Helpful Comments on Tax and Finance – Bicknell Business Advisers Limited www.bicknells.net
Author: Steve Bicknell
Progressive Property Approved Accountant, Business Expert and Trainer/Speaker with Redcliffe Training, MBL Seminars and UK Training
►MD ► Bicknell Business Advisers ✸ family business providing accountancy, tax, and consultancy services to SME's and Start Ups - Xero, Sage One, QuickBooks, Freeagent, Kashflow, Hammock, Dext - Receipt Bank ✸ www.bicknells.net www.stevejbicknell.com
These changes only affect the fuel only rates, the business mileage rates are unchanged
Tax: rates per business mile
First 10,000 miles
Above 10,000 miles
Cars and vans
45p (40p before 2011 to 2012)
25p
Motorcycles
24p
24p
Bikes
20p
20p
Its the Approved Mileage Rates that keep changing
From 1 September 2021
You can use the previous rates for up to 1 month from the date the new rates apply.
Engine size
Petrol – rate per mile
LPG – rate per mile
1400cc or less
12 pence
7 pence
1401cc to 2000cc
14 pence
8 pence
Over 2000cc
20 pence
12 pence
Engine size
Diesel – rate per mile
1600cc or less
10 pence
1601cc to 2000cc
12 pence
Over 2000cc
15 pence
From 1 June 2021 to 31 August 2021
Engine size
Petrol – rate per mile
LPG – rate per mile
1400cc or less
11 pence
8 pence
1401cc to 2000cc
13 pence
9 pence
Over 2000cc
19 pence
14 pence
Engine size
Diesel – rate per mile
1600cc or less
9 pence
1601cc to 2000cc
11 pence
Over 2000cc
13 pence
1 March 2021 to 31 May 2021
Engine size
Petrol – rate per mile
LPG – rate per mile
1400cc or less
10 pence
7 pence
1401cc to 2000cc
12 pence
8 pence
Over 2000cc
18 pence
12 pence
Engine size
Diesel – rate per mile
1600cc or less
9 pence
1601cc to 2000cc
11 pence
Over 2000cc
12 pence
1 December 2020 to 28 February 2021
Engine size
Petrol – rate per mile
LPG – rate per mile
1400cc or less
10 pence
7 pence
1401cc to 2000cc
11 pence
8 pence
Over 2000cc
17 pence
12 pence
Engine size
Diesel – rate per mile
1600cc or less
8 pence
1601cc to 2000cc
10 pence
Over 2000cc
12 pence
For hybrid cars you must use the petrol or diesel rate which may differ significantly from the actual fuel costs. The advisory electricity rate for fully electric cars is 4 pence per mile.
Employees should carefully consider whether it is advantageous having private fuel provided for their company car. Remember that the P11d benefit for having private fuel provided for a company car in 2021/22 is £24,600 multiplied by the CO2 emissions percentage for that vehicle.
For example, a director driving a Mercedes Benz E200 saloon company car (CO2 emissions 169g per km) would be assessed on 37% = £9,102 for 2020/21. If they are a higher rate taxpayer that would mean £3,641 tax. That is an awful lot of private fuel!
Under the Construction Industry Scheme (CIS) if you use subcontractors who don’t have Gross Status the contractor has to make a deduction of 20% or 30% and pay it to HMRC.
In the CIS340 guidance, the deduction is applied as follows
There are 2 steps that contractors must follow.
Step 1: Work out the gross amount from which a deduction will be made by excluding VAT charged by the subcontractor if the subcontractor is registered for VAT, read the examples in CIS 340 Appendix D.
The contractor will need to keep a record of the gross payment amounts so that they can enter these on their monthly returns.
Step 2: Deduct from the gross payment the amount the subcontractor actually paid for the following items used in the construction operations, including VAT paid if the subcontractor is not registered for VAT:
materials
consumable stores
fuel (except fuel for travelling)
plant hire
the cost of manufacture or prefabrication of materials
The bit that is left after following the steps above is the Labour to which tax deduction of 20% or 30% is applied.
