July Tax Tips & News6/07/22
Paying employees more than HMRC’s approved mileage allowances
It seems as though the price of fuel is increasing every day. If you have employees for which you pay their business fuel you may be finding that paying at the HMRC’s set mileage rates does not cover the cost to the employee. Paying above that rate has tax and NIC consequences.
These days few employees have petrol or diesel driven company cars or vans because the tax charged on the benefit in kind generally means that it is not cost-effective to do so (more favourable benefit in kind rates are available for low emission electric vehicles, as well as tax reliefs for companies on purchase). Instead many employees travelling on business use their own cars and their employer reimburses them usually to the HMRC approved amount per mile.
The Approved Mileage Allowance Payments 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 or van. These ‘approved’ rates have not changed for years being 45p per mile for the first 10,000 business miles then 25p per mile thereafter for the tax exemption; the NIC exemption rate is 45p per mile for all business miles.
The problem comes if you pay more than these tax-free set amounts, as it is increasingly becoming aware that businesses may have to in the current financial climate. If payment is more, the excess is a benefit in kind charged on the employee usually taxed via the employees PAYE coding. For NIC purposes the excess is charged to Class 1 NIC in the same way as the payment would be if it were a bonus or salary – all of which increases the tax and NIC bill for the employee so they may be no better off. If HMRC’s set rate does not cover the actual cost, the employee can claim deduction for the difference (but this can entail a lot of calculations in working out the actual figures so maybe not worthwhile). One option to not using the approved rates is to reimburse the actual cost but again this can involve a lot of calculation work. Otherwise the employer could pay an enhanced rate to cover the cost to the employee of using the car for business plus the tax and NIC payable on the excess over the approved rate but the employee would have to take the tax hit.
When should a business register for VAT?
The rules regarding VAT registration appear relatively straightforward — a business must register if its VAT taxable turnover exceeds the VAT registration threshold (currently £85,000, remaining at this level until at least 31 March 2024). A business which makes taxable supplies is liable to register if, by the end of any month, the value of such supplies in the previous 12 months or less is more than the VAT registration threshold; or at any time, where it is expected that the value of taxable supplies in the next 30 day period will exceed the VAT registration threshold.
The problem comes with the definition — what exactly counts as taxable turnover?
What is taxable turnover?
Taxable turnover is the total of all taxable supplies incurred over the previous 12 months of trading except exempt supplies.
This definition includes:
- standard rated goods
- zero-rated goods
- goods hired or loaned to customers
- business goods used for personal reasons
- goods bartered, part-exchanged or gifted
- services received from businesses in other countries that you had to ‘reverse charge’
- building work over £100,000 undertaken for the business (‘self supply’)
- income from employment
- disbursements on behalf of a client
- ‘one-off’ sales of capital assets e.g. proceeds from the sale of a van
The calculation also does not take into account any income that is exempt from VAT. The more common sources of which are:
- income from financial services or selling insurance;
- rental income from properties or the sale of land or existing buildings; and
- betting, gaming or lotteries.
Queries are most likely to arise in situations where a property has been bought and sold within a relatively short period; here HMRC will be looking at whether the taxpayer is, in reality, trading. If HMRC are not satisfied that the relief is due they will look at whether the owner had any intention of living in the property permanently and require proof that the property has been lived in as the PPR.
Recently HMRC have been targeting self-build builders, questioning as to whether the property has been built intending to be the main residence. If a self builder repeats the process of building, moving in, selling and rolling equity gains into subsequent houses, HMRC may take the view that the self builder has become a business and seek to tax the gains as income rather than as exempt under the CGT rules. Such a situation is more likely if the person has no other income or works in the building trade.
A business that makes taxable supplies below the VAT threshold can choose to register voluntarily. This has some benefits (although the business will also have to charge output VAT to customers), for example it allows the business:
- to reclaim input VAT (especially relevant if the business is buying capital items such as a van).
- to build positive impressions to clients – the business looks larger than it is.
- generate a VAT repayment for businesses that sell zero rated goods as they can reclaim the input VAT on purchased goods.
- to back date the registration by up to four years if sufficient evidence can be supplied to HMRC. This means a business may be able to reclaim VAT paid on equipment being used.
Exceeding the threshold temporarily
A business that temporarily goes over the VAT registration threshold e.g. from making a one-off high-value sale, may not have to register for VAT. This exception applies if the VAT registration threshold was exceeded in the previous 12 months, but the business can demonstrate that taxable supplies in the next 12 months will not exceed the de-registration threshold (currently £83,000). The business must apply for an exception in writing less than 30 days after exceeding the registration threshold explaining why expected taxable sales in the next 12 months will be less than the deregistration threshold.
Exception from registration requires HMRC’s approval and cannot be assumed. If the exception request is submitted late HMRC must still be notified and given the known facts as at the time that the threshold was exceeded. HMRC will only give weight to evidence that was available at that time, not information which subsequently becomes available, e.g. actual turnover figures for the months following.
