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Making mileage payments to employees

As the country emerges from the Covid-19 pandemic, business travel is once again on the agenda. Where employees undertake business travel, they will usually be able to claim the associated expenses from their employer. If the journey is by car, the easiest way to do this is for the employer to pay a mileage allowance for the business miles undertaken. 

Where a mileage allowance is paid, there may be tax consequences depending on the amount that is paid. The rules differ depending on whether the employee uses their own car for business travel or has a company car.

Employee uses their own car

The Approved Mileage Allowance Payments (AMAP) scheme allows employers to make tax-free mileage payments up to an ‘approved amount’ where the employee undertakes a business journey in their own car. The approved amount for the tax year is found by multiply the number of business miles driven by the employee in their own vehicle in that year by the approved mileage rate for that particular vehicle. The approved mileage rates are set out in the table below:

VehicleApproved mileage rate
Cars and vansFirst 10,000 business miles in the tax year: 45p per mileEach subsequent business mile: 25p per mile
Motor cycles24p per mile
Bicycles20p per mile

So, if an employee drives 12,000 business miles in the tax year in their own car, the approved amount is £5,000 ((10,000 miles @ 45p per mile) + (2,000 miles @ 25p per mile).

If the employer pays mileage at a higher rate, the excess over the approved amount is taxable, and must either be taxed through the payroll or reported to HMRC on the employee’s P11D. If the employer pays less than the approved amount (or does not pay an allowance), the employee can claim tax relief for the difference between the approved amount and the amount that they receive, if any.

The employer can also pay the employee a tax-free passenger rate of 5p per mile for each passenger for whom the journey is also a business journey. However, there is no tax relief available if the employer does not pay passenger payments, or pays them at a rate of less than 5p per mile. 

For National Insurance purposes, similar rules apply, except that the calculation is performed for each pay period. For cars and vans, an ‘approved’ rate of 45p per mile is used for all business mileage, even if this exceeds 10,000 miles in the tax year. If the amount paid in the pay period is more than the ‘approved’ amount, the excess is included in gross pay. National Insurance purposes only.

Company cars

If the employee has a company car and the employer does not pay for the fuel, a different set of mileage rates – the advisory fuel rates – apply to determine the amount that can be paid tax-free. These are lower than the AMAP rates, which include an element to reflect the running costs and the depreciation of the employee’s own car.

The advisory rates are set quarterly. The rates applying from 1 June 2021 are as follows:

Engine sizePetrol – rate per mileLPG – rate per mile
1400cc or less11p8p
1401cc to 2000cc13p9p
Over 2000cc19p14p
Engine sizeDiesel – rate per mile
1600cc or less9p
1601cc to 2000cc11p
Over 2000cc13p

Payments of 4p per mile can be made for business travel in an electric company car.

Any amounts paid in excess of the advisory rate are taxable and liable to Class 1 National Insurance.

If the employer pays for all fuel, including that for private journeys, a fuel benefit tax charge will arise unless the car is an electric car.Please get in touch here, if you have any questions

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Do I need to register for VAT?

You must register your business for VAT if your VAT taxable turnover exceeds the registration threshold. This is currently £85,000.

You must register if:

  • at the end of any month, the value of your VAT taxable supplies in the previous 12 months or less is more than £85,000; or
  • at any time if you expect the value of your taxable supplies in the next 30-day period alone to exceed £85,000.

Different thresholds apply to businesses based in Northern Ireland for buying from and selling to EU countries.

VAT taxable turnover

The VAT taxable turnover is the total value of sales that are not exempt from VAT. Thus, you should include sales that would attract VAT at the standard rate, the reduced rate or which are zero rated, but not sales that are exempt from VAT.

Exception from registration

If you exceed the VAT registration threshold but believe that your VAT taxable turnover will not exceed the deregistration threshold, currently £83,000, in the next 12 months, you can apply to HMRC for an exception from registration. This can be done on form VAT1. This may be case if you have a one-off sale that is particularly large,

Voluntary registration

Registration is compulsory if your VAT taxable turnover exceeds the registration threshold (unless an exception applies). However, if your VAT taxable turnover is below this level, you may choose to register for VAT voluntarily. This can be advantageous, particularly if you supply goods that are zero rated (such as food) as it will enable you to reclaim any VAT that you pay on purchases.

How to register

Most businesses are able to register online on the Gov.uk website. In certain cases, registration must be done by post, for example, if you apply to join the agricultural flat rate scheme.

You will receive a VAT registration number once you have been registered for VAT. You should receive a VAT registration certificate within 30 days.

Implications of being VAT-registered

Once you have registered for VAT, you will need to charge VAT at the appropriate rate on any sales that you make. You will also be able to reclaim any input tax that you suffer on purchases.

You may choose to join one of the schemes to simplify the process and reduce the associated VAT return, for example, the flat rate scheme for small business. 