What is the Labour if the subcontractor has its own subcontractors?
The subcontractor needs to show the amount of labour inclusive of the subcontractors they have used!
They are charging the main contractor for all labour costs even if some of their subcontractors may be gross status.
You pay Class 2 if your profits are £6,515 or more a year
Class
Rate for tax year 2021 to 2022
Class 2
£3.05 a week
So for the whole year that’s £158.60
Are you running a business?
You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:
being a landlord is your main job
you rent out more than one property
you’re buying new properties to rent out
If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.
You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.
As soon as you reach state pension age, you stop paying Class 2 NIC if you carry on working. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.
In addition Companies who own properties don’t pay national insurance, national insurance is only paid by employees and the self employed.
Class 2 NI would also not apply if you use a letting agent to collect the rents – average fees would be 15%, even if it is a relative or your own company as then your role will only a passive investment role.
The key case on this topic is Rashid v Garcia (Status Inspector) (2002) Sp C 348
Decision released 11 December 2002.
National Insurance – Class 2 contributions – Self-employed earner – Landlord – Taxpayer had income from letting property – Claim for incapacity benefit – class 2 National Insurance contributions paid to qualify for benefit – Revenue took view that property rental activities did not entitle taxpayer to pay class 2 contributions as he was not carrying on business – Benefit refused – Whether taxpayer was self-employed earner carrying on business – Social Security Contributions and Benefits Act 1992, s. 2, 122.
The taxpayer had four properties income £10,942.
It was estimated that the taxpayer spent two to four hours per week on managing the properties and members of his family acting on his behalf spent 16 to 24 hours per week. The Special Commissioner considered this was insufficient activity to constitute a business so no Class2NI was due.
Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.
Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.
Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.
Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.
The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft landing period.
The new penalties take effect:
for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
for ITSA (Income tax and self assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
for ITSA taxpayers with income below £10k starting 6th April 2024
In theory the penalties are fairer but they can work out more expensive than the current penalties.
The new system is based on points, each late return gets a penalty point which expire after 24 months.
The points only apply to VAT and ITSA (not to other taxes at the moment)
Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.
Submission Frequency
Penalty Theshold
Annual
2 points
Quarterly
4 points
Monthly
5 points
Total points will only be reset to zero once when the following 2 conditions are met
A period of compliance based on their submission frequency
All submissions that were due within the preceding 24 months have been submitted
Submission Frequency
Period of Compliance
Annual
24 months
Quarterly
12 months
Monthly
6 months
Late Payment Penalty
Late Payment could potentially mean you get two penalties depending on when you pay!
The first penalty will be levied 31 days after the payemnt due date and will be based on a set percentage of the balance outstanding.
The second penalty will be calculated on amounts outstanding from day 31 until the principle balance is paid in full or a payment plan agreed.
Time to Pay Payment plans suspend penalties.
HMRC will notify the penalties separately.
Penalty
Days after payment due date
Penalty charge
First Penalty
0 to 15
No penalty payable
16 to 29
Penalty calculated at 2% of what was outstanding at day 15
30
Penalty calculated at 2% of what was outstanding at day 15
Plus 2% of what is still outstanding at day 30
Second Penalty
Day 31 plus
Penalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance
There will be a ‘period of familiarisation’ for the first year which is based on 30 days.
Interest Harmonisation
The VAT interest rules will change to be inline with ITSA
When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
the due date of the return
the date the return is submitted
If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.
Other things to note
The Gateway will tell you how many points you have
The Gateway will tell how penalties have been calculated
Agents will not be able to pay the penalties
When appealing you will need to say who was to blame for missing the deadline
When claiming the deadline was missed due to a health issue a declaration of honesty is required
MTD ITSA is at best going to be challenging for tax payers and accountants, but we love a challenge, don’t we?!
