employ allow 18.05

Claiming the Employment Allowance for 2021/22

The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.

Eligible employers

To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.

The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.

There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.

Amount of the allowance

The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.

Example

A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:

Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 – £1,500) is carried forward.

Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 – £1,500) is carried forward.

Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.

Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.

Claiming the allowance

The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.

Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.

Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.

Business,Concept,Employee,Benefits

Reporting expenses & benefits for 2020/21

Employers who provided taxable expenses and benefits to employees during the 2020/21 tax year will need to report these to HMRC, on form P11D by 6 July 2021, unless the benefit or expense has been payrolled or is included within a PAYE Settlement Agreement. Benefits covered by an exemption do not need to be included. 

Where taxable benefits have been provided, the employer must also file a P11D(b) by 6 July 2021. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A amount.

Exempt benefit

The tax legislation contains a number of exemptions which remove a charge to tax. These may be specific to a particular benefit, such as those for mobile phones and workplace parking, or may be more general, such as the exemption for paid and reimbursed expenses, which applies if the employee would have been entitled to a tax deduction had they met the expense directly.

There are also a number of temporary Covid-19 specific exemptions that apply for the 2020/21 tax year. These include the provision or reimbursement of Covid-19 antigen tests and reimbursed homeworking equipment (such as a computer) to enable the employee to work at home during the pandemic if the equipment would be exempt if made available by the employer.

Remember, exemptions are only available if the associated conditions are met. However, care must be taken here where provision is made under a salary sacrifice arrangement and the alternative valuation rules apply as this may negate the exemption.

Taxable amount

The amount on which the employee is taxed is usually the cash equivalent value. This is calculated in accordance with the benefit-specific rules where these exists, as is the case for company cars, vans, living accommodation and employment-related loans. Where there is not a benefit-specific rule, the cash equivalent is determined in accordance with the general rule. This is the cost to the employer, less any amount made good by the employee. Amounts made good are only deducted where the employee makes good by 6 July 2021.

If the benefit is provided under an optional remuneration arrangement (OpRA), such as a salary sacrifice arrangement, the alternative valuation rules are used to calculate the taxable amount, unless the benefit is one which is specifically excluded from the ambit of those rules (such as childcare vouchers, pension provision and advice, employer-provided cycles and low-emission cars (l75g/km or less) or within the transitional rules for 2020/21. Under the alternative rules, the taxable amount is the salary foregone or cash alternative offered where this is more than the cash equivalent value.

HMRC produce worksheets which can be used to calculate the taxable amount for some benefits. These can be found on the Gov.uk website.

Reporting options

There are various options for filing P11Ds and P11D(b):

  • using a payroll software package;
  • using HMRC’s Online End of Year Expenses and Benefits Service;
  • using HMRC’s PAYE Online Service; or
  • filing paper forms.

Whichever method is used; the forms must be filed by 6 July 2021. Employees must be given a copy of their P11D or details of their taxable benefits by the same date.

Any associated employer-only Class 1A National Insurance must be paid by 22 July 2021 if paid electronically, or by 19 July 2021 if paid by cheque.

selling a property post death

Post death capital gains tax on Property .

For capital gains tax purposes, there is a tax-free uplift to the market value at the date of death, irrespective of whether any inheritance tax is payable at the estate. This effectively resets the base value for capital gains tax purposes going forward.

Many estates include a property, whether a main home, or investment properties as well. Where these are sold post death, the issue of whether a capital gains tax liability arises will need to be considered.

Who is selling?

Where a property that forms part of the deceased’s estate is to be sold, the outcome is different depending on whether the executors or administrators are selling the property, for example, to realise cash to distribute to the beneficiaries, or whether legal title has been transferred to the beneficiary/beneficiaries, who have decided to sell.

Sale by executor or personal representative

Where a property is sold by the executor or personal representative following the deceased death, the estate will be liable for any capital gains tax.

