Avoiding the 2020 AIA trap
At the end of 2020 the annual investment allowance (AIA) reverts to £200,000. If your financial year spans the change, transitional rules can unexpectedly restrict your entitlement further. Why, and what steps can you take to work around this?
The annual investment allowance (AIA) is a capital allowance (CA) which gives you a tax deduction for 100% of qualifying expenditure, e.g. purchase of equipment, incurred in the accounting period. With a few exceptions the AIA is allowed for the cost of all equipment which would qualify for CAs.
The maximum amount of expenditure which can qualify for the AIA is usually £200,000, but this was temporarily increased to £1 million from 1 January 2019 until 31 December 2020. There are transitional rules to work out the AIA for an accounting period which spans one of the change dates, i.e. 1 January 2019 or 31 December 2020.
The formula for working out the AIA for any accounting period which spans 31 December 2020 is (a/12 x £1,000,000) + (b/12 x £200,000), where “a” is the number of months in the accounting period falling on or before 31 December 2020, and b is the number of months after 31 December. The maximum amount of expenditure which can qualify for the AIA is capped to the proportion of the AIA limit applicable to each part of the accounting period.
Example. A Ltd’s next accounting year runs from 1 April 2020 to 31 March 2021. It has planned to renew some equipment over the twelve months. As it expects to spend around £180,000 the directors assume there will be no problem in claiming the AIA for all of it because it’s less than the temporary limit of £1 million and the normal limit of £200,000. But the transitional rules could prevent this.
The AIA for expenditure in the period 1 January to 31 March 2021 is capped proportionate to the normal amount, i.e. 3/12 x £200,000, which is £50,000.
If A Ltd were to incur all the £180,000 of expenditure on equipment in the period between January and 31 March 2021 it would only be entitled to the AIA on £50,000. The balance would qualify at the normal CAs rates of 6% or 18% per year on a reducing balance. This means it would take a minimum of twelve years to obtain even 90% of the tax relief it’s entitled to.
To avoid the trap and obtain the AIA for all its expenditure A Ltd should incur at least £130,000 (£180,000 - £50,000) of it on or before 31 December 2020.
The date on which capital expenditure is treated as incurred is the date that you commit to the purchase, i.e. usually the date you sign a purchase order or equivalent document.
After 1 January 2021 the maximum AIA is a fraction of the normal annual amount, e.g. if your financial year ends on 31 March 2021 it’s just £50,000 (£200,000 x 3/12). If you’re considering capital expenditure in excess of the restricted AIA, aim to spend on or before 31 December 2020 when the maximum AIA is much greater.
Reporting low emission vehicles – Changes from April 2020
From 6 April 2020, new appropriate percentage bands – and new lower charges for low emissions cars – will apply for company car tax purposes.
From the same date, the way in which carbon dioxide emissions are measured is also changing. This means that in order to find the correct appropriate percentage for working out the taxable benefit of a company car, you will need to know whether the car was registered on or after 6 April 2020 or before that date, as well as the level of the car’s CO2 emissions. As a transitional measure, with the exception of zero emission cars, the appropriate percentage for cars registered on or after 6 April 2020 is 2 percentage points lower than cars registered prior to that date for 2020/21 and one percentage point lower for 2021/22. The figures are aligned from 2022/23. For zero emission cars, the charge is 0% for 2020/21, 1% for 2021/22 and 2% from 2022/23, regardless of the date on which the car is registered. The maximum charge is capped at 37%. The diesel supplement applies as now.
More information will be needed to work out the appropriate percentage where the car’s CO2 emissions (however measured) fall in the 1—50g/km band. From 6 April 2020, this band is sub-divided into five further bands, each with their own appropriate percentage. The band into which the car falls depends on its electric range (also known as its zero emission mileage). This is the maximum distance that the car can be driven in electric mode without having to recharge the battery. The relevant bands are as follows:
• more than 150 miles
• 70 to 129 miles
• 40 to 69 miles
• 30 to 39 miles
• less than 30 miles
The greater the car’s zero emission mileage, the lower the appropriate percentage.