In the MTD ITSA there are
900,000 Landlords
2.5 Million Self Employed
400,000 Partnerships
Over 130,000 probably need to change their year end and when MTD ITSA starts a single self assessment will be become 6 returns.
HMRC announced in August in there Agent Communications
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) — Agents can sign-up customers in advance of April 2023
It has been confirmed that a bulk sign-up facility for MTD ITSA will not be possible due to several factors including each individual customer having different details to be input.
It is recognised that data will need to be input during the sign up process for each customer. It is accepted that this could be time consuming if all this had to be done at once, especially if it coincided with other peak demands such as the tax year end or VAT filing for example.
Following discussion with agents, HMRC is working to deploy a solution which will help flatten this workload. Agents will be able to sign up mandated MTD ITSA customers from 6 April 2022. This will not activate MTD obligations but will give agents the opportunity to spread the load of sign-up work across a 12-month period.
The back-end process is being worked on and further information will be issued. HMRC reaffirms, this will only come into effect from 6 April 2022 and that any sign-ups made before that date would be for the active pilot.
Since HMRC know all about tax payers (because they get annual Self Assessment Returns) and they know all about agents (because we have agent service accounts with HMRC that list our clients), why is it necessary to have a signing up process.
MTD ITSA is compulsory, so why aren’t the relevant tax payers automatically registered by HMRC?
Let’s hope HMRC can find a back-end process that will save us from manually enrolling millions of tax payers.
Most investors, whether personal landlords or companies, will have suffered some abortive costs for deals that failed.
The nature of the costs will be capital for investors.
BIM35325 – Capital/revenue divide: general themes: abortive expenditure
Expenditure that would have been capital had it been successful does not change its character merely because in the event it is abortive. ECC Quarries Ltd v Watkis [1975] 51TC153 was concerned with costs incurred in an unsuccessful planning application.
If the application had succeeded the expenditure would have been capital. In the event the application failed; no asset was acquired or modified (and the company did not rid itself of any disadvantageous asset).
What this means is that property investors don’t get any tax relief for abortive fees.
This can be extremely bad news as the case of Hardy v Revenue & Customs [2015] UKFTT 250 (TC) a 10% deposit was paid and the outcome was that HMRC disallowed the claim for relief, the taxpayer appealed and the appeal was dismissed.
It seems unfair but the seller who receives the deposit treats it as a capital gain and pays tax on it.
If a property trader/developer had suffered the loss of the deposit and the costs was ‘wholly and exclusively’ for the purpose of the trade, the expenditure might be an allowable deduction from profits.
Companies can have multiple classes of shares and the shares can have different rights. These rights cover:
Voting
Capital Growth
Income via Dividends
This can be of particular benefit to families.
Family Investment Companies (FICs), sometimes called Smart Companies, are particularly useful for Inheritance Tax (IHT) and have been used for over a decade as an estate planning tool.
In its simplest form parents lend money to the company and the company is owned by their adult children, but FIC’s can be structured to go beyond that with different assets and share classes.
They are a great alternative to partnerships which are taxed at income tax rates allowing faster growth as Corporation Tax starts at 19% (25% top rate) and income tax can be as high as 45%.
Capital Gains Tax is paid at Corporation Tax Rates (19%/25%) and they don’t suffer from 10 year anniversary or exit charges that are applied to Trusts.
The only slight downside is that extracting profits from a company will incur tax for the individual.
Over a period of time the income and capital shares will be moved to younger members of the family and the older members will retain the voting rights.
HMRC Family Investment Companies Unit
HMRC have been investigating FICs since 2019 and have now stopped, their findings are published in the meeting minutes 13th May 2021
In the research we undertook there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours. As with any analysis of a taxpaying population, the same broad range of tax-compliance behaviours were observed, with no evidence to suggest those using FICs were more inclined towards avoidance.
