February Tax Tips & News

HMRC questions claims for Lettings Relief

If you have claimed lettings relief to reduce the capital gains tax (CGT) payable on the disposal of a let property after 5 April 2020, you should expect to receive a letter from HMRC asking you to amend your tax return to remove that claim.

The conditions for lettings relief to apply were altered on 6 April 2020, with a retrospective effect. For disposals on or after that date, lettings relief can only apply where both the following conditions are met for residential property:

– The property qualifies as the owner’s only or main residence for CGT purposes for at least part of the ownership period; and

– For a period of letting to qualify the landlord and tenant must occupy the property at the same time.

There is an exception to condition 2) where the owner is living in job-related accommodation, as can apply to Church Ministers, in which case those deemed periods of occupation by the owner, can qualify for lettings relief.

You can’t double count a period of main residence relief and lettings relief. If the taxpayer is in concurrent occupation with the tenants, and they are living as one household, the whole property will qualify as the landlord’s main residence for that period, and lettings relief doesn’t come into play.

It follows that the only situation where lettings relief could apply from 6 April 2020 onwards is where part of the property is occupied separately by a tenant, for example by letting out a ‘granny flat’ or annex. However, if that let area has always been self-contained, it may be regarded as a separate dwelling and thus not part of the main home where the gain is covered by main residence relief.

Capital gains realized on buy-to-let or move-and-let properties that taxpayers expected to be covered by lettings relief plus main residence relief are partly exposed to CGT.

How to challenge a K-code

The PAYE system should deduct approximately the right amount of tax from your salary so that you do not have further tax to pay on that income. However, it assumes that your income remains steady from year to year. This may not be the case.

If you have a PAYE code including the letter K, this means your personal allowance has been reduced to zero and a notional amount of income has been added to your salary to be taxed. The imposition of a K code will result in a significant amount of tax being deducted from your salary.

You may have been allocated a K-code because you had an unusually high amount of non-salary income (eg dividends) in the last completed tax year.

Many company owners/directors took large dividends from their companies in 2021/22 as they knew that the dividend tax rate would increase by 1.25 percentage points on 6 April 2022.

HMRC will have assumed that the same pattern of dividend payments would continue into 2022/23 and coded this high level of dividend into the PAYE code, resulting in a K-code.

If you plan to take more modest dividends in this tax year to 5 April 2023, you need to tell HMRC about your expected dividend income. This is easily done through your online personal tax account under the PAYE heading. This alternation should remove the K-code.

Reporting crypto profits and losses

HMRC defines crypto assets as: “cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically”. The various ‘tokens’ that have been created including Bitcoin, Litecoin, and Ether are all virtual, they exist only on computer servers.

The tax law hasn’t been written to cope with crypto assets, but that doesn’t mean the profits made on investing in crypto are tax-free. HMRC expects most individuals who buy and sell crypto assets to be treated as investors rather than traders, so any gains or losses are subject to capital gains tax (CGT).

Every time a crypto asset is brought, sold, lent, or ‘staked’, this creates a capital transaction. Crypto sales need to be matched with crypto purchases to calculate the profit or loss. This can be a total pain when a taxpayer makes hundreds or thousands of transactions in a year.

The advantage of capital gains treatment for crypto is that you can set your CGT annual exempt amount (£12,300) against any crypto asset profits made in the tax year if you haven’t used that exemption elsewhere. But, be aware that this CGT exemption will drop to £6,000 for 2023/24 and will be cut again to £3,000 for 2024/25.

Many crypto assets investors will have seen the value of their assets drop or even disappear over the last few months with the collapse of one of the largest crypto exchanges in the world: FTX Trading Ltd.

If you have sold crypto assets at a loss, or the assets are no longer worth anything at all, you may be able to claim a capital loss for the assets becoming of ‘negligible value’. These losses must be claimed on your tax return before they can be used.