Splitting the 1—50g/km band introduces additional reporting requirements. The precise nature of those changes depends on whether car and fuel benefits are payrolled.
Where car and fuel benefits are payrolled, information on cars provided to employees is submitted to HMRC on the Full Payment Submission (FPS), rather than on form P46(Car). From 6 April 2020, where an employee has a car with carbon dioxide emissions that fall within the 1—50g/km band, the car’s zero emission mileage must be reported to HMRC in the new field that will be available from that date.
If car and fuel benefits are not payrolled, form P46(Car) provides the mechanism for letting HMRC know when an employee has been given a car for the first time or given an additional car. The form can be submitted in various ways – on paper, using the online service or PAYE online.
From 6 April 2020, the form will have an additional field for zero emission mileage which must be completed when providing an employee with a car with CO2 emissions in the 1—50g/km band. The deadlines for submitting the form are unchanged and are as shown in the table below.
Period in which change took place Deadline for reporting it to HMRC
6 January to 5 April 5 April (where electronic form used)
3 May (where printed form used)
6 April to 5 July 2 August
6 July to 5 October 2 November
6 October to 5 January 2 February
If you’re lucky enough to own shares which have increased in value you might be liable to capital gains tax (CGT) if you sell or transfer them. Working out the taxable gain isn’t always as easy as comparing how much the shares cost you with the amount you receive from selling them. When you buy or acquire shares of the same type in the same company at different times, their cost for CGT purposes is averaged. This is known as pooling.
Pooling can work for or against you. Shares on which you think you’ve made a loss or a small gain could show a large gain for tax purposes, or vice versa.
Example - part 1. In 2004 Ali bought 10,000 10p shares in Acom Plc for £12,000. He inherited a further 5,000 shares from his father in 2007 when they were worth £2.20 each and bought 1,500 more in 2018 for £6,500. In January 2020 Ali sold the 1,500 shares for £10,000. Ali assumes he’s made a capital gain of £3,500 (£10,000 less £6,500). But because all his shares in Acom are pooled and their costs averaged, the taxable gain is actually £7,818.
Using your annual exemption
If Ali made no other capital gains in 2019/20 he would not have to pay tax on his gain from selling his Acom shares because it would be less than the annual CGT exemption, which is £12,000 for the year. But if he had already made gains from selling other assets his miscalculation could result in an unexpected tax bill. Note. If Ali had made capital losses in 2019/20 these reduce the amount of taxable gains before applying the exemption.
Example - part 2. Prior to selling the Acom shares, Ali had made a capital gain of £8,000 from selling a property. He had assumed the gain on his Acom shares of £3,500 would push his total gains to £11,500, i.e. within the CGT exemption with a little to spare. But actually his taxable gains are £15,818 (£8,000 + £7,818) meaning that he’ll have to pay tax on £3,318 (£15,818 - £12,000 exemption).
Selling assets to utilise your annual CGT exemption is good tax planning. It prevents large gains building up in shares and so can significantly reduce tax in the long run.
If you’re married it’s relatively easy to double the annual CGT exemption by transferring assets to your spouse to sell. HMRC accepts this type of tax-saving arrangement.
Example. Instead of them selling all 1,500 Acom shares, Ali gave half to his wife to sell. The effect of the special rules which apply to transfers of assets from one spouse to the other means that when they sell they each make a gain of £3,909 (£7,818/2). Adding this gain to Ali’s others for 2019/20 means that his total gains are £11,909 - just within his annual CGT exemption of £12,000. Assuming his wife hasn’t made other gains exceeding £8,091 in 2019/20, those which she makes from selling the shares in Acom will be covered by her annual CGT exemption.
When you work out the capital gains or losses on shares remember that the cost of all shares you’ve bought at different times is averaged. Gains and losses you make in the same year are aggregated before applying the annual exemption. You can transfer shares to your spouse to make use of their annual exemption.
Changing accounting date
Making the most of pension tax allowances
Pension savings can be tax efficient as contributions to registered pension schemes, attracting tax relief up to certain limits.
Limit on tax relief
Tax relief is available on private pension contributions to the greater of 100% of earnings and £3,600. This is subject to the annual allowance cap.
