Is my training tax deductible?

Training Practice Workshop Mentoring Learning Concept

Training courses can be expensive, in this blog we are going to focus on the self employed.

The key rules are contained in BIM42526

Specific deductions: administration: own training courses

Provided it is incurred wholly and exclusively for the purposes of the trade carried on by the individual at the time the training is undertaken, expenditure on training courses attended by the proprietor of a business (either as a sole trader, or in partnership with others) with the purpose of up-dating their skills and professional expertise is normally revenue expenditure, which is deductible from the profits of the business.

Business purpose test

In considering the question of purpose, you should not take an unduly narrow view of whether the content of any particular course only up-dates existing skills of the individual. But if it is clear that, for example, a completely new specialisation or qualification will be acquired as a result of the expenditure, it is unlikely that the expenditure will be wholly and exclusively for the purposes of the existing trade.

Capital test

Expenditure on new skills etc may also be capital if what is acquired can be viewed as an identifiable asset of sufficient substance and endurance. See Dass v Special Commissioner and others [2006] EWHC2491 (Ch)

Let’s take the example of Property Courses

There are many property courses available for investors, often the investors are self employed/sole traders/individual investors, the courses can cost thousands.

What courses are claimable:

  • Improving your skills – for example you have a basic understanding of finances but want improve your knowledge of tax

What courses are not claimable:

  • Beginners Day/Novice Courses – any course for beginners or novices would suggest you have no previous knowledge so they won’t be allowed
  • New Skills – you want to learn something new for example you currently let property and want to learn how to do property development

If the course is disallowed the travel costs will also be disallowed

What about companies?

The rules for companies are much easier to comply with and written with a much wider scope..

Income Tax (Earnings and Pensions) Act 2003

Section 250 Exemption of work-related training provision

(1)No liability to income tax arises by virtue of—

(a)the provision for an employee of work-related training or any benefit incidental to such training, or

(b)the payment or reimbursement to or in respect of an employee of—

(i)the cost of work-related training or of any benefit incidental to such training, or

(ii)any costs of a kind specified in subsection (2) in respect of such training.

(2)The costs are—

(a)costs which are incidental to the employee undertaking the training,

(b)expenses incurred in connection with an examination or other assessment of what the employee has gained from the training, and

(c)the cost of obtaining any qualification, registration or award to which the employee becomes or may become entitled as a result of the training or such an examination or other assessment.

Section 251 Meaning of “work-related training”

(1)In this Chapter “work-related training”, in relation to an employee, means a training course or other activity designed to impart, instil, improve or reinforce any knowledge, skills or personal qualities which—

(a)are likely to prove useful to the employee when performing the duties of the employment or a related employment, or

(b)will qualify or better qualify the employee—

(i)to perform those duties, or

(ii)to participate in any charitable or voluntary activities that are available to be performed in association with the employment or a related employment.

(2)For this purpose “related employment”, in relation to an employee, means another employment with the same employer, or with a person connected with the employer, which the employee—

(a)is to hold,

(b)has a serious opportunity of holding, or

(c)can realistically expect to have a serious opportunity of holding in due course.

steve@bicknells.net

Don’t mix up your property investments with your main business

Entrepreneur startup business model

There are lots of good reasons to keep property investments in their own companies rather than mix them up with your main business activity.

We have a blog explaining why residential investments should be in a company https://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

Entrepreneurs Relief when you sell your business is one of the major reasons not to have property in your trading business as significant Non Trading Activity will be a problem, if a business contains investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business.

What is Entrepreneurs Relief

Entrepreneurs Tax Relief applies if you sell or close your business and means that you only pay 10% Capital Gains Tax on any qualifying profits.

There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.

Companies

To claim Entrepreneurs’ Relief you must:

  • own at least 5% of the shares in the business for a year
  • be a director, partner or employee of the business

Sole traders

To claim Entrepreneurs’ Relief you must have been trading for at least a year.

Full details are on the HMRC Helpsheet HS275

steve@bicknells.net

How can you spread your Tax Payments

Pay up.

