased, whichever is later. Provisional claims are available to defer the gain even if the new assets have not yet been purchased at the time the CGT would be normally due.

 

Your State Pension

Adrian Mooy - Friday, March 13, 2020
 
In the current tax year, for the first time, the cost to the UK government of state pensions is set to surpass £100 billion, according to the Office for Budget Responsibility. This figure does not take into account other benefits state pensioners can claim, and is set to rise each year.
 
There will come a point where the state pension scheme is unsustainable, as some countries across the world have already found.

 

The rising cost of UK pensions is caused partly by improved healthcare, which helps us all to live longer. The government has tried to redress it to some extent by increasing the age state pensions can be claimed, but this has not dropped the annual figure, which is now 14% of GDP.

 

Voluntary pensions

 

In the UK, the employer must have a pension scheme in place, but it does not have to be used. Employees can opt not to contribute to the scheme, and if that is the case the employer does not have to contribute either.

 

Self-employed workers also have the choice whether to contribute to a pension or not.

 

The need for a pension other than from the state

 

Most people have ideas about how they would like to live when they retire, but very few think about how they will finance the lifestyle they desire until it is too late. For those that wait until their forties to start thinking about a pension, the contributions needed to give them a reasonable pension can be too high.

 

For people in their twenties, retirement seems a very long way off, but that is the best time to get something in place. A delay of just ten years in starting a scheme can make a big difference to the pension pot when they reach retirement. This is because for those ten years all their contributions will be making money and will continue to do so for the length the scheme has to run.

 

Of course, there are some jobs that have pensions attached, such as the armed forces and many roles within large organisations. Unless someone is lucky enough to have a pension included, they really need to think about saving for their future now.

 

A tax-efficient way of saving

 

Pensions are the most tax-efficient way of saving as tax relief is given on the contributions. This relief is given at the highest rate of tax being due as long as the contributions are not more than the annual salary or do not exceed the annual allowance, which is currently £40,000.

 

All other forms of savings or investments are taxed for most people, and for those that do not have any other income, they can claim their returns on investments tax-free. A pension goes one step further and basically amounts to a contribution from the government towards your retirement pot.

 

Prepare for the worst?

 

The government needs to do whatever it can to reduce the burden of state pensions and whether someone is employed or a business owner, they can’t rely on the government to provide for their old age. Our current trajectory makes it likely the government will go the way of other countries, and state pensions will be stopped.

 

VAT and free meals for staff

Adrian Mooy - Friday, March 13, 2020
 
If a business provides a canteen for staff, VAT is due on what the business actually charges for the meals, etc. If a business charges the market rate, VAT would be due in the normal way.
 
However, if a business provides subsidised or free meals to staff, VAT is still only due on the actual monies received. This means that no VAT is due on catering supplied free to staff and is only due on what the staff actually pay for a subsidised meal. Even if catering is provided free to staff, any associated input tax is fully recoverable (assuming the employer is not partially exempt) as a legitimate business expense.
 
Employee contributions
 
Where employees pay for meals and so on under a salary sacrifice arrangement, following the judgment of the CJEU in Astra Zeneca (Case C-40/09), employers must account for VAT on the value of the supplies unless they are zero-rated. Subject to the normal rules, the employer can continue to recover the input VAT incurred on related purchases.

 

However, in RW Goodfellow and M] Goodfellow (MAN/85/0020), the tribunal held that deductions made from an emp1oyee’s wages to take account of catering and accommodation paid in accordance with the Wages Order in force for the industry could not be regarded as monetary consideration and no VAT was due.
 
Businesses should be careful to distinguish between a contract of employment, such as in the above tribunal case where no VAT was due, and any agreement between employer and employee whereby a deduction from salary or wage is specifically related to a supply of catering, in which case VAT is due.
 
Where deductions are made other than under a contract of employment, the value of the supply is the amount deducted. HMRC argues that deductions made from an emp1oyee’s wages to take account of catering and accommodation amount to monetary consideration, and that the amount of the deduction was, therefore, liable to VAT.
 
Vending machines
 
In other commercial situations, employers may provide free or subsidised meals or catering in another form, such as drinks or food from a vending machine.
If a business installs vending machines for its employees to use free of charge and it gives them tokens to operate the machine or it is operated Without tokens or coins, no VAT is due on the supplies from the machine. If a business gives its employees money, or they have to pay for tokens to operate the machines, the supplies are standard rated, and the business must account for VAT on them.
 
Restaurants and hotels
 
If the proprietor of a restaurant, café or other catering establishment supply themselves or their family with meals, this is not regarded as catering and they need not account for VAT on those meals.
 
However, they must account for tax on the full cost to the business of any standard rated items (e.g. ice cream, sweets and chocolates, crisps, soft or alcoholic drinks) that they take out of their business stock for their own or their family’s use.
 
If an employer provides staff with free meals or accommodation in the establishment (e.g. a night manager) no VAT is due.
 
If a business provides its staff with meals or accommodation it only has to account for VAT on the amount paid, so if they are supplied free no VAT is due. Any input tax incurred in providing free or subsidised meals can be recovered as a legitimate business expense.

 


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