You must also file VAT returns each quarter and pay any VAT owing over to HMRC and comply with Making Tax Digital for VAT. You can appoint an agent, such as an accountant, to file your VAT returns on your behalf.

Please get in touch here, if you have any questions.

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New FHL – Applying the test

All business must start at some point, and a furnished holiday lettings (FHLs) business is no exception. Unlike other rental properties, furnished holiday lettings enjoy special tax rules. As a result, they are able to benefit from capital gains tax reliefs for traders and claim capital allowances for furniture, fixtures and fittings. The profits from a furnished holiday lettings business also count as earnings for pension purposes.

However, to access these reliefs, the let must meet several tests for it to be considered a FHL. 

The tests

The property must be let furnished and must be in the UK or the EEA. It must also pass all three of the following occupancy conditions:

Condition 1 – The pattern of occupation condition

Continuous lets of more than 31 days must not exceed 155 days in total in the year.

Condition 2 – The availability condition

The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year. Days when the landlord stays in the property are not counted.

Condition 3 – The letting condition

The property must actually be let as furnished holiday accommodation for at least 105 days in the tax year. Longer-term lets of 31 days are excluded, as are periods when the property is let to family or friends for free or at a reduced rate.

Period for which the tests are applied

For a continuing holiday let, these tests are applied on a tax year basis to determine whether the property qualifies as a furnished holiday letting for the tax year.

However, different rules apply for the first year and the tests are applied over the 12-month period from the date that the holiday letting began. This means that some periods will be taken into account twice in working out whether the property qualifies.

Example

Rueben buys a cottage in Devon, which he plans to let as a furnished holiday let. The sale is completed in August 2021. He spends a couple of months refurbishing the property and it is let as a holiday let for the first time on 14 October 2021. Letting commences in the 2021/22 tax year.

For year one, the tests are applied for the first 12 months, from 14 October 2021 to 13 October 2022.

Thereafter, the tests are applied on a tax year basis.

Please get in touch here, if you have any questions.

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Capital gains on investment property

If you sell a property that has not been your main residence throughout the period that you have owned it, you may need to pay capital gains tax if a gain arises on the disposal of the property. This may be the case if you have an investment property, such as a buy-to-let or holiday let, or a second home.

It is important that you understand how to calculate the gain. Overlooking deductible expenses may prove costly.

Need to act promptly

Working out whether there is a gain on the disposal is something that needs to be done promptly – residential property gains must be reported to HMRC within 30 days of completion and the tax paid, if any, within the same time frame. Interest and penalties may be charged for failure to report the gain and pay the tax within this time frame.

Consideration

The starting point of the calculation is the consideration for the disposal. This will normally be the amount that the purchaser paid for it. However, in certain situations, the market value is used instead of the amount paid, for example where the property is sold or gifted to a ‘connected person’ such as a child or a sibling.

Costs of disposal

When working out the gain, you can deduct the costs of disposal from the sale proceeds (or market value where relevant). This will give you the net disposal proceeds. Relevant costs here are estate agents’ fees, legal fees and suchlike.

However, if you have a mortgage on the property, any amount paid to clear the mortgage cannot be deducted.

Amount paid

In working out the gain, you will also need to deduct the purchase cost of the property, and the cost of any improvements that you have undertaken since you acquired the property, for example, any costs incurred in extending the property. However, normal decorating and maintenance costs should be ignored in calculating the gain.

Cost of acquisition

You can also deduct any incidental costs of acquisition, such as legal fees, survey fees and stamp duty land tax.

Reliefs

Once you have worked out the gain, you will need to take account of any available reliefs. For example, if the property has been your main residence at some point, you will be entitled to main residence relief for the period for which you lived in it as your main residence, and also the last none months of ownership.

Jointly-owned property

If a property is jointly-owned, each owner is only liable for their share of the gain, and it is this rather than the total gain that they must report to HMRC. The gain is reportable and payable per chargeable individual rather than per property.

Working out the tax

A payment on account of the tax due on a residential property gain must be paid within 30 days. This is the best estimate of the tax due at the date of sale. Losses realised previously in the tax year or brought forward can be taken into account, as can the annual exempt amount, if this has not been used already.

As the end of the year there may be some adjustment after the tax return is filed, and it is possible that a repayment may arise if losses are realised on later disposals in the tax year.

Please get in touch here, if you have any questions.

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Gifting property to the children

No one likes the idea of the taxman taking a chunk of their estate when they die, particularly if it will be necessary to sell a much-loved property to pay the inheritance (IHT) bill. The introduction of the residence nil rate band (RNRB -set at £175,000) means that a couple can now leave combined estates worth £1 million free of inheritance tax where this includes a residence valued at £350,000 or more, which is left to direct descendants. However, the RNRB is reduced where a person’s estate is worth more than £2 million and lost where the value of the estate exceeds £2.35 million.

If it looks likely that there may be IHT to pay, the idea of taking steps to reduce this is attractive. Where property is given away more than seven years before the donor’s death, it escapes IHT. Giving property to the children may, at first sight, be an attractive option, but there are traps to be aware of.

