There are ways that you can claim tax relief for your mortgage interest.
Qualifying Loan Interest Relief
Often when you start a business you will need to borrow money personally to lend to your new company or buy shares.
You might borrow by increasing your mortgage.
You may be entitled to claim tax relief for interest paid on a loan or alternative finance arrangement used to buy:
shares in, or to fund, a ‘close’ company (contact your HM Revenue & Customs (HMRC) office if you are not sure if the company is ‘close’)
an interest in, or to fund, a partnership
plant or machinery for your work (but make sure you do not claim this interest twice, you will do if you have already deducted it as a business expense)
If you receive a low-interest or interest free loan from your employer for one of the above purposes you may be able to claim relief for any benefit taxable on you.
This is called ‘Qualifying loan interest relief’, HMRC have a helpsheet which gives further details HS340
Property Investors/Buy to Let
At the moment property investors can also offset mortgage relief against their profits but the rules are changing.
2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%
2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21 100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
How much can you borrow?
In summary if you re-mortgage above the original market value and you own the property personally and take out the cash you will not be able to claim relief from interest on the part above the original market value
If however you borrow to invest in another property that is ok.
Before you buy a commercial property you will need to find out if the current owner has opted to tax.
Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.
However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies. VAT Notice 742A
If an Option to Tax is in place the seller will charge VAT when they sell the property.
If the purchaser is not registered for VAT they get a very large VAT bill to pay, however, if they register for VAT or are registered for VAT before the sale takes place then its possible to use the TOGC rules to avoid having to pay VAT on the purchase.
The main conditions are:
the assets must be sold as part of the transfer of a ‘business’ as a ‘going concern’
the assets are to be used by the purchaser with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical) – for example commercial property rental
where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer
in respect of land which would be standard rated if it were supplied, the purchaser must notify HMRC that he has opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date
The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it is very important that you establish from the outset whether the business property is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and or interest.
Problem areas:
Gap in trading – for TOGC to apply there must be no significant gap in trading between the sale and purchase
VAT registration – If the vendor is VAT registered, there can only be a VAT-free TOGC if the purchaser is registered at or before the transfer
TOGC Intended for Residential Use
Schedule 10 para 6 VATA 1994 Notice 742A para 3.4
Your option to tax will not apply if you supply a building or part of a building that is not designed or adapted as a dwelling (or number of dwellings) or for a relevant residential purpose but you receive a certificate (VAT1614D) from the recipient of your supply (by the time described in paragraph 3.4.3 and paragraph 3.4.4) certifying that it is intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose. This can apply where the building, or relevant part, is either intended for such use:
without conversion work being undertaken
after conversion
Conversion of Commercial to Residential for Sale – Zero Rating
You are a ‘person converting’ a building if, in relation to that building, you are acting as, or have, at any point in the past, acted as:
a developer – you physically converted, or commissioned another person to physically convert, a building (in whole or in part) that you own or have an interest in
a contractor or subcontractor – you provided construction services to the developer or another contractor for the conversion of the building, sub-contracting work as necessary
5.5.6 TOGC of converted developments of dwellings, relevant residential buildings
A person acquiring a residential development that has been subject to a qualifying conversion as part of a TOGC inherits ‘person converting’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as:
a) a zero rated grant has not already been made of the converted building or relevant part by a previous owner (not including the grant that gives rise to the TOGC)
b) the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed or converted qualifying buildings to an associated company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption “claw back” provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances – we would consider this to be an unfair disadvantage)
c) that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building)
A recent case suggests the rules even apply to Houses of Multiple Occupancy (HMO’s) and that HMO’s can also be Zero Rated
Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.
HMRC allowed the £45,000 input tax claim on the basis that it would be supply of a non-residential building converted to residential use and therefore zero-rated under Item 1(b), Group 5 of schedule 8 to the Value Added Tax Act 1994 (“VATA”)
On 22 April 2015 HMRC wrote to the Company stating that, because it had been converted for multiple occupancy, the sale of Tintern House
was not a zero-rated but an exempt supply and any input tax incurred that was directly attributable to it was not recoverable.
HMRC lost the case, here is the result..
Reduced Rate VAT for Conversion from Commercial to Residential
Using the reduced rate of 5% is useful for Residential property (exempt from VAT) but is also useful for commercial buildings where there is no option to tax in place.