Tax relief may be given automatically where your employer deducts the contributions from your gross pay (a ‘net pay scheme’). Alternatively, if you pay into a personal pension yourself or your employer pays contributions into the scheme after deducting tax, the pension scheme will claim basic rate relief (‘relief at source’). Thus if you pay £2,880 into a pension scheme, your scheme provider will claim basic rate relief of £720, meaning your gross contribution is £3,600. If you are a higher or additional rate taxpayer, the difference between the basic rate tax and your marginal rate can be reclaimed from HMRC via your self-assessment return.
The pension annual allowance caps tax-relieved pension savings – contributions can be made to a registered pension scheme in excess of the available annual allowance, but they will not attract tax relief. The annual allowance is set at £40,000 for 2019/20; although this may be reduced if you have high earnings. The annual allowance taper applies where both your threshold income is more than £110,000 (broadly income excluding pension contributions) and your adjusted net income (broadly income including pension contributions) is more than £150,000. Where the taper applies, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £150,000 until the annual allowance reaches £10,000. This is the minimum amount of the annual allowance. Only the minimum allowance is available where adjusted net income is £210,000 or more and threshold income is more than £110,000.
The annual allowance can be carried forward for up to three tax years if it is not used, after which it is lost. The current year’s allowance must be used first, then brought forward allowances from an earlier year before a later year.
Harry has income of £100,000 in 2019/20. He has received an inheritance and wishes to make pension contributions of £60,000. In the previous three years he has used £10,000 of his annual allowance, leaving £30,000 to be carried forward for up to three years.
To make a contribution of £60,000 for 2019/20, Harry will use his annual allowance of £40,000 for 2019/20 and £20,000 of the £30,000 carried forward from 2016/17. The £10,000 remaining of the 2016/17 allowance will be lost as cannot be carried forward beyond 2019/20. The unused allowances of £30,000 for 2017/18 and 2018/19 can be carried forward to 2020/21.
Reduced money purchase annual allowance
A lower annual allowance of £4,000 (money purchase annual allowance (MPAA)) applies to those who have flexibly accessed pension contributions on reaching age 55. This is to prevent recycling of contributions to secure additional tax relief.
The lifetime allowance places a ceiling on your pension pot. For 2019/20 it is set at £1,055,000. A tax charge will apply if you exceed the lifetime allowance.
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Is advice about personal tax a business expense?
The First-tier Tribunal recently ruled on whether a company was entitled to reclaim VAT on fees it paid for advice about a scheme to reduce income tax bills for its directors.
Taylor Pearson (Construction) Ltd (TPC) reclaimed VAT of just under £10,000 that it had paid for advice involving complex scheme to remunerate its directors tax efficiently. HMRC argued that the scheme benefited the directors by saving them income tax and as this was a personal and not a business objective the company wasn’t entitled to reclaim the VAT on the fees. TPC’s counter argument was that the scheme had tax and NI advantages for it as well, and therefore it had a business purpose.
In case its main argument failed HMRC had a back up which was that there was no “direct and immediate link” between the VAT reclaimed with taxable supplies, i.e. supplies on which TPC would charge VAT. HMRC uses this argument if it objects to VAT being reclaimed but has no other solid legal grounds to refuse it. The “direct and immediate” argument derives from a Supreme Court judgment and so carries significant weight.
The judgment also states that VAT on purchases can be reclaimed if there is “...a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” . In other words, VAT paid on a genuine overhead of a business is deductible (unless specifically prohibited as is the case for business entertainment).
The First-tier Tribunal’s decision therefore turned on whether the cost of the advice it received was an overhead of TPC’s business or for the personal benefit of the directors. While there was no doubt that the latter was significant, the judge noted that the advice only related to tax and NI matters linked to remuneration from the company and not to the directors’ other income. It was therefore an overhead of the business and TPC was entitled to reclaim the VAT it had paid.
A company isn’t entitled to reclaim VAT paid on fees for advice given in respect of a director’s personal tax or other financial affairs.
The judge showed his displeasure with HMRC’s suggestion that incentivising employees by reducing their tax and NI bills on company income had no direct and immediate link with the purposes of its business. He said, “I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward” . Especially as it had relatively recently lost a very similar case which it didn’t appeal against.
