Auto enrolment

Auto-enrolment – Employer obligations

The Covid-19 pandemic has introduced many challenges for employers. However, despite the pandemic, their responsibilities in relation to auto-enrolment remain the same. The employer’s on-going duties include their re-enrolment and re-declaration obligations.

Every 3 years, the employer must put certain members of staff back into their auto-enrolment pension scheme and complete a declaration to tell the Pensions Regulator that they have done so. This is known as re-enrolment and re-declaration. 

The key date is the third anniversary of the employer’s staging date or start date. Thereafter, the re-enrolment and re-declaration processes must be undertaken at three-year intervals.

Re-enrolment

Under re-enrolment, the employer must check:

  • whether they have staff to put back into the pension scheme and re-enrol them; and
  • write to staff who have been re-enrolled.

To do this, the employer will need to assess staff who have left the scheme or who have reduced their contributions.

Staff must be enrolled in a pension scheme automatically if:

  • they are aged between 22 and State Pension Age.
  • they earn over £10,000 a year (£833 a month, £192 a week).

If staff who meet the above criteria have previously opted out, they need to be re-enrolled. 

Staff who need to be re-enrolled should be put back into the pension scheme within 6 weeks of the re-enrolment date. If this date is missed, it should be done within 6 weeks of the date on which staff were assessed.

If an employee does not want to be a member of the scheme, they can opt out. However, they must be re-enrolled if they are eligible at the re-enrolment date; once re-enrolled they can opt out. Opting out lasts only until the next re-enrolment date, at which time they must be put back in (but can then opt out again if they want to). Employers must re-enrol eligible staff even if they know they want to opt out.

Once staff have been re-enrolled, the employer must deduct employee contributions from their pay and pay them over to the scheme with the employer contributions.

The employer must write to staff who have been re-enrolled to let them know, and also to inform them of the contributions that will be paid and that they can opt out if they want to.

Re-declaration

The final stage of the re-enrolment and re-declaration process is to submit the re-declaration of compliance. This has to be done regardless of whether or not staff have been put back into the pension scheme.

The re-declaration of compliance is an online form which confirms to the Pensions Regulator the employer has met their legal obligations in relation to auto-enrolment. The re-declaration of compliance must be filed no later than 5 months from the third anniversary of the duties start date, or staging date, as appropriate. The deadline is the same regardless of whether staff within 6 weeks are assessed within of the re-enrolment date, or at a later date. 

Van benefit

Picking up on van benefits

An income tax charge will generally arise where an employee, or a family member, is able to use a work’s van for private use. This will nearly always include home-to-work travel. 

From 6 April 2020, the flat-rate van benefit charge crept up once again and currently stands at £3,490 (rising from £3,430 in 2019/20), which equates to an additional £12 a year for a basic rate taxpayer. A lower cash equivalent applies for zero emissions vans.

If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2020/21 the flat-rate van fuel benefit charge has been increased from £655 to £666.

The benefit charge applies regardless of the employee’s earnings rate but may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.

For 2020/21, a basic rate taxpayer will pay £698 for the use of a work’s van (£3,490 x 20%), which equates to around £13.40 a week. For a higher rate taxpayer, the cost will be £1,396.

If fuel is also provided for private use, for 2020/21, a basic rate taxpayer will pay additional tax of £133.20 (£666 x 20%), and a higher rate taxpayer will pay £266.40.

Tax is normally collected through a restriction to the employee’s Pay As You Earn (PAYE) tax code.

The trouble with pick-ups

Given their versatility and ‘outdoorsy’ nature, double-cabbed pick-ups are increasingly becoming a popular choice for a family vehicle. So, how does this work for the van benefit-in-kind (BIK) tax charge? 

To qualify as a van for BIK purposes, a vehicle must be:

•           a mechanically propelled road vehicle; and

•           of a construction primarily suited for the conveyance of goods or burden of any description; and

•           of a ‘design weight’ which does not exceed 3,500kg; but 

•           not a motorcycle as defined in the Road Traffic Act 1988, s. 185(1). Broadly, this means that it must have at least four wheels.

