What is Class 2 National Insurance and do Landlords need to pay it?

You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension.

Most people pay the contributions as part of their Self Assessment tax bill.

You pay Class 2 if your profits are £6,515 or more a year

ClassRate 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 Class 2 NI was due.

Back in 2015 HMRC did try to get Landlords to pay Class 2 as explained in our blog Should Landlords pay Class 2 NI? – Steve J Bicknell Tel 01202 025252

HMRC Examples NIM23800

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.

steve@bicknells.net

New Multiple Penalties for MTD ITSA and VAT!

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 FrequencyPenalty Theshold
Annual2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission FrequencyPeriod of Compliance
Annual24 months
Quarterly12 months
Monthly6 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.

PenaltyDays after payment due datePenalty charge
First Penalty0 to 15No penalty payable
16 to 29Penalty calculated at 2% of what was outstanding at day 15
30Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30
Second PenaltyDay 31 plusPenalty 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

steve@bicknells.net

What is a Family Investment Company/SMART Company? What do HMRC think about them?

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, the topic is covered in a free publication you can download from our website

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 is 19% and income tax can be as high as 45%.

Capital Gains Tax is paid at Corporation Tax Rates (19%) 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

steve@bicknells.net

What are Basis Periods and what will be the impact of Government Proposals to reset them? – Making Tax Digital (MTD ITSA)

Here is an example of how Basis periods work and how they create overlap periods taken from our blog What is Overlap Profit? – Steve J Bicknell Tel 01202 025252

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:

2010-2011Year 11 October 2010 to 5 April 2011
2011-2012Year 212 months to 30 September 2011
2012-2013Year 312 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.

According to an article in the Law Society Gazzette 13th August

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.

steve@bicknells.net

Making Tax Digital (MTD ITSA) – what will you have to do?

Making Tax Digital (which some have dubbed ‘Making Tax Difficult’) is coming.

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6th April 2023. However, its expected that HMRC will encourage businesses to start from 6th April 2022 to gain experience in the process before it becomes compulsory.

Its compulsory! failure to comply will result in penalties – you will have 30 days from the end of the quarter in which to file

Making Tax Digital for Landlords and the Self Employed with income over £10k

When it starts the key issues will be

  1. You will basically have 2 returns to file at the same time one for the previous year and new quarterly reporting
  2. The basis periods are expected to be re-aligned so that all the self employed and landlords start at the same time – 6th April 2023
  3. A single annual self assessment will become at least 6 new filings – 4 quarters, end of period and a new self assessment return

The primary legislation for Making Tax Digital relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017.

Business will have to use HMRC approved accounting software, for example

Xero

Sage

Freeagent – free if your business banks with NatWest/RBS

Quickbooks

When we refer to MTD-compatible software, we mean software that can integrate with HMRC systems to send updates to HMRC.

HMRC is not offering its own software products but has provided the Application Programming Interfaces (APIs) that commercial software developers are using to develop a range of applications that enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that links 2 or more software programmes together, allowing them to exchange data.

So there won’t be a Government Gateway where you can enter the information, you have to use commercial software approved by HMRC.

You have to have all your self employed and property businesses in a single piece of software but be able to report the information separately for each business in the following formats

Furnished Holiday Lets

Income
Accounting Basis (Traditional or Cash)
Rent paid, repairs, insurance and costs of services provided
Loan Interest and other financial costs
Legal, management and other professional fees
Other allowable property expenses
Private use adjustment
Profit or Loss

Residential Property Income

Total Rents and other income from property
Accounting Basis (Traditional or Cash)
Rent, rates, insurance and ground rents
Property repairs and maintenance
Non-residential property finance costs
Legal, management and other professional fees
Costs of services provided, including wages
Other allowable property expenses
Profit or Loss
Private use adjustment
Residential property finance costs

Self Employed

If the turnover is below £85,000 only Turnover and Total Expenses need to be reported otherwise you will need

Turnover
Accounting Basis (Traditional or Cash)
Costs of goods bought for re-sale
Car, van and travel expenses
Wages, salaries and other staff costs
Rent, rates, power and insurance costs
Repairs and maintenance of property and equipment
Accountancy, legal and other professional fees
Interest and bank and credit card etc financial charges
Telephone, fax, stationery and other office costs
Other allowable business expenses
Profit or Loss

What is the process?