VAT paid on fees incurred by a company to minimise tax and NI liabilities on remunerating its directors or employees is a legitimate overhead of the business and can therefore be reclaimed.
Is a working holiday tax deductible?
Business, private and mixed expenses
The general rule for expenses; to be tax deductible they must be incurred “wholly and exclusively” for the business. This condition is modified for directors and employees who incur travel expenses; to be tax deductible they must be incurred in the performance of their job. However, this rule is not as straightforward as it might seem.
Example. A director often travels from home to visit a customer on the way to the firm’s offices. One interpretation of the rules suggests that none of the cost of the journey to the office from home is tax deductible because travel between your home and your normal place of work (a commute) counts as a private journey. Alternatively, the travel is two journeys, one from home to the customer and one from the customer to work. The second part meets the condition while the first doesn’t because any journey beginning or ending at home is commuting.
Because both interpretations have flaws HMRC usually accepts that a journey incorporating a business element which starts from or ends at your home meets the condition for a tax deduction.
Example. You travel 200 miles to visit several customers. You stay overnight in a hotel. In the evening you go to the cinema. While the cost of travel from your hotel to the cinema is clearly private, HMRC says this won’t jeopardise the tax deductibility of the main journey from your home or office to visit customers. HMRC’s guidance confirms this.
A business trip with pleasure
In the example above the purpose of the journey is clearly business which happens to offer an opportunity to undertake private activities. What’s more, it’s easy to identify and separate the business from the private element of the trip. This means the cost of travel from home or work to the hotel and the customer is tax deducible, while the cost of travelling to and from the cinema is not. A similar approach can be used to differentiate between deductible and non-deductible expenses if the main purpose of your journey is private but you undertake some business while away.
Example. You’ve booked your family’s summer holiday in southern Spain. You intended to leave them to their own devices for a couple of days while you fly to Barcelona to visit some work colleagues to discuss business. The cost of your and your family’s travel and accommodation in southern Spain is obviously not related to travelling in the performance of your job even though it is one leg of your trip to visit work colleagues. None of it is tax deductible. Conversely, the cost of your flight to and accommodation in Barcelona is business, and therefore tax deductible, even if you visit a bar or two in the evening with your colleagues.
If you’re combining business with pleasure keep detailed records that identify the tax deductible and non-deductible cost elements.
The main purpose of a trip determines if tax relief is allowed. If it’s private, no relief is allowed even if there’s a business element. However, separate costs you incur wholly for business while on holiday, say paying for travel to visit a customer, qualify for relief.
Reporting a pension annual allowance charge
If your pension savings for a year exceed your annual allowance (AA), either you or your pension provider must pay the tax. The first step is filling in the “Pension savings tax charge”’ part on your tax return. For help, look at form SA101 and use HMRC’s HS345 pension savings help sheet (see the links below).
Use Box 10 on the Pensions Savings Charges page if you have a charge, even if the scheme pays some or all of it. If they contribute, put the amount they pay in Box 11. You will need your scheme’s Pension Scheme Tax Reference to fill in Box 12.
If you forget to report the AA charge on your tax return you have twelve months from the filing deadline to amend it. For example, if you forget something off your 2018/19 return, which had to be filed by 31 January 2020, you have until 31 January 2021 to notify HMRC.
For the SA101
For the HS345
Changing accounting date
When you start a business, whether it’s via a company or sole trade, you can choose when your first financial (accounting) period will end. Tax and company law place limitations on companies but for unincorporated businesses the choice is more flexible. HMRC encourages unincorporated businesses to opt for an accounting period that coincides with the end of the tax year. This makes life simpler but is not necessarily tax efficient.
Over the life of a business you’ll be taxed on the profits your business makes. However, the year in which the profits are taxed can vary depending on your choice of accounting date. There’s no single right answer, as different accounting dates suit different situations.