The design weight of a vehicle, also known as the ‘manufacturer’s plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.

Human beings are not ‘goods or burden of any description’ so vehicles designed to carry people (such as minibuses) will not be a van for these purposes.

When it comes to double cab pick-ups, former contention has arisen as to whether they should be treated as cars or vans. HMRC now interpret the legislation that defines cars and vans for tax purposes in line with the definitions used for VAT purposes.  This means that a double cab pick-up that has a payload of 1 tonne (1,000kg) or more will be accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight. The 1 tonne rule only applies to double cab pick-ups, not to any other vehicle.

A word of warning though – under an agreement between HMRC and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore, the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car because the net payload is reduced to 965 kg. This in turn, will have the potential knock-on effect of throwing up a much higher BIK tax charge.

Winding up

Winding up a company – Overview

Disposing of a limited company usually involves a considerable amount of forethought, planning and paperwork because a number of possible exit routes exist and each company situation is different. In general, however, the directors usually sell their shares to someone else, who continues to run the business, or sell their assets and shut down the company.

Once it has been determined that a company is to be wound up, there are a number of relationships and obligations which must be terminated. Whether a company is solvent or insolvent, obligations to customers, suppliers and employees must be brought to a close. 

Closing down

Once the directors have voted to cease trading, closing down a limited company begins with preparing final trading accounts. For corporation tax, when the winding up period begins, the current accounting period comes to an end and a new one begins.  From that point on, the company’s accounting periods run for periods of 12 months until the winding up is complete.

Final accounts will be submitted to HMRC along with form CT600 (company tax return) and the computation of corporation tax. HMRC will be advised that these are the final accounts and that the company is to be dissolved. If final liabilities are not paid in full, HMRC may object to dissolution of the company.

Disposal of shares and/or assets

Where shares are disposed of, the sale consideration flows directly to the shareholder, whereas on a disposal of assets, the money flows to the company, and further tax may be payable when the money is subsequently extracted. The effective double charge to tax on gains arising in companies where the money is extracted by shareholders has been mitigated over the years by:

  • business asset disposal relief for shareholders in computing their gains on the shares;
  • the relatively recent reductions in the standard rate of capital gains tax to 18%, and now 10%, for basic rate taxpayers; and
  • indexation relief available up to 31 December 2017 and frozen from that date.

If the vendors are individuals and they want to receive the sale consideration personally, a simple sale of the company is generally likely to result in lower tax liabilities than a sale by the company of its assets followed by a distribution to the shareholders (whether by way of a dividend or in a winding-up or a combination of both).

BADR

Business asset disposal relief (BADR) (formerly known as Entrepreneurs’ Relief (ER)) may be available to individuals who dispose of shares in their personal company. There is a lifetime limit on the amount of BADR available to an individual – for disposals on or after 11 March 2020, the lifetime limit is £1m. Qualifying gains within the lifetime allowance are charged at the rate of 10%. Gains in excess of this limit are charged at the rate of 20% rate.

To qualify, both of the following must apply for at least two years up to the date the shares are sold:

  • the individual is an employee or office holder of the company (or one in the same group);
  • the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group.

There are also other rules depending on whether or not the shares are from an Enterprise Management Incentive (EMI).

If the shares are not from an EMI, for at least two years before the sale of shares, the business must be a ‘personal company’. This means that the individual has at least 5% of both the:

  • shares; and
  • voting rights

They must also be entitled to at least 5% of either:

  • profits that are available for distribution and assets on winding up the company; or
  • disposal proceeds if the company is sold 

If the number of shares held falls below 5% because the company has issued more shares, the individual may still be able to claim BADR.