Tax risks related to FICs The key findings in relation to the tax risks associated with FICs are outlined below: • The use of FICs appears to be a planning strategy, often with the primary objective generational wealth transfer and mitigation of Inheritance Tax. • There is some diversity in the way that a FIC is structured and managed, creating tax risks and compliance activity across a variety of tax regimes, including Inheritance Tax, Capital Gains Tax, Stamp Duty Land Tax and Corporation Tax.
Conclusions The team have been subsumed into WMBC and FICs are now looked at as business as usual rather than having a dedicated team
Fixed Assets generally include Buildings, Computers, Office Furniture, Plant, Equipment, and Vehicles. The Accounting Standards generally refer them as ‘Property, Plant and Equipment’ and in Published Accounts Assets are often called ‘Tangible Fixed Assets’.
Most business set a rule for what value an item has to be before its treated as a fixed asset, for example it might be items costing more than £200, below that value the items might be expensed in the P&L.
Fixed Assets must have a life beyond the current accounting year, for example a computer might have a life of 3 years or more.
The reason we capitalise the items and turn them into a fixed asset is so that we can apportion/spread the cost of the asset over its useful economic life. This means the accounts get a fair allocation of cost each year.
This is not the same as the tax treatment, many assets qualify for Capital Allowances and of those many might qualify for the Annual Investment Allowance. The Annual Investment Allowance gives 100% tax relief immediately.
How are Assets Depreciated?
There are several methods of depreciating assets Straight Line, Reducing Balance, Units of Production and others too. The most commonly used ones are Straight Line and Reducing Balance.
You need to use your judgement to decide the rate of depreciation, for example to depreciate straight line over 4 years you would choose 25%. Rates are normally set for an entire asset class for example Computers as a whole.
Reducing balance works by taking the net asset value and apply the depreciation %
Original Value
Less Depreciation to date (accumulated depreciation)
Net Book Value
Apply Reducing Balance Depreciation %
Every year the current year depreciation is added to the accumulated depreciation the cycle repeats each year.
Depreciation is disallowed as a tax deduction, because you claim Capital Allowances instead.
Business should maintain a Fixed Asset Register listing every asset and its Original Value, Accumulated Depreciation and Net Book Value.
When an asset is sold the value from the asset register need to be used to remove its value from the accounts, any profit or loss on disposal is posted to the P&L.
When an asset is sold there may also be a tax adjustment known as a Balancing Charge, its the difference between the Tax Written Down Value and Fixed Asset Register Written Down Value.
If you pay interest on a personal loan then you used to lend money to your limited company then you can probably claim tax relief on the interest that you pay on your personal loan.
Here are the rules from HS340 – You may be able to claim relief for interest paid or for alternative finance payments where the loan or alternative finance arrangement is used to:
buy ordinary shares in, or lend money to, a close company in which you own more than 5% of the ordinary share capital on your own or with associates
buy ordinary shares in, or lend money to, a close company in which you own any part of the share capital and work for the greater part of your time in the management and conduct of the company’s business, or that of an associated company
acquire ordinary share capital in an employee controlled company if you are a full-time employee – we regard you as a full-time employee if you work for the greater part of your time as a director or employee of the company or of a subsidiary in which the company has an interest of 51% or more
acquire a share or shares in, or to lend money to, a co-operative which is used wholly and exclusively for the purposes of its business
acquire an interest in a trading or professional partnership (including a limited liability partnership constituted under the Limited Liability Partnership Act 2000, other than an investment limited liability partnership)
to provide a partnership, including an limited liability partnership, with funds by way of capital or premium or in advancing money, where the money contributed or advanced is used wholly for the partnership’s business – if the partnership is a property letting partnership, read information about the residential property finance costs restriction
buy equipment or machinery for use in your work for your employer, or by a partnership (unless you’ve already deducted the interest as a business expense) – relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question – if the equipment or machinery was used only partly for your employment, or only partly for the partnership business, only the business proportion of the loan interest or alternative finance payments qualifies for relief)
You cannot claim relief for interest on overdrafts or credit cards.