It should be noted that exception cannot be granted if a business is liable to be registered under the 30-day future turnover rule.
Can employing a family member save tax?
Regardless of your business structure (sole trader or limited company) employing a spouse/ civil partner (or any other family member) can be one of the more efficient ways of reducing tax for your business. Such employment can take advantage of lower tax rates and personal allowances that may be available to your family member. If they are a shareholder of the company and also employed, a mixture of salary/bonuses, benefits, and dividends, could be paid thereby reducing the overall tax bill.
The work undertaken by the family member must be ‘wholly and exclusively’ for the business. The National Minimum Wage does not apply to family members working in the family business if they live in the same household so technically you could pay whatever you wanted. However, the payment must be commercially viable, the amount realistic and not excessive for the work undertaken. If no work or little work is undertaken, HMRC could refuse the company a tax deduction and treat the payment as a distribution to the director. By appointing the family member as a director a small salary could be paid, even if little work is undertaken.
Whether the family member lacks sufficient NI contributions towards their state pension (or is not liable to NI payments) may also have a bearing on the amount to pay. For a year to qualify for state pension purposes payment needs to be of 52 weeks x Lower Earnings Limit of £533 a month (£6,396 a year).
Should HMRC question the amount paid and decide that the payment is ‘excessive’, then the amount will be disallowed in computing the taxable profits. If the employment is in a company not only will the amount be disallowed but if the family member is also a shareholder, that amount may be treated as a distribution, taxed at the dividend tax rates.
The salary should preferably be paid into the family member’s personal bank account and recorded in the accounts as payment just like any other employee. Payments for wages to children must follow similar principles and caution is needed if employing minors to ensure that working regulations are not breached. It would also be preferable for the family member to be included on the payroll.
Apart from the payment amount being similar for comparable work outside of the business, when working out the amount to pay, consideration will be needed to ensure that the tax saving achieved is not counteracted by a higher tax bill for the family member. Other factors to consider include whether:
– the family member has another job or income and if so how much personal allowance remains to be allocated against the salary
– the transferable marriage allowance is available
– the employee is over state pension age as no NIC contributions are payable or under 21 years as no employer’s NIC is payable
– the Employment Allowance (EA) can be claimed (enabling eligible employersto reduce their annual NIC liability by up to £5,000). Whether or not the EA can be claimed will also have a bearing on the optimum salary payable.
As ever in tax – evidence is important. Bank statements and recording payments in the business accounts would provide evidence of what had been paid, which could be linked to the recorded hours worked.
Tax relief for rental property losses post Covid
Landlords could have been said to be the ‘forgotten business’ of the Covid pandemic – granted, they were able to take a three month ‘holiday’ from mortgage payments but were not given any direct help from the government (apart from business rate holidays and grants for Furnished Holiday Lets). Despite assistance via the furlough scheme for employees and the self-employment income support scheme for those running their businesses, some tenants fell into rent arrears such that many landlords are currently sitting on losses (although the tenant remains liable for the unpaid rent). How those losses are dealt with taxwise depends on the type of rental property and whether the landlord uses the ‘cash basis’ or the ‘accruals basis’ of calculation.
Profits and losses on property income are calculated in the same way as for a trading business but the letting is taxed as investment income such that the normal reliefs for trading businesses (including those available to offset losses) are not available. In addition, if a landlord has more than one type of ‘property business’, separate ‘pools’ are used for similar types of property i.e. furnished holiday lets, UK and overseas lets are kept separate.
As part of HMRC’s ‘Making Tax Digital’ strategy where an individual landlords’ annual total turnover (gross rents) is less than £150,000, the default accounting method is now the cash basis. Companies and Limited Liability Partnerships are required to use the ‘accrual’ basis (i.e. recognising income received, and expenses paid on an invoice basis, regardless of whether or when the cash is received). However, an individual landlord can ‘opt out’ of the cash basis and use the ‘accruals’ basis by making an election on their tax return. In addition should the landlord have separate type of property businesses they can opt out of the cash basis for one property business and remain within for another. The ‘opt out’ election takes the landlord out of the cash basis for one tax year only and must be made for each subsequent year as required.
The calculation of profit or loss is undertaken at business level so providing automatic offset if one property makes a loss and another makes a profit. Although the general rule is that losses from a property rental business can only be relieved by carry forward and offset against future profits of the same property business, there is a limited set off available for commercial properties. If there is an overall income tax loss on an individual’s continuing commercial property portfolio over a tax year and that loss has been created by excess capital allowances claimed, then the loss can be relieved by being offset against the owner’s other (‘general’) income for the same and/or next tax year. Otherwise the loss is automatically carried forward and set against future profits of the same UK property business.
This loss relief may be further restricted because it is only available up to £50,000 or 25% of the taxpayer’s adjusted net income, whichever is the lower.
If a landlord’s other income is less than the personal allowance, the accrual basis of calculation has been used (possibly because the rental income exceeds £150,000) and the loss has been incurred due to capital allowances, then rather than offsetting the total loss against general income in the year of loss, better tax planning would be to disclaim some or all of the capital allowances and carry forward the balance so as not to waste the personal allowance.