Early planning

Early planning and preparation will be the key to a successful exit strategy. In some cases, the disposals make be phased gradually over a number of years. Seeking professional advice when thinking about disposing of a business is always recommended.

Property LLP

Advantages of using a property LLP

A limited liability partnership (LLP) can be used for a property business and offers some advantages over unincorporated businesses and limited liability companies. A property LLP is something of a halfway house, providing the comfort of limited liability with the flexibility as to how profits are shared.

The use of a property LLP can be particularly useful in a family situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.

Setting up a property LLP

Like a company, a property LLP must be registered at Companies House.

An LLP can hold property in its own right. The LLP can acquire property or the partners can transfer property that they already own into the LLP.

Transferring property into the LLP can be advantageous from a tax perspective. The property is held on trust in the LLP, but the underlying legal ownership is unchanged, meaning there is no SDLT to pay. Where a member transfers property into the LLP, the value of that property at the time of transfer forms the opening balance on their equity account.

Flexibility to share profits and losses

One of the key benefits of the LLP is the flexibility to share profits and losses. This provides the potential for a tax efficient distribution.

The default position is to share profits and losses in accordance with the ratios on the members’ capital accounts. However, the ability to pay salaries in a different ratio provides flexibility to tailor the distribution in a tax efficient manner. Providing or withdrawing capital will also change the default profit sharing ratio.

Tax position

From a tax perspective, an LLP is transparent for tax purposes. 

This means that the individual partners are treated as being self-employed and must pay income tax on their share of the profits, and also Class 2 and Class 4 National Insurance contributions where relevant.

Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.

Each individual partner must return their income from the LLP on their personal tax return. The LLP must file a partnership return.It is important that the LLP is carried on with a view to making a profit as anti-avoidance rules may apply which have the effect of switching the tax transparency off.

Student loan

Increased thresholds for student loan repayments from April 2021

Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HMRC. Employers have an obligation to deduct student loan repayments in certain circumstances and to account for such payments ‘in like manner as income tax payable under the Taxes Acts’. 

There are two plan types for student loan repayments, which have different repayment thresholds. From April 2021, the thresholds are as follows:

  • plan 1 with a 2021-22 threshold of £19,895 (£1,658 a month or £382 per week) rising from £19,390 in 2020-21); and
  • plan 2 with a 2021-22 threshold of £27,295 (£2,274.50 a month or £525 per week) rising from £26,575 in 2020-21).

Plan 1 loans are pre-September 2012 Income Contingent Student Loans and repayments will start when the £19,895 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £27,295 is reached.  Previously plan 2 loans have been repaid outside of the payroll directly to the SLC, but from April 2016 they are to be calculated and repaid via deduction from an employer’s payroll. This means that employers and payroll software must be capable of coping with both types of plans.

From 6 April 2021 HMRC are introducing a new plan type for Scottish Student Loans (SSL) known as Plan 4. The Plan 4 threshold will be £25,000. Student Loan deductions will continue to be calculated at 9% on earnings above the Plan 1, Plan 2 or Plan 4 threshold.

Post-graduate loans

Repayment of postgraduate loans (PGL) via PAYE commenced from April 2019. Broadly, if an individual has a PGL, HMRC will send their employer a Postgraduate start notice (PGL1) to ask them to start taking PGL deductions. Individuals may also be liable to repay a Student Loan Plan Type 1 or 2 concurrently with PGL. HMRC will let their employer know this by continuing to send the normal Student Loan start (SL1) and Student Loan stop (SL2) notices as well as PGL1s and PGL2s. 

The Postgraduate Loan threshold will remain at its current level of £21,000 for 2021-22. Earnings above £21,000 will continue to be calculated at 6%.

Repayment

Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:

  • a new employee’s P45 shows deductions should continue – the employer will need to ascertain which plan type the employee has;
  • a new employee confirms they are repaying a student loan – again, the employer will need to confirm the plan type;
  • a new employee completes a starter checklist showing they have a student loan – the checklist will tell the employer which plan type to use; or
  • HMRC issues form SL1 (Start Notice), which will tell the employer which plan type to use.