With the next self assessment payment on account due at the end of July many tax payers are wondering if they can spread their tax payments.

HMRC say..

Contact HM Revenue and Customs (HMRC) as soon as possible if you can’t pay all your tax on time.

You may be able to either:

  • get more time to pay

  • pay your bill in instalments by direct debit

But HMRC are generally reluctant to agree time to pay unless there are exceptional circumstances.

So an alternative might to use interest free credit cards.

Here is some great advice from Martin Lewis

Do it right and credit cards are the cheapest way to borrow. You can get 0% for up to 27 months – yet get it wrong and you’ll be stuck in debt for years.

Done right, it’s possible to borrow at no cost.

  • Make at LEAST the minimum repaymentsEnsure you set up a direct debit for at least the minimum repayment as soon as you are accepted. Even though you’re paying 0%, you still need to make repayments. If you miss one, you will lose your 0% deal, so the rate will jump and you’ll get a £12 charge.

    However, don’t almost clear your card in full – clear it IN FULL if you can. For example, if you’ve £1,000 debt from spending on a credit card and pay off £999, the fact it’s not cleared IN FULL means you pay a month’s interest on the whole amount.

    So if you can nearly clear your card, do what you can to totally clear it (even if it’s a 0% spending card it’s a good habit to get into).

  • Clear the card within the 0% periodGo even one month beyond the promotional period and the rate rockets, so calculate the amount needed to clear the balance by then. For example, borrow £600 on a year’s 0% card, divide the spend by the number of months (£600 / 12) to get the monthly repayment – in this case £50 – and set up a direct debit to do that.
  • Diarise the end datesIt’s incredibly vital you make a note of the 0% end dates (or use the Tart Alert) to make sure you pay off the debt in time, or be ready to switch to a new Best Balance Transfer deal. If you forget to switch when the deal ends, the interest cost will swiftly outweigh the card’s benefit.

You can see Martins full advice at http://www.moneysavingexpert.com/credit-cards/best-0-credit-cards

steve@bicknells.net

Hooray! we have now paid our tax – Tax Freedom Day was 2nd June 2016

tax free icon, red round glossy metallic button, web and mobile app design illustration

According to the Adam Smith Institute

Taxpayers worked 154 days this year to pay their taxes, four days longer than 2015

  • Tax Freedom day falls four days later than it did in 2015
  • Brits work 154 days of the year solely to pay taxes; every day from 1st January to 2nd June
  • Tax receipts projected to be 42.27% of net national income this year
  • Government needs to cut spending and keep tax reform a priority
  • Adam Smith Institute calling on government to raise National Insurance Threshold to help lowest paid in society

This is first time in 15 years that Tax Freedom Day has moved into June!

Whilst net national income has increased by £34.6bn from 2015, government has actually gobbled up £35.4bn more in taxes, meaning the government has actually left Britons £1bn worse off than last year, a reminder that tax reform must remain a priority.

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

“The Treasury hates Tax Freedom Day because they don’t want us to know how much tax we really pay. They conceal the tax burden with stealth taxes that we don’t even realise we’re paying.

“But it’s shocking that the government takes over two-fifths of the country’s earnings – and then borrows more. We work longer for the government than mediaeval serfs had to work for their Lords!

“It is absurd that people on the minimum wage are liable for National Insurance Contributions, which raise their cost to employers and make it harder to move from benefits into work. The poor are also worst hit by regressive taxes like excise duties on what they buy.”

Tax Freedom Day is designed to reveal to the public how much they really pay out in taxes, which Britain’s lengthy tax code can often obscure. ASI calculations include direct taxes like income tax and national insurance, as well as indirect taxes like VAT and corporation tax.

steve@bicknells.net

If you’re a Landlord get an accountant now!

Hand writing the text: Property News

Last week the Bank of England turned up the heat on Landlords.

The Bank of England expressed concerns about Buy-to-Let Investment and lending levels. New rules have been proposed that aim to tighten requirements for landlords involved in investment properties and limit the amount that can be borrowed for these types of endeavours.