Unfortunately, capital losses cannot be carried back to set against capital gains realized in an earlier tax year, except where the loss arises in the year of death. You can carry the capital losses forward to use against future capital gains – made on any type of asset.

HMRC is chasing down the gig-economy

HMRC is writing to online sellers, gig economy workers, and influencers, asking them for unpaid taxes.

There are two versions of the HMRC letter.

– This letter is directed to those who sell goods, or their own services, through an online marketplace. This will include people who sell items on eBay or Etsy, as well as taxi drivers who find their customers through apps such as Uber.

– This letter is addressed to people who have created online content, and who generate money from that, such as authors and influencers.

HMRC is only writing to those individuals who it believes have received more than £12,570 from online sales in a single tax year, and thus may owe income tax. The periods when the income was received are likely to be the tax year 2020/21 or earlier.

If you receive such a letter, it doesn’t necessarily follow that you have tax to pay. The income reported to HMRC by the online marketplaces will be a number of gross sales. You may also have deductible expenses to set against that sales income, including the use of home allowances.

You may receive one of these letters when you have correctly declared all of your income to HMRC. It is possible that HMRC has not checked your tax return before dispatching the letter.

If you have under-declared your online sales income, HMRC asks you to make a full disclosure using the online digital disclosure service (DDS) facility and return a certificate of tax position within 30 days.

You should reply to HMRC within the deadline given, indicating how you plan to provide the information required. You can reply by letter, by phone, or by completing and returning the certificate of the tax position, once you have spoken to an experienced tax investigation expert.

 

February Questions and Answers

Q. One of my let properties required extensive repairs to cure a damp problem. The tenant was on an assured tenancy, so we reached an agreement under which I paid her to vacate the property, to allow the repairs to be carried out. The flat was relet after the repairs were completed. Is the payment to the tenant treated as capital or a revenue expense?

A. Your payment to the tenant to surrender her tenancy will be treated as a capital payment if it is reflected in the state or nature of the property at the date of disposal. However, as you relet the property (presumably on similar terms) the surrender of the tenancy is not reflected in the value of the property, so it cannot be treated as a capital cost. It is also not a revenue expense, so it ends up being a ‘tax nothing’, not deductible for tax at all.

Q. I am the sole employee of my company and I pay myself £100 per week. Does the company have to operate a PAYE scheme and report my wages under RTI to HMRC?

A. The company does not have to operate a PAYE scheme if none of its employees earn at least £123 per week, and none receive expenses or benefits or have another job or pension. However, the company must keep adequate payroll records so it can prove what has been paid as wages and when.

As an employee, you don’t pay tax or national insurance contributions (NIC) on your wages under £175 per week, but if you are paid at least £123 per week you receive a NIC credit. This allows you to build up entitlement to the state pension and other state benefits.

Q. I work through my own company and the business is run from my home. I use my kitchen for entertaining clients as well as other rooms in the house. Can I claim back the VAT charged on fitting a new kitchen in my home on the basis that it is used partly for business purposes?

A. The company cannot claim back VAT on an invoice addressed to you personally. If the company has directly paid for the new kitchen in your home, this would amount to a benefit in kind for you, on which you will need to pay income tax and NIC. The company would need to report this benefit to HMRC as part of the annual benefits and expenses declaration, or treat the cost as part of your salary and tax it through the payroll. The cost of entertaining clients is not a deductible expense for the company, and VAT cannot be reclaimed on those costs.

February key tax dates

1 – Individual taxpayers who have not paid their remaining tax and NI liabilities for 2020/21 by this date face a further penalty of greater than 5% of the tax showing as due on the return.

Individual taxpayers who have not filed their 2020/21 self-assessment tax return by this date face a further penalty of the greater of £300 and 5% of the tax showing as due on the return.

2 – Employers must submit Form P46 (Car) to report cars first provided to employees during the quarter to 5 January 2023.

14 – Last day for employees to apply for deferment of primary class 1 NIC for 2022/23.