Employers are not responsible for handling employees’ student loan queries – the employee must contact SLC for this (https://www.gov.uk/government/organisations/student-loans-company).

Student loan deductions are made from gross pay, alongside tax and NIC.

Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.

If an employee has two jobs, the employer does not need to be concerned with the employee’s other income, but should calculate the deduction based only on amounts paid by him. However, if the employee has two employments with the same employer, these should be aggregated for student loan purposes if they are aggregated for NIC purposes.

Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee’s pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above). 

Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.

Taxpayers who make repayments through PAYE can swap to repaying by direct debit in the last 23 months of their loan if they so wish. SLC will normally contact individuals shortly before this time to offer this option. This payment method enables account holders to choose a suitable monthly repayment date and ensures that they do not repay too much.

If an employee makes additional student loan repayments direct to SLC, they will have no effect on the size of the repayments made through the payroll – the employer will continue to deduct 9% of earnings above the threshold. The employee will, of course, pay off the loan more quickly.

connected parties

Capital gains tax rules for connected persons

Although it is possible to transfer assets between spouses at a value that gives rise to neither a gain nor a loss, giving a property to children or other family members may trigger an unwelcome capital gains tax bill, even if nothing was received it return.

The market value rule

Where assets are disposed of to a connected person, the transfer is deemed to take place at market value, regardless of whether any consideration is actually received and the amount of that consideration.

The list of connected persons includes:

  • spouses and civil partners;
  • relatives (siblings, ancestors or lineal descendants);
  • spouse or civil partners of relatives; 
  • relatives or spouses or of civil partners; and
  • spouses or civil partners of those relatives.

However, as noted above, the no gain/no loss rule applies to transfer between spouses and civil partner rather than the market value rules. 

The following case study illustrates the potential cost of being caught out by the market value rule.

Case study

Adrian has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.

At the time that he gifted the property to his daughter, the house was valued at £300,000. 

Adrian purchased the property ten years earlier for £200,000. Costs of acquisition and disposal are £5,000.

As his daughter is a connected person, Adrian is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £95,000 (£300,000 – (£200,000 + £5,000)).

Assuming Adrian is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £26,600 (£95,000 @ 28%). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.

Despite not receiving a penny for the property, Adrian must find £26,600 to pay in capital gains tax.

The gift will also be a potentially exempt transfer for IHT purposes.

Driving

Using your own car in your property business

A landlord running an incorporated business is likely to need to use their own car for the purposes of the business. Where this is the case, what can they claim by way of expenses?

Two options

Costs incurred wholly and exclusively for business purposes can be deducted when working out the profits of a property business. When it comes to cars, a deduction can be claimed for the cost of fuel and associated running costs. There are two options for working out the deductible amount:

  • using the simplified expenses system; or
  • by reference to actual costs.

Depending on the method used to work out the deductible amount, it may also be possible to claim capital allowances in respect of the cost of the car.

Simplified expenses

As the name suggests, the simplified expenses system is an easy way to work out the allowable deduction. The landlord only needs to keep a record of business mileage for the year and calculate the deduction by reference to the permitted mileage rates. However, it is not an option if capital allowances have been claimed for the car – the rates include an element to reflect depreciation.

The system can also be used where a van or motorcycle is used for the purposes of the property business.

The mileage rates used to calculate the deduction are as follows:

VehiclesRate per mile
Cars and vansFirst 10,000 business miles45p
Subsequent business miles25p
Motorcycles24p

Actual costs

The landlord can instead claim a deduction by reference to the actual costs. This will necessitate more work but may give a higher deduction. 

Where the car is used for both the business and privately, the costs must be apportioned – a deduction is only given to the extent that they relate to the business.