Executors collectively are entitled to a single annual exempt amount for disposals in the tax year in which death occurred and the two following tax years. After this, there is no annual exempt amount to mitigate any capital gain. Any chargeable gain on a residential property (after deducting any available annual exempt amount) is charged at the higher residential rate of 28%.

Chargeable gains on residential property must be notified to HMRC within 30 days of completion. The associated capital gains tax should be paid in the same time frame.

What about the main residence exemption?

In certain situations, a post-death disposal by the personal representatives may benefit from the main residence exemption. This is the case where:

  • immediately before and immediately after the death of the deceased, one or more individuals occupied the property as their only or main residence;
  • the individual or individuals is/are entitled to at least 75% of the net sale proceeds or to an interest in possession of 75% or more of the net sale proceeds; and
  • the personal representatives make a claim for private residence relief.

A claim may be possible where, say, a property is owned by a married couple as tenants in common, each with a 50% share. The husband dies, leaving 70% of his share to his wife and 30% of his share to his daughter. On sale by the executors following his death, the deceased’s spouse is entitled to 85% of the net sale proceeds and the deceased’s daughter to 15%. As the property has been the wife’s main residence before and after the deceased death, the personal representatives can claim the main residence exemption.

Sale by the beneficiary

If legal title to the property is transferred to the beneficiary or beneficiaries following the deceased’s death, their base cost for capital gains tax purposes is the market value at the date of death. If they subsequently sell the property and it is not their main residence, a chargeable gain will arise. They will benefit from their own annual exempts amount to the extent not used elsewhere, and any available capital losses. The gain will be charged at the appropriate residential rate – 18% or 28%. The gain must be reported to HMRC within 30 days and the tax paid within this window.

If the property is occupied after the deceased’s death as the beneficiary’s main residence, they will benefit from the main residence exemption when the property is sold.

Planning a sale

Where a property is included within the estate, and the plan is to sell that property, consideration should be given to whether it should be sold by the personal representatives or the beneficiaries, and if a capital gain is likely to be realised, what will achieve the best outcome.

dist on co cess

Distributions on company cessations

On cessation many directors find that monies have accumulated over the years which need to be distributed to shareholders before closure – preferably in the most tax efficient way. Dividends may have been made to the full extent possible from realised profits previously but there may still be further monies to distribute. 

Whether the company is being ‘struck off’ or placed into liquidation will define the tax treatment of withdrawals. 

‘Striking off’

‘Striking off’ is not a formal winding up procedure (although it is a statutory process).  Any distribution of surplus assets (including the repayment of its share capital represented by those assets) is an income distribution (rather similar to a dividend). However, if the following conditions are present such distributions can be treated as capital subject to Capital Gains Tax (CGT) rather than income tax, if more tax efficient to do so:

  • Providing that at the time of distribution, the company has collected, or intends to collect, its debts and has paid off or intends to pay off its creditors
  • The amount withdrawn is less than £25,000 (whether as a single distribution or in separate amounts).

If a company has applied to be ‘struck off’ but within two years of making a distribution it still has not been or it has failed to collect all its debts or pay all its creditors, then the distribution is automatically treated as an income dividend.

Distributions above the £25,000 limit are taxed in full similar to a dividend at the director’s dividend rate, unless the company goes down the route of formal liquidation.

As capital the distribution could attract “Business Asset Disposal Relief’ (restricted if the ‘lifetime allowance’ of £1 million has been exceeded). In addition, the annual exempt amount will be available (£12,300 2021/22).

Liquidations

Once a liquidator has been appointed all distributions made during the winding up process are treated as capital. As such any company needing to make a distribution of more than £25,000 will be effectively forced down the formal liquidation route with the additional costs that this process incurs in the form of liquidators’ costs (usually approximately £2,000 – £3,000 for a small uncomplicated company). Where the distribution is of assets other than cash the valuation of those assets could assume greater significance in determining whether the £25,000 threshold is breached. 