Giving away the main residence

If the main residence is given away, there will be no capital gains tax to pay as long as the main residence exemption applies in full. However, if the property is retained by the children as an investment property, the capital gains tax clock will start to run from the date that they acquire it. By contrast, if the property is gifted at death, there will be a capital gains tax uplift to the value at death, but there may be some inheritance tax to pay (potentially at 40%). 

Problems can arise if the parents give the property to the children but continue to live in it. There are two sets of anti-avoidance rules that can apply – the gifts with reservation rules (GWR) and the pre-owned asset (POA) rules.

The GWR rules apply where a donor gives an asset away but continues to derive benefit from it. An example would be parents who transferred their home to their children but continued to live in it. The rules effectively ignore the transfer for inheritance tax purposes, such that it forms part of the death estate.

The POA impose an income tax charge on the previous owner if they give a property away but continue to live in it, based on a notional market rent of the property.

Investment property

Seeking to take an investment property outside of the death estate can trigger a capital gains tax charge where a property is given to a child, even if no money changes hands. The child is a connected person and the property is deemed to be disposed at market value. This may trigger a capital gains tax bill of 18% or 28% of the gain (to the extent it exceeds the annual exemption), which must be paid within 30 days (but with no proceeds from which to pay the tax).

Take advice

Giving away property in an attempt to save inheritance tax can be very complicated and it is easy to get it wrong; professional advice should be taken in advance.

Please get in touch here, if you have any questions.

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What is meant by taking ‘reasonable care’?

All taxpayers have a responsibility to complete their tax returns correctly, to the best of their ability. However, inevitably, mistakes occur which may not be the taxpayer’s fault; other times the ‘error’ may be deliberate. There is a statutory definition of ‘careless’ which provides that an ‘inaccuracy in a document given by [a person] to HMRC is “careless” if the inaccuracy is due to the failure by [the person] to take reasonable care’. 

HMRC provides its understanding of ‘reasonable care’ in its Compliance Handbook by giving examples of errors made despite reasonable care having been taken (for which no penalty would be due) as well as examples of ‘careless’ errors (HMRC CH81145). However, it must be remembered that HMRC’s guidance is only their view of the rules rather than the actual law. 

Deliberate or careless?

The difference between ‘deliberate’ and ‘careless’ behaviour can be narrow. In deciding whether the non-disclosure was ‘reasonable’, HMRC will look at several factors including the taxpayer’s abilities and circumstances, the complexity of the taxpayer’s tax affairs and whether any systems of control and records were in place. They will also consider whether the taxpayer is represented, the belief being that in most cases an unrepresented taxpayer will have a lower understanding of the complexities of tax law than a represented taxpayer. If a taxpayer consulted with a tax adviser with appropriate expertise, HMRC would normally consider this as having taken ‘reasonable care’ unless the information submitted was not ‘accurate and complete’. 

HMRC offers the following basic guidance as to what might constitute a ‘reasonable excuse’:

  • Bereavement – this may apply if one of the taxpayer’s close relatives or their domestic partner passed away around the time they should have filed their return or paid tax. 
  • Serious illness – if the taxpayer or a close relative fell seriously ill around the time that the tax should have been paid.
  • Unforeseen events – including delays due to industrial action or returns/ payments being lost in the post.

Deemed to be self-employed

HMRC also quotes a rare instance where a taxpayer believed that they were employed but on further investigation was deemed to be self-employed. In this situation their ‘reasonable’ excuse for not submitting a self-assessment return and possibly VAT returns would be valid. 

HMRC has a penalty regime in place where it is found that an inaccuracy leading to an underpayment of tax has been made. The level of penalty depends on whether the error was ‘careless’ or ‘deliberate but not concealed’ or ‘deliberate and concealed’. Reductions are possible if the disclosure of the error is ‘prompted’ or whether HMRC discovered it themselves as well as the level of assistance the taxpayer gives HMRC in ascertaining the accuracy of the disclosure (e.g. giving HMRC access to records). No penalty is levied if the taxpayer took ‘reasonable care’ however, the maximum penalty for a ‘careless’ error is 30% of the additional tax. If the penalty was a ‘deliberate but not concealed’ error the maximum penalty is 70% or 100% for an error which is ‘deliberate and concealed’ (but note that if the error involves an offshore matter, the penalties are potentially much higher, up to a statutory maximum of 300%).’Deliberately’ means that the taxpayer was aware of the error but either chose not to come forward and declare or that they knew the figures on the return were wrong when submitted.

Burden of proof

The burden of proof that the taxpayer acted ‘deliberately’ falls on HMRC which must back up whatever assertion they are making. HMRC’s Compliance Handbook manual (CH54300) confirms this when it states: ‘the onus of proof of careless or deliberate behaviour is on HMRC and that the standard of proof is on the ‘balance of probabilities’.

Please get in touch here, if you have any questions.