Conversions into single household dwellings
A qualifying conversion includes the conversion of:
a property that has never been lived in, such as an office block or a barn
a multiple occupancy building such as a bedsit block
living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice
It does not include:
the creation of living accommodation that is not a ‘single household dwelling’, such as most ‘granny’ annexes or additional bedrooms at a care home, and
the renovation or alteration of living accommodation that had been used for other purposes without the premises being adapted, such as a flat above a shop that has been used for storage. If the living accommodation has not been lived in for two years or more, the reduced rate explained in section 8 may apply
Conversions into multiple occupancy dwellings
A qualifying conversion includes the conversion into a multiple occupancy dwelling of:
a single household dwelling
a building used for a relevant residential purpose, such as a care home, and
a property that has never been lived in
It does not include, for example, the creation of additional bedrooms at a dwelling consisting of bed-sits.
Conversions into premises intended for use for a relevant residential purpose
A qualifying conversion includes the conversion of:
a single household dwelling
a multiple occupancy dwelling, and
a property that has never been lived in
into premises that will be used solely for a relevant residential purpose.
It does not include:
the remodelling of an existing ‘relevant residential purpose’ building, such as a care home, and
any conversion where a new qualifying residential ‘home’ or ‘institution’ is not created in its entirety, such as the conversion of outbuildings into additional bedrooms for an existing care home
What services can I reduced-rate?
Other than installing goods that are not building materials, you can reduced-rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the building.
You can also reduced-rate works within the immediate site of the premises being converted that are in connection with the:
means of providing water, power, heat or access
means of providing drainage or security, or
provision of means of waste disposal
All other services are standard-rated. For example, you must standard-rate:
the installation of goods that are not building materials, such as carpets and fitted bedroom furniture
the erection and dismantling of scaffolding
the hire of goods
landscaping
the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors
Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose
(1)A company may only make a distribution out of profits available for the purpose.
(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.
(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).
A distribution must be justified by
The Company’s last published accounts
Interim Accounts
Initial Accounts
In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:
Board Minutes
Dividend Vouchers
What are illegal dividends?
Companies Act 2006 Section 847 – Consequences of unlawful distribution
(1)This section applies where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part.
(2)If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable—
(a)to repay it (or that part of it, as the case may be) to the company, or
(b)in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution (or part) at that time.
(3)This is without prejudice to any obligation imposed apart from this section on a member of a company to repay a distribution unlawfully made to him.
Mistakes can happen..
Mistakes can happen even to large companies like NEXT PLC…
Whilst the Company always had sufficient reserves to pay the Relevant Distributions at the time that they were made, the Act required this to be demonstrated by reference to interim accounts filed at Companies House prior to payment. Regrettably, those interim accounts were not filed with Companies House until after the Relevant Distributions had been paid and after the lapse had been identified. No fines or other penalties have been incurred by the Company.
Section 386 Duty to keep accounting records
(1)Every company must keep adequate accounting records.
(2)Adequate accounting records means records that are sufficient—
(a)to show and explain the company’s transactions,
(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
(3)Accounting records must, in particular, contain—
(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
(b)a record of the assets and liabilities of the company.
(4)If the company’s business involves dealing in goods, the accounting records must contain—
(a)statements of stock held by the company at the end of each financial year of the company,
(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and
(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.
The test is only satisfied where the employee can demonstrate that occupation of the particular property (as opposed to any other property) is essential to the proper performance of the duties of the employment.
Support for this view can be derived from Langley and Others v Appleby (53TC1), in which Fox J said at page 21
if it is asserted that it is essential for the servant to occupy the house in order to perform his duties, it seems to me that the servant must establish affirmatively that for the performance of his duties he must live in that house and no other.
The words “that house and no other emphasise the strict nature of the test.
An employee may claim that it is necessary to occupy a particular residence because the employer requires the employee to live there. This is not enough to satisfy the test. It must be shown that the duties of the employment require occupation of the residence. An argument that the employee cannot afford to live elsewhere is not sufficient, see Vertigan v Brady (60TC624).
Rent Allowances and Deductions
It is common for an employee to:
own the property he lives in, or
rent the property from a third party, not his employer.
In both cases the employer may pay the employee extra salary or a rent allowance to help with the accommodation costs. This extra salary or rent allowance will count as earnings under Section 62 ITEPA 2003
An employer may own or rent accommodation and provide it to an employee. If the employee is entitled to a fixed wage or salary from which sums are deducted by the employer in respect of the accommodation then the fixed wage or salary is earnings under Section 62 ITEPA 2003. No deduction is allowed from earnings for the deductions made by the employer. See Cordy v Gordon (9TC304) and Machon v McLoughlin (11TC83)
There are special tax deductions available to Nurses including midwives, auxiliaries, students, dental nurses, nursing assistants and healthcare assistants.