July Questions and Answers
Q1. My business recently hit the VAT registration threshold and I duly completed the necessary forms. That was six weeks ago and HMRC have not sent the VAT number. Now a customer is refusing to pay the VAT element of their invoice. What shall I do?
A: Until you receive the number you cannot issue a valid VAT invoice but that is not to say that you cannot issue invoices. It is permissible to issue invoices that include the amount of VAT, but VAT should not be shown separately. For example, if you are raising an invoice for £1,000 plus VAT the invoice should show £1,200 and then when payment is received the £200 will be available to pay HMRC. You should also ensure that a statement is shown on the invoice confirming that the VAT number has been applied for (e.g. ‘VAT number applied for – a VAT invoice will be issued once received. ‘). When you do receive the number, send a replacement invoice with the correct details to the customer.
However, in your case it would appear that you have issued an invoice which showed the VAT element separately. You can therefore do one of the following:
– Ask the customer to pay the net amount as a payment on account and then the remainder being the VAT element at a later date when you are able to issue a valid invoice or
– Cancel the invoice with a credit note issuing an invoice for the net amount only with no mention of VAT. Once the VAT number is received, issue a VAT only invoice.
You should liaise with the customer confirming what you intend to do.
Q2. I am a landlord using my home as the base for my property business. When I drive to a rental property for an inspection I sometimes stop off on the way to a DIY store, for example, to collect materials for repairing of the property. Then on the way back after the inspection I may visit a supermarket for some personal shopping. Can I claim the whole trip as business against my rental income?
A: The first stage of the trip, from base to the DIY store and then on to the rental property itself, is fully allowable, but the journey back from property to base cannot be claimed, as it was not undertaken ‘wholly and exclusively’ for business reasons.
However, a deduction can be claimed for a journey where any personal benefit is incidental, e.g. a trip made to the rental property, but the landlord stops on the way to pick up a newspaper.
Q3. My wife and I are director/shareholders on our own company. I own 65% of the ordinary share capital and my wife owns 35%. I also personally own the property from which the business is being run. I am getting to retirement age and now wish to sell the property and the business will continue but being run from rented premises. At the same time, I want to give between 5% and 10% of my shares to my adult son who will take over from me in running the business. What will be my tax position? Can I claim Business Asset Disposal relief on the sale of the property?
A: Business Asset Disposal Relief can be claimed on the disposal of the shares but also on the associated disposal of any assets used in or by the company. This can include the business premises used by the business but personally owned by a director, as in this case.
The main condition that needs to be satisfied is that for at least two years ending on the date of disposal the shareholder must be beneficially entitled to:
– at least 5% of both the company’s profits available for distribution to ‘equity holders’ and the company’s assets available for distribution on a winding up and/or
– at least 5% of the proceeds of sale in the event of a disposal of the whole of the company’s ordinary share capital.
In your case in order to meet the 5% test, you would have to make a minimum disposal of 7.7% of your holding (65% x 7.7% = 5%). A disposal of 5% of your holding would mean disposal of only a 3.25% stake (65% x 5%) and, as such, the 5% test would not be satisfied and Business Asset Disposal Relief cannot be claimed on either the sale of the shares or of the property.
July Key tax dates
5 – PAYE Settlement Agreements for 2021/22 must be agreed with HMRC.
Letting agents acting for non-resident landlords must make a return of the rents paid to landlords and tax deducted in 2021/22 (form NRLY). If no letting agent is acting the tenant must make the return.
6 – Employers to submit forms P11D and returns of Class 1A NICs (forms P11D(b)) to HMRC for 2021/22.
Employers must supply relevant employees with P11D information for 2021/22.
Annual returns for reporting events relating to all employee share schemes in 2021/22 must be submitted through ERS.
Employee share schemes put in place in 2021/22 must be registered.
File report of termination payments and benefits where non-cash benefits are included in the package, where the total value of the settlement is £30,000 or more.
Where a close company has provided beneficial loans to a director, it must elect by this date for all loans to be treated as a single loan to calculate benefits in kind.
7 – Return must be made of non-cash benefits provided in 2021/22 to retired employees under the employer-financed retirement benefits scheme.
19 – Employer non-electronic payments of Class 1A NICs for 2021/22 on benefits returned on a declaration of expenses and benefits (form P11D(b)) must reach HMRC. The due date is 22 July for payments made by an approved electronic payment method.
31 – Second payment on account of self-assessed income tax and Class 4 NIC for 2021/22 due.
Tax credit claims for 2021/22 must be confirmed and renewed for 2022/23 if required.
Deadline to pay any self-assessment tax owing for 2020/21 before a second automatic penalty is charged.
Where a pension scheme annual allowance charge of over £2,000 is due for 2021/22 the pension scheme member must inform the scheme administrator if they want to scheme to pay that charge from their pension benefits.