When working out a deduction based on running costs, the following should be taken into account:

  • fuel;
  • insurance;
  • repairs;
  • servicing;
  • MOT; 
  • tyres;
  • breakdown cover; and
  • road tax.

If the cash basis is used to prepare the accounts, the deduction is given in the period when the expenditure is incurred; if the accruals basis is used, the expenditure must be matched to the period to which it relates.

Capital allowances

Capital allowances can only be claimed if simplified expenses have not been used to work out the deductible amount. Where the deduction is based on actual costs, writing down allowances can be claimed for the cost of the car. As with expenses, if the car is used both for business and private mileage, an apportionment is necessary.

Cars do not qualify for the annual investment allowance or a deduction under the cash basis capital expenditure rules.

January payment

What tax do I need to pay by 31 January 2021?

The self-assessment tax return for 2019/20 must be filed by midnight on 31 January 2021. If you miss this deadline, you will automatically receive a late filing penalty of £100, regardless of whether you owe any tax, unless you are able to convince HMRC that you have a reasonable excuse for filing your tax return after the deadline.

You must also pay any outstanding tax that you owe for 2019/20 by 31 January 2021, unless you have agreed a Time to Pay agreement with HMRC. The amount of tax that is outstanding for 2019/20 will depend on whether you opted to defer payment of the second payment on account for 2019/20, which would ordinarily have been due by 31 July 2020. 

To help taxpayers who were struggling financially as a result of the Covid-19 pandemic, self-assessment taxpayers could opt to delay payment of the second payment on account for 2019/20, paying it instead by 31 January 2021. Where this option was taken, the balance owing for 2019/20 will be the total liability for the year (tax plus, where relevant, Class 2 and Class 4 National Insurance), less any amount paid on account by 31 January 2020.

If you decided instead to pay your July payment on account as normal (or if you paid it later than normal but have now paid it in full), you will only owe tax for 2019/20 if the total liability is more than what has already been paid on account. 

Payments on account

If your total tax and Class 4 National Insurance liability was at least £1,000 for 2019/20 and less than 80% of your total liability is collected at source, for example, under PAYE, you will need to make payments on account for 2020/21. Each payment is 50% of the 2019/20 tax and Class 4 National Insurance liability. The first payment is due by 31 January 2021, along with any tax owing for 2019/20. The second payment should be paid by 31 July 2021.

Struggling to pay

For many, 2020 has been a difficult year financially. Where the option to delay the July 2020 payment on account has been taken, taxpayers may struggle to pay the higher than normal January tax bill in full by 31 January 2021. Where this is the case, they can agree with HMRC to pay the tax that they owe in instalments over the year to 31 January 2021.

If the amount that is owed is £30,000 or less, an agreement can be set up online. Where the amount outstanding is more than £30,000 or the taxpayer needs more than 12 months to pay, contact HMRC to discuss setting up an arrangement to suit.

As payments on account for 2020/21 are based on pre-pandemic profits, consider reducing the payments if profits for 2020/21 are likely to be lower.

Electric Van

Electric company vans and the benefit in kind charge

If an employee is able to use a company van privately, a benefit in kind tax charge may arise. The exception to this is if the van meets the conditions for a pool van (basically one used by several employees and not generally taken home overnight by any of them) or if the private use is limited to the journey between home and work, any other private use being insignificant.

Van benefit charge

Unlike cars, the benefit in kind charge in relation to a private van is unaffected by the value of the van and, with the exception of zero-emission vans, its CO2 emissions. For 2020/21, the taxable amount for a van other than an electric one is set at £3,490. This means that where an employee has unrestricted private use of a company van, for 20202/21 they will pay tax of £698 for the privilege if they are a basic rate taxpayer and tax of £1,396 if they are a higher rate taxpayer. 

Separate fuel charge

Where the employer also provides fuel for private mileage in the company van, a separate fuel benefit charge arises. For 2020/21, this is set at £666, costing a basic rate taxpayer a further £133.20 in tax and a higher rate taxpayer an additional £266.40.