Stage One – Sign Up and Software

  • Business that fall within the scope of MTD ITSA (Income Tax Self Assessment ) will need to be signed up before April 2023
  • ‘Digital Records’ need to kept on approved HMRC software
  • The minimum amount of information will be Date, Amount and Tax Category
  • The information needs to be summarised in the format noted above
  • Each property and business activity will need its own reports

Stage Two – Quarterly Reporting

  • An electronic submission of summary totals for specified categories from digital records of each business on a quarterly basis (obligation period) from software to HMRC needs to be made
  • The first submission will include designatory data
  • Updates are due from 10 days before to one month after the quarter end date
  • The update does not need to include a statement that the data is complete and accurate
  • HMRC will return a calculation of the tax liability based on the information sent but payment will due on the current pre-MTD dates (or at least for now)

Stage Three – End of Period Statement

  • Process to finalise the taxable profit or allowable loss for any one source of business income
  • The process will pull together the quarterly submissions and allow you to claim allowances and reliefs
  • You will be able to exclude disallowable expenses
  • This submission does require a declaration that the information is complete and correct
  • HMRC will then calculate the tax due

Stage Four – Final Declaration (New Self Assessment Return)

  • Referred to as crystallisation
  • It will take into account all sources of income and gains not just those from Self Employment or Property
  • Its a replacement for the SA100 tax return
  • The deadline will be 31st January
  • HMRC will provide a Submission Interface

steve@bicknells.net

How does your personal tax allowance get allocated against different types of income?

Every year we are given a personal tax allowance, this year its £12,570 (2021-22) last year it was £12,500 (2020-21).

The allowance is the amount we can earn before we pay tax.

The tax bands are currently (2021-22)

BandTaxable incomeTax rate
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £150,00040%
Additional rateover £150,00045%

But on your tax return the personal allowance is allocated in a specific order

  1. Non-savings income – comprised of earnings, pensions, taxable social security payments, trading profits and income from property. The highest type gets the first allocation.
  2. Savings income
  3. Dividend income is the top slice.

The Rules are in the Income Tax Act 2007 (legislation.gov.uk)

Section 25 (2) states …deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer’s liability to income tax.

What makes this even more complicated is the the way that other allowances work for example the Savings Allowance and Dividend Allowance.

Your allowances for earning interest before you have to pay tax on it include:

  • your Personal Allowance
  • starting rate for savings
  • Personal Savings Allowance

Starting rate for savings

You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.

The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.

If your other income is £17,570 or more

You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

If your other income is less than £17,570

Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.

Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.

To work out your tax band, add all the interest you’ve received to your other income.

Income Tax bandPersonal Savings Allowance
Basic rate£1,000
Higher rate£500
Additional rate£0

Dividend Allowance

The Dividend Allowance is currently £2,000

You only pay tax on any dividend income above the dividend allowance.

Tax bandTax rate on dividends over the allowance
Basic rate7.5%
Higher rate32.5%
Additional rate38.1%

Your SA302 Tax Calculation should show you how the allowances have been allocated.

steve@bicknells.net

Residential Letting – What is the Finance Cost Allowance and how are Unused Finance Costs used up?

This is often referred to clause 24 or section 24 relating to Finance Act 2015 (No 2) [Section 26 Finance Act 2016] that introduced the change which started from 6th April 2017. It took full force for the tax year 2020/21. The rules restrict interest relief to the basic rate of tax (20%).

The legislation was inserted into Income Tax (Trading and Other Income) Act 2005: Sections 272A, 272B and 274A-274C and Income Tax Act 2007: Sections 399A and 399B.

The legislation does not apply to Furnished Holiday Lets or Limited Companies.

Finance Costs include all finance costs, even those to buy furnishings and the incidental cost of arranging the finance.

The Relief

Its calculated as 20% of the lower of

  1. Finance costs not deducted from income, or
  2. The profits of the property business, or
  3. The adjusted total income

What is adjusted Total Income?

Net income is defined in the Income Tax Act 2007 Section 23

23 The calculation of income tax liability

To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. Step 1

Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

The sum of those amounts is “total income”.

Each of those amounts is a “component” of total income.

Step 2

Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.

See [F1sections 24A and 25] for further provision about the deduction of those reliefs.

The sum of the amounts of the components left after this step is “net income”.

It excludes Saving and Dividend Income (ITA07/S18 (3) & (4)).

It excludes the personal allowance and blind persons allowance (ITA07/S23).

The end results is adjusted total income (ATI) – S274AA.

A tax reduction can not be used to create a tax refund but it can be carried forward.