As with the ‘strike off’ process ‘Business Asset Disposal Relief’ may be available plus, if timed right, two distribution payments could attract two amounts of CGT allowances. A liquidator usually distributes 75% of the amount as soon as funds are received, retaining the remaining amount as a ‘buffer’ payable once HMRC clearance has been obtained and the period for any creditors to object has passed. The tax planning point is that should it be possible to make any payments on either side of the 5 April tax year end, then a claim for two years CGT allowances is possible. 

Another tax planning possibility may be available if it is expected that shareholders will be higher rate taxpayers on withdrawals as dividends under ‘strike off’. In this case shareholders withdrawing less than the £25,000 limit could take advantage of placing the company into liquidation if the shareholders CGT tax rate would be lower than the marginal dividend tax rate (and/or ‘Business Asset Disposal Relief’ is available). However, this route should only be embarked upon if tax savings exceed the costs of liquidation.

Untitled design-7

Making a formal complaint against HMRC

Making a formal complaint against HMRC

Sometimes a taxpayer may find themselves in a position whereby HMRC seem to be taking an inordinate amount of time to settle a particular issue or the service received as a ‘customer’ does not meet the standards expected or even that they feel they are being discriminated against. Although complaints can be made in several ways, (‘informal’ being where a taxpayer only wishes to express their dissatisfaction without seeking compensation), should the taxpayer want to formalise the complaint HMRC has a set complaints procedure under the ‘HMRC Charter’. 

The starting point for any formal complaint is either a phone call or completion of the online iForm that can be found on the taxpayer’s own government gateway or by writing a letter.  The complaint will be dealt first by the original point of contact whenever possible. HMRC has empowered complaint handlers to make decisions without needing to refer to a higher-level policy unit. In the month to February 2021, 4,149,407 complaints were received.

If, after further correspondence with that person the taxpayer is still dissatisfied then HMRC can be asked to review the matter again (termed ‘Tier 1’). This time the review is undertaken by an impartial special complaints officer separate from whoever responded to the initial complaint. That officer will review the file, analysing each stage so that any errors in procedure may be identified. This review should take approximately a month although currently it may take longer due the impact of the coronavirus on staffing levels. Even so, HMRC statistics show that in February 2021 a total of 5,497 complaints were elevated to ‘Tier 1’ with approximately 45% being upheld. 

If, after receiving the result of their review, the taxpayer is still not satisfied, then they can ask for another review to be undertaken by a different member of the complaints team who will give a final response (termed ‘Tier 2’). In February 2021, 402 such complaints were re-reviewed, 34% being upheld.

Should the file have gone through the steps above, with the complaint being fully investigated but the taxpayer still not satisfied, then the next step is to complain to the independent adjudicator. This department is independent of HMRC but has an office within HMRC as part of their service level agreement.

The final step is to take the complaint to the parliamentary ombudsman via the taxpayer’s MP in a letter for the attention of the Parliamentary and Health Service Ombudsman if the taxpayer is still not satisfied.

Financial redress

The aim of HMRC’s complaints procedure is first and foremost to put things right and apologise if it is found that the case has been acted upon incorrectly. However, the Charter allows financial compensation in some instances, for example, reimbursement costs which have been reasonably incurred by the complainant as a direct result of HMRC’s actions, or compensation for the worry and distress that the mistakes and/or delays may have caused the taxpayer. 

These costs include basic quantifiable amounts such as ‘out of pocket’ expenses (travel, stationery, postage and telephone costs). Professional fees for advice given to a taxpayer as to the complaint are only considered where the taxpayer would face extreme hardship by paying the invoice and the situation is likely to continue for an uncertain period. Other more relative costs depend on the circumstance and not designed to put the taxpayer in a better position financially than would be the case if everything has gone smoothly. The Charter states that payments are for ‘demonstrable financial loss, but not for any loss which is hypothetical, speculative or insubstantial’In the context of our policy on remedy, the term ‘demonstrable’ should be understood to mean ‘evidenced beyond reasonable doubt’.