Laundry & Clothing
Uniforms are normally not a taxable benefit and often provided by the employer.
b. Nurses, midwives, chiropodists, dental nurses, occupational, speech, physiotherapists and other therapists, healthcare assistants, phlebotomists and radiographers. See guidance at EIM67200 for shoes and stockings/tights allowance
125
c. Plaster room orderlies, hospital porters, ward clerks, sterile supply workers, hospital domestics and hospital catering staff.
125
d. Laboratory staff, pharmacists and pharmacy assistants.
80
e. Uniformed ancillary staff: maintenance workers, grounds staff, drivers, parking attendants and security guards, receptionists and other uniformed staff.
80
If you are an employee who wants to claim the laundry allowance you should send HMRC a letter as follows:
Re: Uniform Tax Rebate
I have been employed at……… since….. My job title is ……. and I wear a company uniform.
I am obliged to launder the uniform, which is supplied to me by the company. I therefor wish to claim any payment to cover the laundry costs.
The uniform provided is not suitable to be worn outside of the work environment due to having the company logo on it.
I would like to receive the rebate in the form of a cheque….
Expenses deductions may be permitted to nurses of all grades including midwives, for expenditure incurred and defrayed by them on the repair and renewal of shoes and stockings/tights:
shoes: where the wearing of a prescribed style is obligatory in the hospital or other workplace in which they may work allow £12 per year
stockings/tights/socks: where the wearing of a prescribed style or colour is similarly obligatory, allow £6 per year.
Mileage
Nurses may need to travel between locations and the 2013 case of Dr Samad Samadian v HMRC defined the rules for mileage claims
The results of the case in summary were:
Home to Hospitals – Disallowed
Hospital to Hospital – Disallowed as Business Expenses (but could be allowed against Employment)
Visits to Patients – Allowed
Approved Tax Free rates per business mile
Type of vehicle
First 10,000 miles
Above 10,000 miles
Cars and vans
45p
25p
Motorcycles
24p
24p
Bikes
20p
20p
Travel to a Temporary Work Place
A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose. So even where an employee attends a workplace regularly, it will be a temporary workplace and so not a permanent workplace, if the employee attends for the purpose of performing a task of limited duration or other temporary purpose.
Limited duration is explained at EIM32080.
Temporary purpose is explained at EIM32150.
If a workplace is capable of being a temporary workplace by reference to this rule, you must consider the following additional rules:
A period of attendance at a workplace for a limited duration does not make that place a temporary workplace if the employee attends in the course of a period of continuous work (see EIM32080) that can be expected to last for all, or almost all, of the period for which he or she is likely to hold, or continue to hold, that employment. In these cases the 24 month rule (see EIM32080) is overridden and the workplace is a permanent workplace.
The legislation does not define almost all of the period of the employment. You should not normally challenge relief under this paragraph where the likely duration of work at a workplace is less than 80% of the likely duration of the employment.
Doctors & Nurses often agree to pay for their own continuing training personally because of a shortage of NHS funds but when they do pay for courses its unlikely they will be able to claim tax relief.
EIM32530 states that it is well established that employees are not entitled to an expenses deduction under Section 336 ITEPA 2003 for the expenses continuing professional education (CPE). The Commissioners and the Courts have traditionally held that the duties of trainee doctors, for the purpose of the expenses rule, are limited to the clinical work that they do for the NHS Trust by whom they are employed. Their training activities are not undertaken “in the performance of” those duties for the purpose of Section 336 . That is so even though the training activities may be compulsory, and failure to complete them may lead to the employee losing his or her professional qualifications, and/or their job.
The Commissioners and the Courts upheld that view in a number of cases, as follows:
Parikh v Sleeman (63TC75) – a hospital doctor was refused relief for the expenses of attending training courses during periods of study leave.
Snowdon v Charnock (SpC282) – a specialist registrar was refused relief for the expenses of undergoing mandatory personal psychotherapy.
Consultant Psychiatrist v CIR (SpC557) – an NHS consultant was refused relief for the expenses of CPE necessary to maintain her professional qualification.
Decadt v CRC (TL3792) – a specialist registrar was refused relief for the expenses of taking professional examinations, even though it was a condition of his employment that he should do so.