This reaction comes from recent suggestions that mass buy-to-let property management could have a destabilising effect on the UK economy.

The rules put a spotlight on lenders, encouraging them to require more extensive financial information from the potential landlord before granting a mortgage.

The requirements go beyond ensuring the rental income of the property is significantly higher than the mortgage payments (the income coverage ratio), to also considering an individual’s overall financial situation.

The Prudential Regulation Authority (PRA) – an arm of the Bank – has recommended that banks and building societies take account of:

  • all the costs a landlord might have to pay when renting out a property
  • any tax liability associated with the property
  • a landlord’s personal tax liabilities, “essential expenditure” and living costs.
  • a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.

If adopted, the new rules could reduce lending to landlords by up to 20% over the next three years.

https://debitoor.com/blog/how-use-debitoor-property-accounting

Landlords have already been hit but tax changes…

Buy to Let Stamp Duty

Prop Value Std Rate B2L Rate
< £125,000 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
Over £1.5m 12% 15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

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 it’s 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.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

  1. Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
  2. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  3. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
  4. Increasing the Rent – Could you charge more to cover the extra taxes?
  5. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  6. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

Thank you Mr Osborne – we like pensions the way they are!

This is exactly how I pictured the partners lounge

Hooray!!!

On the 5th March George Osborne announce that he would drop the changes that were proposed on 20th January 2016.

The changes that had been proposed were…

The ISA idea

Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.

I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment

Flat Rate Tax Relief

The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.

The BBC explained how this might work

At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.

It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.

Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.

http://www.bbc.co.uk/news/business-35360978

Pot of gold coins isolated on white

Pensions are a fantastic way to save tax…

Inheritance Tax

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.

Business Premises

Your pension can own Commercial Property, including your own business premises.

In many cases it is better for business premises to be owned by the business owners pension fund because:

  1. The object of the business is not to own its own property, the objective should be for the business to make profits from trading
  2. The business could use cash tied up in the premises to invest in trading activities
  3. Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
  4. Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
  5. You may be able to use 3 year Carry Forward to get funds into your pension scheme

Commercial Investment Property

Your pension scheme can own commercial investment property – shops, offices, industrial units.

It can borrow up to a third of the value of the pension scheme.

There is no capital gains tax and no tax on the rental income.

In Specie Transfers

In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.

Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.

HMRC say…

In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.

Net Relevant Earnings (NRE)

Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.

Employer v’s Employee Pension Payments (Net Relevant Earnings)

Lend Money to your Pension Scheme

If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.

But one thing you may not know is that connected parties can lend to the fund…

Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).

A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.

A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm07104010.htm

This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.

25% Tax Free

When you retire you get 25% of you pension fund tax free.

http://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-and-the-cash-lump-sum

Shares and Loans

SSAS Pensions can lend money to their scheme employer and the scheme employer can borrow from a SSAS subject to passing 5 tests.

steve@bicknells.net

Time to prepare for tax year end April 2016

Fotolia_91134201_XS Advice

Now you have filed your April 2015 Return (50% will have been filed in January 2016) you only have 2 months left to take action to save tax on your April 2016 tax return.

What should you be doing right now to save tax?

Contribute to your Pension

Transitional rules, for 2015/16 only, mean that there’s an annual allowance of £80,000, although only £40,000 of this can be used between 9 July 2015 and 5 April 2016. You may also have unused annual allowances from the three previous tax years.

These Transitional rules are to align PIP’s (Pension Input Periods) with the Tax Year.

Pensions have huge tax saving advantages

How a family pension scheme will save you tax

Optimise your 2015/16 Salary

You can’t carry forward any unused personal allowances so generally the optimum salary will be £10,600

What is the optimum tax efficient salary 2015-16?

Take Dividends now

When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year.