Zero-emission vans – Policy reversal

Since 2015/16, the charge for a zero-emission van has been a percentage of the full charge, and that percentage has been increasing. For 2015/16, the taxable benefit of a zero-emission van was 20% of the full charge. By 2020/21, it had increased to 80% of the full charge and was due to increase further to 90% for 2021/22, being aligned with the full charge from 2022/23.

As a result, for 2020/21, the taxable benefit of an electric company van available for private use is £2,792; by contrast, an employee can enjoy the benefit of an electric company car tax-free in 2020/21. 

At the time of the 2020 Budget it was announced that from 6 April 2020, to encourage employers to embrace electric vans, the benefit in kind charge for an electric van will fall to zero from 6 Aril 2021. Consequently, from that date, where an employee has an electric company van, they can enjoy unrestricted private use of that van without triggering a benefit in kind tax charge, rather than paying 90% of the full charge as had previously been the plan. This is quite a reduction.

Planning ahead

Employers investing in new vans will be rewarded for choosing zero-emission models. Not only will employees be able to use the vans privately without having to pay tax on the benefit, there will be no Class 1A National Insurance for the employer to pay either. As an added bonus, because HMRC do not regard electricity as a ‘fuel’ for car and van benefit purposes, if the employer pays the cost of electricity for private mileage in a company van, there is no fuel charge to worry about either.

Staycation

Advantages of buying a holiday let

Those looking to buy an investment property may wish to consider a holiday let. Not only do the second and subsequent homes benefit from SDLT savings as a result of the temporary increase in the SDLT threshold, they can also benefit from the favourable tax regime for furnished holiday lettings.

Tax advantages

There are special tax rules for properties that qualify as furnished holiday lettings:

  • plant and machinery capital allowances can be claimed for furniture, equipment and fixtures;
  • capital gains tax reliefs for traders – business asset disposal relief, business asset rollover relief, relief for gifts of business assets — are available;
  • profits count as earnings for pension purposes.

However, to qualify, the let must meet the conditions to qualify as an FHL.

Conditions

The property must be in the UK or in the EEA, it must be let commercially and it must be let furnished. In addition, it must meet three occupancy conditions:

  1. pattern of occupancy condition — the total of all lettings that exceed 31 days is not more than 155 days in the year;
  2. the availability condition — the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property); and
  3. the letting condition –the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year (ignoring lets of more than 31 days unless the let exceeds 31 days as a result of unforeseen circumstances and lets to family or friends).

Second chances

If the let does not meet the letting condition (which may be the case, for example, if there are further lockdowns) all is not lost. Where the landlord has more than one property let as a FHL, the letting condition is treated as met if the average rate of occupancy for all properties is at least 105 days in the year. To take advantage of this, the landlord must make an averaging election no later than one year from 31 January following the end of the tax year (i.e. by 31 January 2023 in respect of an election for 2020/21).

The second way of qualifying as a FHL in a year where the letting condition has not been met is to make a period of grace election. This route can be taken where there was a genuine intention to meet the condition but this did not happen due to unforeseen circumstances (such as letting cancelled due to lockdowns). To be eligible to make an election, the pattern of occupation and the availability conditions must have been met and, for the first year for which a period of grace election is made, the lettings condition was met in the previous tax year. Where a period of grace election is made, the lettings condition is treated as met. A further period of grace election can be made for the following year if the lettings condition is not met that year. However, if after two successive period of grace elections the letting condition is not met, the property will cease to qualify as a FHL.

Separate FHL business

Lettings that are FHLs are taxed as a separate FHL property business. 

SDLT deadline

The residential SDLT threshold is increased to £500,000 where completion takes place between 8 July 2020 and 31 March 2021. This also benefits those purchasing second and subsequent residential properties as the 3% supplement is added to the residential rates, as reduced. However, the clock is running and completion must take place by 31 March 2021 to benefit from the savings.