Example 2020-21 onwards

Fred has

  • Employment Income £45,000
  • Residential Property Income £25,000
  • Mortgage Interest £10,000
  • Allowable expenses £5,000
  • Property Losses Carried Forward £15,500
  • Unused Finance Costs carried forward from 2019-20 £2,000

Calculation as follows

Employment Income£45,000
Property Income Calculation
Rental Income£25,000
Finance Costs – you can’t deduct Mortgage Interest£0
Allowable Expenses-£5,000
Property Business Profits£20,000
Less Property Losses Carried Forward-£15,500
Taxable Property Business Profits£4,500
Net Income – Employment and Property£49,500
Income Tax Calculation
Personal Allowance £12,500 at 0%
Basic Rate £37,000 at 20%£7,400
Higher Rate £0 at 40%
Income Tax Liability before Residential allowance£7,400

The Basic Rate Tax 20% reduction for Residential Property is the lower of

  1. Finance Costs not deducted in this case that’s £10,000 Mortgage and £2,000 Unused Finance Costs carried forward from 2019-20 which totals £12,000
  2. Property business profits which are £4,500
  3. Adjusted total income (exceeding personal allowance) £37,000 (£49,500 – £12,500)

The lowest amount is the

  • Property business profits which are £4,500
  • So the basic rate tax reduction is 20% x £4,500 = £900

    We can now deduct that from the £7,400, leaving £6,500 as the final income tax liability.

    Unused Finance Costs
    Residential Finance Costs£12,000
    Used in the Basic Rate Reduction-£4,500
    Unused Residential Finance Costs£7,500

    The Unused Residential Finance Cost is carried forward to the next tax year, in this example 2021-22.

    We repeat the calculations above in 2021-22, following all the same steps.

    Let’s assume in 2021-22 his net income from Employment and Property is £60,000

    The tax would be 0% x £12,570 plus 20% x £37,700 plus 40% x £9,730 = £11,432

    The Basic Rate Tax 20% reduction for Residential Property is the lower of

  • Finance Costs not deducted £10,000 Mortgage as in the previous year and £7,500
  • Unused Finance Costs = £17,500

  • Property business profits which are £20,000 (assuming its the same as the previous year – losses having been used up in the previous year)
  • Adjusted total income (exceeding personal allowance) £47,430 (£60,000 – £12,570)
  • The lowest is £17,500.

    So the basic rate deduction is £17,500 x 20% = £3,500

    £11,432 less £3,500 gives a final income tax liability of £7,932

    Unused Finance Costs
    Residential Finance Costs and carried forward amount£17,500
    Used in Basic Rate Reduction-£17,500
    Unused Residential Finance Costs to be Carried Forward£0

    steve@bicknells.net

    How do you register for CIS?

    You may need to register as a contractor or a subcontractor or both, let’s look at what you need to do.

    Registering as a Contractor

    If you are within the Construction Industry and you pay Subcontractors, you will be a Contractor.

    What are Mainstream contractors

    If your business is construction and you pay subcontractors for construction work, you’re a ‘mainstream’ contractor. This applies if you’re a:

    • builder
    • labour agency
    • gangmaster (or gang leader)
    • property developer

    What are Deemed contractors

    You count as a ‘deemed’ contractor if your business does not do construction work but you have spent more than £3 million on construction in the 12 months since you made your first payment. This could apply to:

    • housing association or arm’s length management organisations (ALMOs)
    • local authorities
    • government departments

    How do you Register

    You register as an employer but tick the box to say you will be paying subcontractors (you can also register by phoning the HMRC Helpline 0300 200 3210), I generally use the gateway.

    It can take 5 working days to register (longer at the moment), you can’t register more than 2 months in advance and you need to register before you make payments.

    You register on Government Gateway, its registering for taxes, you need to choose PAYE.

    You then need to know:

    • Business UTR
    • Business Contact Details
    • Your NI Number
    • Start date
    • Tick the Subcontractor Box

    When done, you’ll get a letter from HM Revenue and Customs (HMRC) with the information you need to start working as a Construction Industry Scheme (CIS) contractor.

    Contractors need to:

    • Verify Subcontractors – checking deduction status
    • Deduct tax from payment at the rate stated by HMRC
    • Pay tax to HMRC
    • Complete a Monthly CIS return
    • Provide Subcontractors with a Deduction Statement

    Registering as a Subcontractor

    To register for the Construction Industry Scheme (CIS) as a subcontractor you’ll need:

    • your legal business name – you can also give a trading name if it’s different to your business name
    • your National Insurance Number
    • the unique taxpayer reference number (UTR) for your business
    • your VAT registration number (if you’re VAT registered)

    If you’re a subcontractor and a CIS contractor (you pay subcontractors to do construction work), you’ll need to register for CIS as both.