Dividend tax rates before April 2016

Tax band Effective dividend tax rate
Basic rate (20%) (and non-taxpayers) 0%
Higher rate (40%) 25%
Additional rate (45%) 30.56%

 

This will change from April 2016, see the table below

Dividend tax rates after April 2016

Tax band Effective dividend tax rate
Tax Free £5,000 0%
Basic Rate Tax Payers (20%) 7.5%
Higher Rate Tax Payers (40%) 32.5%
 Additional Rate Tax Payers (45%)  38.1%

 

Capital Gains Tax Allowance

Each year individuals get a capital gains tax allowance, this year its £11,100. If you have capital gains it could worth phasing them to use up the capital gains tax allowance.

Here are some great blogs on how you could transfer a personally owned property or sell shares in a property company to take gains in stages

http://stevejbicknell.com/2014/08/13/how-do-you-give-away-property-in-stages/

http://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

Other Ideas

steve@bicknells.net

act now icon

If you are self employed have you tried the HMRC Simplified Expenses Checker?

15081303234_3ff228fc8a_z

Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs.

You don’t have to use simplified expenses. You can decide if it suits your business.

Simplified expenses can be used by:

  • sole traders
  • business partnerships that have no companies as partners

You can use flat rates for:

  • business costs for vehicles
  • working from home
  • living in your business premises

You must calculate all other expenses by working out the actual costs.

Costs you can claim as allowable expenses

These include:

Use this checker to work out which method is best for you.

What you need to know:

  • you’ll be asked to make estimates about some of your business expenses – you don’t have to give accurate amounts
  • this checker doesn’t give exact figures to use in your tax return, it gives you an idea of which way of calculating your expenses might be best for you
  • limited companies aren’t eligible

act now icon

Start now

steve@bicknells.net

Contact Us

Will TAAR cause you problems on company distributions? (New Share Rules)

Successful Businessman With A Contract In Hand

HMRC are currently consulting on new rules to start in April 2016.

The consultation is focusing on Capital Gains Tax (CGT) ways to extract money from companies to create Target Anti Avoidance Rules (TAAR) covering:

  1. A disposal of shares to a third party
  2. A distribution made in a winding up
  3. A repayment of Share Capital including Share Premium
  4. A valid purchase of own shares in an unquoted company

Here are the examples of ‘problems’ HMRC want to resolve, Example 1 is ‘moneyboxing’ and/or ‘phoenixism’ and sometimes involves ‘special purpose vehicles’

Example 1

Example 2 involves creating a holding company…

Example 2

The consultation ends on the 3rd February 2016, the results are likely to be controversial!

steve@bicknells.net

Contact Us

5 million paid the wrong tax last year – is your tax code right?

Tax Refund Green Blue Horizontal

As reported last year by the Telegraph

Five million people may have been billed incorrectly by HMRC.

You’ll find your tax code on:

  • your pay slip
  • your PAYE Coding Notice – you usually get this a couple of months before the start of the tax year and you may also get one if something has changed but not everyone needs to get one
  • form P60 – you get this at the end of each tax year
  • form P45 – you get this when you leave a job

Among those most likely to be affected are veterans who have taken a civilian job after leaving the Armed Forces, but who also draw a military pension. Pensioners with two pensions and those who have continued to work part-time after retirement are also more likely to be hit.

Taxpayers, who must complete their self-assessment tax returns before Jan 31, are being warned to check their paperwork again to make sure they are not affected.

Problems arise because various tax offices around Britain are failing to share information about taxpayers’ incomes on a central database.

People with more than one income, whether from pensions, PAYE employment or a mixture of the two, are being allocated their personal tax-free allowance multiple times. It means the tax codes issued for their various income sources are incorrect, so not enough tax is taken. Often the mistakes are discovered by HMRC years later, leading to unexpected tax demands. Telegraph

If you think your Tax Code is wrong you should tell HMRC as soon as possible using online form P2

https://online.hmrc.gov.uk/shortforms/form/P2

You can check how your tax using this HMRC link

https://www.gov.uk/check-income-tax

The most common tax code for tax year 2015 to 2016 is 1060L (£10,600 being the annual income tax free allowance for 2015/16) – in 2014 to 2015 it was 1000L. It’s used for most people born after 5 April 1938 with one job and no untaxed income, unpaid tax or taxable benefits (eg company car).

steve@bicknells.net

Contact Us