Consolatory payments are not the taxpayers by right and will only be considered where it is proved that there has been a serious (or persistent) error. A complainant is certainly not going to get rich on such proceedings as there are strict monetary limits. Payment will usually be within the range of £50 to £250 although payments of up to £1,000 or even £2,000 will be considered.

buy to let or fur

Buy-to-let or furnished holiday let?

When looking for an investment property, there are various decisions that need to be made. If the intention is to let the property, one consideration is whether to go down the buy-to-let route or whether to look at a holiday let.

From a tax perspective, holiday lets that qualify as furnished holiday lettings have their own tax rules, which can be more beneficial than those for unincorporated property businesses. However, to qualify there are stringent tests that must be met.

Tax rules – Buy-to-let

Rental income from a traditional buy-to-let investment is taxed under the property income rules, and unless the landlord opts to operate through a limited company, the relevant rules are those for unincorporated property businesses. Under these rules, all rental properties owned by the same person or persons form part of the same property rental business, and profits and losses are computed for the property rental business as a whole.

The landlord’s rental profit (or his or her share of the rental profit) forms part of their income chargeable to income tax. It is taxed at the appropriate marginal rate to the extent that the individual’s total taxable income exceeds their personal allowance.

Key features of the tax regime for unincorporated property business are as set out below.

  1. The cash basis is the default basis where rental income is £150,000 or less – a landlord who is eligible for the cash basis must opt for it not to apply if they wish to compute profits using the accruals basis.
  2. Relief for interest and finance costs are given as a basic rate tax reduction, rather than deduction in calculating taxable profit.
  3. Losses can only be carried forward and set against future profits of the same property rental business.
  4. Profits do not count as earnings for pension purposes.

Furnished holiday lettings

The tax regime for furnished holiday letting (FHL) is more akin to that for a trade and offers some advantages not available to those running an unincorporated property rental business.

  1. Interest is deductible in full in calculating the profits of the property rental business, meaning relief is obtained at the landlord’s marginal rate of tax.
  2. The landlord can claim capital gains tax reliefs for traders, such as business assets disposal relief, business asset rollover relief, gift relief and relief for loans to traders.
  3. The landlord is entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures.
  4. Profits from the FHLs count as earnings for pension purposes.

Where a landlord has FHLs and other lets, such as a buy-to-let, the profits from the FHL business must be worked out separately.

The tax regime for FHLs is only available to holiday lets that qualify as a FHL. To do this, the property must be in the UK or EU, it must be let furnished and it must three occupancy tests (for which see HMRC Helpsheet HS253). 

Making a choice

In deciding whether to go down the buy-to-let route or furnished holiday lettings route, it is necessary to consider all relevant factors, not just the tax considerations. However, the differing tax regimes should be borne in mind when determining which route provides the best return on investment.

In our previous blog here, we provide details on the eligibility of FHLs to Business Asset Disposal Relief.

And in this blog we listed  the of advantages of buying a furnished holiday let.

Please get in touch here if you have any questions.

relief 4 interest costs

Relief for interest costs on residential property

Most landlords will need some sort of finance in order to invest in property to let out. However, while tax relief for mortgage and finance costs are available regardless of whether the property business is operated as an unincorporated property business or whether it is run through a limited company, the mechanism and extent of the relief differ.

Unincorporated property business

The way in which relief is given for interest and finance costs incurred by an unincorporated property business has changed in recent years, moving gradually from a system of relief by deduction to relief as a basic rate tax reduction. The transition is now complete.

The effect of this is that rather than deducting interest and finance costs, such as mortgage interest, when calculating the profits of the property rental business, these costs are ignored initially. Relief is given at a later stage as a reduction when working out the amount of tax that the landlord has to pay. The reduction is equal to 20% of the allowable interest and finance costs or, if lower, the amount that reduces the landlord’s tax bill to nil.

This is illustrated in the following example.

Example 1

Malcolm is a landlord running an unincorporated property rental business. His rental income for 2021/22 is £90,000. He incurs deductible expenses of £12,000 and mortgage interest of £9,000. He has no other income.