    You can register by phoning the HMRC Helpline

    Telephone:
    0300 200 3210

    Monday to Friday: 8am to 6pm

    Closed on weekends and bank holidays.

    You can also register using the goevrnment gateway – register for CIS online. You’ll need the Government Gateway user ID and password you used when you registered for Self Assessment (or another government service).

    You can apply for gross payment status at the same time.

    If you do not have a UTR, register as a new business for Self Assessment and choose ‘working as a subcontractor’ when prompted. You’ll be registered for Self Assessment and CIS at the same time.

    Companies can use form CIS305 to apply.

    How do you qualify for Gross Status

    You must show HM Revenue and Customs (HMRC) that your business passes some tests. You’ll need to show that:

    • you’ve paid your tax and National Insurance on time in the past
    • your business does construction work (or provides labour for it) in the UK
    • your business is run through a bank account

    HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:

    • £30,000 if you’re a sole trader
    • £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
    • £30,000 for each director of a company, or at least £100,000 for the whole company

    If your company’s controlled by 5 people or fewer, you must have an annual turnover of £30,000 for each of them.

    Gross Status means you can be paid without any tax being deducted.

    steve@bicknells.net

    How much VAT can you claim back for expenses before you became VAT Registered?

    You don’t have to wait till you hit the £85,000 threshold to register for VAT, you can voluntarily register even before you make your first taxable supply (sale). You can even back date the registration!

    VATREG21550 – Voluntary registration: intending traders: what is an intending trader?

    An intending trader is a person who, on the date of the registration request:

    • is carrying on a business
    • has not started making taxable supplies
    • has an intention to make taxable supplies in the future.

    Intending traders normally seek registration from a current date in order to reclaim input tax incurred in the setting up and development of their business. In some cases, the amounts involved may be substantial and cover a long period of time.

    VATREG21650 – Voluntary registration: intending traders: requests from an intending trader for retrospective registration

    Requests for backdating an EDR in cases of voluntary registration can only be considered at the time of initial application: see VATREG21150.

    When you are considering such requests, traders must be able to provide evidence that they would have satisfied us at the time (that is, the earlier date requested) that they had a firm intention to make taxable supplies.

    What Evidence is needed?

    Examples would include

    • potential contracts
    • planning permission
    • items purchased for the business
    • patents applied for
    • application for option to tax land or buildings

    What about new companies?

    Companies don’t exist until they are formed (incorporated), so they can’t be registered until they exist, but you can still claim for pre-trading expenses, subject to the rules in the next few paragraphs. The VAT is reclaimed by submitting an expense claim to the company on the day the company was created (incorporated).

    Purchases made before registration

    There’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:

    • 4 years for goods you still have, or that were used to make other goods you still have
    • 6 months for services

    You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

    You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including:

    • invoices and receipts
    • a description and purchase dates
    • information about how they relate to your business now

    Personal Use

    If the purchases have a element of personal use that must be excluded.

    For example a mobile phone acquired before the business started or not on a business contract used for personal and business, only the business proportion can be claimed on your VAT return.

    If the phone subsequently is replaced with a business contract then the whole cost can be claimed.

    What Goods can the 4 year rule be applied to?

    A good example would be Stock or Work in Progress and to support your claim you would need

    • Quantities and Descriptions
    • Invoices
    • Details of how they relate to your business now

    Fixed Assets would also qualify, for example

    • Computers
    • Desks
    • Office Equipment

    However, VIT32000 states a business may not use regulation 111 to recover VAT on supplies that were purchased for non-business or private purposes. The expense is not a business cost and no VAT can ever be recovered, regardless of any subsequent business use. This principle was confirmed in the case of Waterschap Zeeuws Vlaanderen (see VIT62520). For example:

    • an individual buys a van to use for wholly private purposes. Three years later the individual registers for VAT and uses the van exclusively within their business. The VAT paid on the van is permanently outside of the VAT system because there were no business activities at the time the van was bought. The VAT paid on the van can never be brought back in under the terms of regulation 111

    What about the 10 year Capital Goods rule?

    For capital items within the Capital Goods Scheme and acquired after 1 January 2011 there are different rules.

    Capital items are defined as:

    • Land, buildings and civil engineering work or capital expenditure in relation to the same including construction, refurbishment, fitting out, alteration and extension, where the value is more than £250,000 (Land); or
    • Ships, boats or other vessels and aircraft including capital expenditure in relation to the same of construction, refurbishment, fitting out, alteration and extension, where the value is more than £50,000 (Ships and Aircraft); or
    • Single items of computer hardware where the value is over £50,000 (Computers).