In the recent case of Revenue & Customs Commissioners v Dr Piu Banerjee ([2010] EWCA Civ. 843), the Court of Appeal accepted that a deduction for training costs incurred by an employee should be allowed if the employee was employed on a training contract where training was an intrinsic contractual duty of the employment (see also EIM32535 & EIM32546) and where any personal benefit, unlike most CPE courses, would be incidental and not therefore give rise to a dual purpose of the expenditure.
Salary Sacrifice solves this problem.
Salary sacrifice works particularly well for training because except in the most extreme cases, employees cannot claim a tax deduction for training costs that they pay personally but if the employer pays for training that is work-related:
Just focusing on income tax, HMRC assume that when you buy a property/investment property its owned 50/50 between husband and wife or civil partners living together, this set out in the Income tax Act s 836. However, this rule will not apply in any of the following instances:
the income is from furnished holiday lettings;
there is actually a partnership in which case the income is divided according to the terms of the partnership agreement;
both husband and wife, or both civil partners, have signed a declaration stating their beneficial interests in both the property and the income arising from it.
When you make a declaration it must apply equally to ownership and income and a couple must be married or civil partners, you can’t be separated or divorced or joint tenants.
You can use this form to declare a beneficial interest if you hold property jointly and:
• you actually own the property in unequal shares, and
• you are entitled to the income arising in proportion to those shares, and
• you want to be taxed on that basis.
Form 17 must be submitted with in 60 days of completion, in addition a Declaration of Trust is likely to be required.
If there is a change, even a minor change, after submitting the Form 17 it will be invalid and revert to 50/50.
If the property is held in a single name it may be possible to use a declaration of trust to confirm joint beneficial interest.
Income Tax and Capital Gains Tax will be be based on the beneficial interest in the property, so if one spouse is a higher rate tax payer and the other a lower rate tax payer changing the proportion of ownership could have a significant tax advantage.
There is no default ownership for unmarried property owners.
Property owners may also need to agree the split with their mortgage lender.
Which of my activities are business activities for VAT purposes?
These include:
providing benefits to members in return for membership subscriptions (for members racing clubs where subscriptions finance the purchase of racehorses see Notice 700/67 Registration scheme for racehorse owners)
providing benefits to members in return for a separate charge
making supplies to non-members for a charge
admission to any premises for a charge
providing catering, social and other facilities to non-members in return for a charge
The general rule is that subscriptions are consideration for a package of benefits. The liability will follow that of the various supplies being made. Therefore, you will need to apportion the subscription unless all of these supplies have the same liability.
Our historic view that membership benefits supplied in return for a subscription constitute mixed supplies that need to be apportioned rather than a single supply was taken in the case of The Automobile Association (see VBNB75960). In that case the High Court accepted the AA’s subscription charge was for a mixed supply of their magazine, the key to the AA box insurance and various other services.
However, following the decision in Card Protection Plan (see VBNB75960) we concluded that our previous approach was wrong in law. The subscriptions of a members’ club were usually consideration for a bundle of supplies, each of which is for the better enjoyment of the principal supply, and all the supplies therefore share the same VAT liability.
We did, however, accept that in some cases there were two or more supplies, each of which was an end in its own right. In those cases apportionment was the proper treatment. Where a business had incorrectly treated its supplies as mixed under the old legal understanding, we took no action and we introduced ESC 3.35 to allow non-profit making members’ clubs to continue to do so.
Normally a body will apportion its subscriptions either in relation to the costs that it incurs in making the supplies or in relation to the price at which the supplies are separately available (a market value method). However, here are no fixed rules requiring apportionment by a particular method. Any method is acceptable as long as the end result is fair and reasonable.
Last week the ICAS reported based on IFAC research..
SMEs were shown to traditionally rely on accountants as a main source of business advice. One study identified an 8.1% average increase in sales growth and a 29% decrease in likelihood of failure for businesses using an external accountant.
Also last week smallbusiness reported that 1.3 million britons want to start their own business.
So when would a business need to contact an external accountant?
Business Plans
Budgeting and Forecasting
Cash Flow Management
Buy or Rent decisions
Capital Investment Appraisal
Accounting Procedures and Systems
Business Strategy
Busines Funding and Investment
KPI’s
For start ups its particularly important to ask your accountant to help with:
Choosing the right business structure for your business – most businesses start out as sole traders but once they start making profits convert to limited companies, this is because sole traders pay more tax than company structures
Choosing the best VAT Scheme you might be better off with Flat Rate or Cash Accounting
Choosing the most suitable accounting software
Creating a business plan and cash flow forecast – research shows that business that have a business plan make 20% more profit