His tax position is as follows:

 £
Rental income90,000
Less: deductible expenses(12,000)
Rental profit78,000
Less: personal allowance(12,570)
Taxable income65,430
Tax (£37,700 @ 20%) + (£27,730 @ 40%)18,632
Less: Tax reduction for interest (£9,000 @ 20%)(1,800)
Net tax payable£16,832

Although Malcolm pays tax at the higher rate, relief for his interest costs is only available at the basic rate.

Where the tax liability is insufficient for relief to be given for the full amount of the interest, unrelieved interest costs can be carried forward and relieved (as a basic rate tax reduction) in a future year.

Limited company

The rules restricting relief for interest do not apply to limited companies. Instead, interest is deductible in accordance with the loan relationship rule. As a result, interest and finance costs are deducted in full in calculating the taxable rental profits of the company. This means relief is given in full at the prevailing rate of corporation tax. Further, interest costs can be deducted in full, even where this creates a loss.

Example 2

M Ltd, like Malcolm in example 1, has rental profits for the year to 31 March 2022 of £80,000. It too incurs deductible expenses of £12,000 and interest and finance costs of £9,000. The company’s tax liability is calculated as follows:

 £
Rental income90,000
Less: Deductible expenses(12,000)
          Interest costs(9,000)
Profit chargeable to corporation tax59,000
Corporation tax @ 19%£11,210

Not the end of the story

The fact that the interest restriction does not apply to companies, together with a corporation tax rate that is less than the basic rate of income tax, may suggest at first sight that it will always be better to operate as a limited company. However, that is not the end of the story – profits from a company will need to be extracted if the landlord wishes to use them personally, and this may incur additional tax and National Insurance liabilities. 

In our blog here, we provide details of what happens when not all the finance costs for unincorporated businesses are used in a tax year.

Get in touch here, if you have any questions.

restart grants

Restart Grants and Recovery Loans

As lockdown restrictions are eased, businesses may need help to re-open and to recover from the impact of the pandemic. Depending on the nature of the business, they may be eligible for a Restart Grant or a Recovery Loan.

Restart Grants

The Restart Grant Scheme provides support to help business that were required to close to re-open as lockdown restrictions are eased. The grants are available to businesses in non-essential retail and businesses in the hospitality, accommodation, leisure, personal care and gym sectors. 

The grants are available from 1 April 2021 and must be claimed from the local council. Applications can be made on the relevant council’s website.

To qualify, a business must:

  • be based in England;
  • pay rates; and
  • be trading on 1 April 2021.

Non-essential retail business can apply for a Restart Grant of up to £6,000, whereas businesses in the hospitality, accommodation, leisure, personal care and gym sectors can apply for a Restart Grant of up to £18,000. Local councils will use their discretion to determine whether a business is eligible for a grant.

Recovery Loan Scheme

The Recovery Loan Scheme is designed to provide access to finance for UK businesses as they recover from the impact of the Covid-19 pandemic. Businesses of any size can apply for loans under the scheme, and can benefit from a loan or overdraft of between £25,001 and £10 million per business or asset finance of between £1,000 and £10 million per business. However, the amount offered and the terms are at the discretion of the lender.

To encourage lenders to participate, the Government guarantee 80% of the finance to the lender; however, the borrower remains liable for 100% of the debt.

A business can apply for a Recovery Loan if it is trading in the UK. Applicants will need to demonstrate that their business:

  • would be viable were it not for the pandemic;
  • has been adversely impacted by the pandemic; and
  • is not in collective insolvency proceedings.

Businesses that meet the eligibility criteria can apply for a recovery loan, regardless of whether they also have a Bounce Back loan or a Coronavirus Business Interruption Loan. Under the scheme, no personal guarantees are taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.

The scheme is due to run until 3 December 2021.

More details on HMRC’s website –  www.gov.uk/guidance/check-if-youre-eligible-for-a-coronavirus-restart-grant and www.gov.uk/guidance/recovery-loan-scheme.

Contact us if you need assistance at Hello@vineaccountingandtax.co.uk or 02034886508.