    Where the goods or services acquired prior to registration are capital items and when the business registers on or after 1 January 2011, even in cases where the registration is backdated to an earlier date, the normal regulation 111 time limits of six months for services and four years for goods on hand may not apply. Instead a business may be able to recover VAT incurred up to ten years prior to registration in respect of land and up to five years prior to registration for other capital items.

    What counts as Services?

    Examples could include

    • Subcontractors
    • Professional Services from Accountants and Lawyers
    • Software
    • Rent of Premises
    • Telephone and Internet
    • Equipment leasing

    The main problem is deciding whether the services have been consumed/used up before registration for example Rent – the rental period could be expired before registration in which case it can’t be claimed (however that might not apply to warehouse holding stock or rent paid in advance). The same issues apply to Telephone and Internet – was the cost to generate future work or past work. In fact most types of service need to be carefully examined as they could be past or future, only those relating to period after registration can be claimed as these costs haven’t been ‘Consumed’.

    In order to qualify

    1. The services must be for the business now registered for VAT
    2. Supplied for the purpose of the business and relate to taxable/Vatable activities (ie not exempt activities)
    3. Not related to goods consumed/disposed of before registration, for example if the subcontractor worked on a project sold before the Effective Date of Registration then you can’t claim it

    steve@bicknells.net

    If you were not adversely affected what happens to your SEISS?

    You will have noticed on your self assessment return and partnership returns for 2021 extra boxes for showing grants.

    You must tell HMRC if, when you made the claim, you were not eligible for the grant. For example:

    • for the first or second grant, your business was not adversely affected
    • for the third or fourth grant, your business had not been impacted by reduced activity, capacity or demand or inability to trade in the relevant periods
    • you did not intend to continue to trade
    • you’ve incorporated your business

    You must also tell HMRC if you:

    • received more than we said you were entitled to
    • amended any of your tax returns on or after 3 March 2021 in a way which means you’re no longer eligible or are entitled to a lower fourth grant than you received

    You must reasonably believe that you’ll suffer a significant reduction in trading profits due to reduced business activity, capacity, demand or inability to trade due to COVID-19- between 1 May 2021 and 30 September 2021. You must keep evidence that shows how your business has been impacted by COVID-19 resulting in less business activity than otherwise expected.

    HMRC expects you to make an honest assessment about whether you reasonably believe your business will have a significant reduction in profits.

    What HMRC mean by impacted by reduced activity, capacity and demand

    This applies to your business if it has been impacted by reduced activity, capacity or demand due to COVID-19. For example, you:

    • have fewer customers or clients than you’d normally expect, resulting in reduced activity due to social distancing or government restrictions
    • have one or more contracts that have been cancelled and not replaced
    • carried out less work due to supply chain disruptions

    You must not claim if the only impact on your business is increased costs. For example, if you’ve had to purchase face masks and cleaning supplies. This would not be considered as reduced activity, capacity or demand.

    When you must tell HMRC

    In most cases, if you’re not eligible and have to pay the grant back, you must tell us within 90 days of receiving the grant.

    The 5th SEISS Grant

    Full details of the fifth Self-Employed Income Support Scheme (SEISS) grant, including a new turnover test which determines the level of the grant, were published by HMRC on 6th July.

    Although the eligibility for the fifth grant is the same as the fourth grant, the amount of the fifth grant will be determined by how much the turnover of the business(es) have reduced compared to the turnover in the reference year.

    See: Check if you can claim a grant through the Self-Employment Income Support Scheme – GOV.UK (www.gov.uk)

    The fifth grant is 80% of three months’ average trading profits capped at £7,500 for those whose turnover has reduced by 30% or more. Those with a turnover reduction of less than 30% will receive a grant based on 30% of three months’ average trading profits, capped at £2,850.

    We have been waiting for the precise rules for determining turnover, but HMRC guidance provides more questions than answers and further clarification is still required.

    See:  Work out your turnover so you can claim the fifth SEISS grant – GOV.UK (www.gov.uk)

    The turnover figure required is for a 12-month period starting on any date between 1 and 6 April 2020. Those who prepare accounts on a tax year basis will be able to use the same figure that will appear on the 2020/21 tax return.

    That turnover figure is then compared to the turnover in the “reference period” which for most individuals will be the turnover figure from their 2019/20 tax return and there is an option to use 2018/19 if 2019/20 was not a normal year for the business.

    The turnover figure will be the sum of all of the taxpayer’s businesses but should exclude coronavirus support payments (for example previous SEISS grants, eat out to help out payments and local authority grants). The rules for partners seem particularly illogical, especially where they are also involved in another business.

    steve@bicknells.net