The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.
To claim the tax relief you enter the amount of interest paid on your self assessment return under Additional Information SA101 ‘Qualifying Loan Interest Paid in the Year’.
This could be useful for Property Investors who invest via a limited company. Here is an example
Fred Smith owns his own home worth £500k without a mortgage
He borrows 75% £375k against his home and lends it to his limited company, the interest rate from his broker is 2% cheaper than borrowing in his limited company.
So he could save £7,500 a year interest
He also gets tax relief on the interest that he has paid.
A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.
The basis periods for the first three tax years are:
2010-2011
Year 1
1 October 2010 to 5 April 2011
2011-2012
Year 2
12 months to 30 September 2011
2012-2013
Year 3
12 months to 30 September 2012
The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.
It is a complicated and confusing process and the overlap profit is effectively taxed twice and given back later as tax relief.
There are two ways to gain access to your overlap relief: cease trading or change your accounting date.
The Proposal
The HMRC proposal affects the self-employed, partnerships, trusts, and estates with trading income. The proposal affects unincorporated businesses that do not draw up annual accounts to 31 March or 5 April, and those that are in the early years of trade.
Having carried out a short informal consultation with a range of businesses and tax experts, the government intends to implement the proposed reform ahead of the mandation of Making Tax Digital for Income Tax in April 2023.
The consultation period end on 31st August 2021.
Example
A business draws up accounts to 30 June every year.
Currently, income tax for 2023 to 2024 would be based on the profits in the business’s accounts for the year ended 30 June 2023. Part of the accounts are outside of the tax year, and part of the tax year is not included in profits taxed.
The proposed reform would mean the income tax for 2023 to 2024 would be based on:
3/12 of the income for the year ended 30 June 2023, plus 9/12 of the income for the year ended 30 June 24.
Basis periods are straightforward for the estimated 93% of sole traders and 67% of trading partnerships that draw up their accounts to 5 April or 31 March every year. But if a different accounting date is chosen then the rules are more complex and can be confusing for businesses to understand and apply. The rules can be particularly challenging for new or unrepresented businesses, leading to errors and mistakes in tax returns.
Aligning the basis of assessment for trading income with other forms of income enables wider, simpler reforms to be considered in the future. In particular, transitioning to the tax year basis in the tax year 2022 to 2023 will simplify the introduction and experience of Making Tax Digital for Income Tax. For simplicity, the government proposes a one year transition period, with an option to spread any excess profit arising in that transition period over five years.
The transition tax year would introduce the equivalence rule. This means that businesses can treat the end of the tax year for their tax year basis as any date between 31 March and 5 April.
Alongside this transition, the proposals would mandate that all overlap relief must be claimed in the transition tax year, including any historic transitional overlap relief, or overlap relief generated during the new transition year. No overlap relief would be carried forwards into the new tax year basis, and no new overlap relief would be generated after the transition year.
The new rule, proposed by HM Revenue & Customs under the guise of simplification, could generate a badly needed windfall of more than £1bn for the Treasury next year.
Aligning the reporting date with the tax year would mean that profits that arise in each reporting year would be allocated to that tax year. Currently, profits are taxed for the year in which the business’s accounting period ends. Many partnerships thus end their accounting period on 30 April, allowing them 11 months’ grace.
In summary
The basis period reform will apply from 2023-24.
There will be a transition period in 2022-23.
Accounting periods that end between 31 March and 4 April inclusive will be treated as ending on 5 April.
In the 2022-23 transition year, business profits will be reported from the end of the previous period assessed in 2021-22 up to 5 April 2023.
Businesses with a 31 March 2023 accounting date will report business profits up to that date. This will be deemed to be 5 April 2023.
The subsequent accounting period will be deemed to start on 6 April 2023.