Example. You started a business on 1 May 2017 and prepared your first accounts for up to 5 April 2018. These showed a loss of £6,000. In the next year, 2018/19, you made a profit of £5,200. You estimate your profits for 2019/20 will be £30,000. For tax purposes losses for which no special tax relief is claimed reduce future taxable profits. Therefore, £5,200 of the £6,000 loss is used to reduce the taxable profit to £0 for 2018/19. Because you had no other income in 2018/19 you would not have paid tax on the £5,200 profit even ignoring the losses as your tax-free personal allowance (£11,850) would have covered them. You’ve therefore wasted some of the losses on income that would have been tax free anyway.
Loss relief must be claimed within 20 months of the end of the tax year in which the losses occurred. As that was the tax year ended on 5 April 2018 you needed to have filed a claim with HMRC by 31 January 2020. Despite missing the time limit your can recover some of the wasted loss.
Retrospectively changing your accounting dates can alter which tax year profits are assessed. There are conditions and time limits but they allow for a great deal of flexibility in the first three years of a business.
You are entitled to amend your tax return for 2019/20 so that the accounting period for that year ends twelve months from the start of the business, i.e. 30 April 2018. Your accounts for the period 6 April 2018 to 30 April 2018 show a profit of just £120. So for the twelve months from the start of your business to 30 April 2018 your accounts show a loss of £5,880 (£120 profit plus the £6,000 loss from 1 May 2017 to 5 April 2018). Your taxable profit for 2018/19 is therefore £0 and you have only used £120 of your loss - the remaining £5,880 can be carried forward and used to reduce your taxable profits for 2019/20, which you know will be around £30,000.
Time limits apply but you can change your mind about the date on which your accounting period should end even after you’ve sent the figures to HMRC. This can change the amount of profit taxable for a year which means there’s some scope for retrospective tax planning.
Will HMRC write off your tax bill?
Tax bills not worth the effort
For many years HMRC adopted a policy of not assessing tax if the amount involved was small. 40 years ago the limit was £30 and eventually became £70. However, that was in the days when the Inland Revenue, as it was then, had to go through the rigmarole of manually writing or typing an assessment, posting it to the taxpayer and notifying the collector of taxes to issue demands. The so-called assessing tolerance disappeared with the introduction of self-assessment in 1996. However, HMRC has found it necessary to renew this old policy, but not in all situations.
If you submit self-assessment tax returns you’ll have to settle the tax bill that results, however small the amount. HMRC routinely make adjustments to eliminate very small debts, typically no more than £2. The legislation gives HMRC management powers to do this. It can, but very rarely does, use the same rules to write off larger sums, but it’s not open to negotiating a debt down.
HMRC will seemingly write off a debt if it loses track of someone who owes it money. This is usually no more than a temporary reduction. So if you change address when HMRC eventually tracks you down it will reinstate the tax charge and add interest to the bill.
Currently HMRC issues informal tax calculations known as P800s. The idea behind these is that rather than force individuals with simple tax affairs to complete self-assessment returns HMRC uses the information it has to decide if you you’ve over - or underpaid tax. It then asks you to pay or refunds you. The debt is not enforceable and so if you refuse to pay HMRC is likely to send you a self-assessment form to fill in or, if you have income that’s taxed through PAYE, adjust your tax code to increase the amount you pay on your salary etc.
P800s are often inaccurate and you should check them, especially if they include estimated figures (savings or investment income is usually estimated). HMRC must adjust the P800 if you provide it with the correct figures.
HMRC simple assessments
A few years ago legislation was introduced to allow HMRC to issue simple assessments in certain circumstances where a P800 is not suitable. Tax payable on a simple assessment is enforceable, but they too often include estimates and should be checked. Unlike P800s you must formally notify HMRC within 60 days if you disagree with the figures.
HMRC’s practice of not issuing assessments or P800s for small amounts is back. It should not assess you if you owe less than £50. If you receive such an assessment/ P800 call HMRC on the number shown on the document and ask for the debt to be cancelled. It will usually agree to this.
If you’ve completed a self-assessment return you must pay the demand, assuming the amount requested ties up with your calculations, no matter how small it is. However, if the demand is in respect of a Form P800 or simple assessment and is for less than £50, HMRC ought not to have sent it. It will usually cancel the charge if you ask.