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The chancellor’s breezy Autumn statement 2023 speech was all about attempting to deliver a boost to the economy through a combination of national insurance cuts and business investment incentives. This autumn statement continues the spring budget theme of encouraging growth and investment.
In order to encourage business investment in assets and equipment, the full expensing of capital assets introduced in the 2023 Spring budget will continue on a permanent basis, rather than ceasing in March 26.
This measure began from 1 April 2023. It allows the full value of qualifying main pool plant and machinery to be claimed in the year that it’s purchased through capital allowances. Or 50% can be claimed for special rate expenditure.
This will primarily benefit companies who want to make significant investment in plant and machinery that would exceed the current £1 million annual investment allowance and doesn’t qualify for first year allowances. However, it only applies to capital allowances from limited companies, not to sole traders.
R&D tax relief will look quite different from April 2024 with the current R&D Expenditure Credit (RDEC) scheme merging with the SME scheme in an attempt to simplify R&D credits.
Contracted out R&D can be claimed by the decision making company in the merged scheme. There are also changes to the impact of grants on the ability to make a claim.
Loss making companies within the merged scheme will be taxed at the small profits rate of 19% rather than the main rate of 25%.
R&D intensive loss making SMEs are required to have more than 40% of the total expenditure in the period on R&D in order to access the enhanced 14.5% rate of payable credit on their losses. This is compared to the usual 10% payable credit for non-qualifying companies. For accounting period from 1 April 24 this criteria will be reduced to 30% R&D expenditure. However, this looks to remain as a separate scheme.
The current scheme for audio-visual creative tax relief will switch to an expenditure credits based scheme (similar to R&D RDEC scheme) with credit rates from 34-39% depending on the type of production.
From 1 April 2024 the national living wage will increase to £11.44 per hour from the current rate of £10.42. The age threshold for this rate will decrease from 23 to 21 years old. So not only are the wages increasing but the higher rate will potentially apply to more employees.
The other age threshold rates below 21 years will also increase but there is no change to the thresholds themselves.
There is no change to the current employer Class 1 national insurance rate or threshold.
The main rate of Class 1 national insurance, will be reduced to 10% from the current rate of 12%. This rate applies to employees with salary between £12,570 and £50,270.
However, the 2% reduction will apply from 6 January 24 rather than waiting until the new 2024-25 tax year in April.
The personal allowance and higher rate thresholds for income tax will remain frozen for another two years until April 2028.
The national insurance thresholds and inheritance tax thresholds will also be frozen until April 2028.
The tax free allowance for dividends will still reduce in 2024-25 from the current £1,000 to only £500, as previously announced.
The capital gains annual exempt amount will also still reduce in 2024-25 from £6,000 to £3,000.
State pension will likely be increased by 8.5% in line with the triple lock. This increases the pension by the highest of inflation, average wage increase in the UK or 2.5%. This could bring the annual pension amount for 2024-25 up to a maximum of £11,502.
Currently sole traders and partners should prepare their accounts using the accruals basis in a similar way to company accounts. Income and expenses are accounted for when they are earned or incurred. They can opt to use a cash basis instead, accounting for income and expenses as they are received or paid. The cash basis has been restricted for use by businesses with turnover less than £150k.
From April 2024 things will switch around and the cash basis will become the default. Businesses that want to continue with the accruals basis will have to actively “opt out” of the cash basis in their tax return. Businesses switching from accruals to cash will have to make some accounting adjustments for the first year to make sure nothing gets missed or double counted.
This also hits at the same time as basis period reform. From 2024-25 all sole traders and partnerships must have their accounting period in line with the tax year.
Class 2 national insurance is being abolished (for most) from 6 April 2024.
For 2024-25 onwards anyone with self employed profits over £6,725 will automatically get credit towards State Pension entitlement and other contributory benefits without having Class 2 national insurance to pay.
Those below the small profits threshold of £6,725 will continue to be able make voluntary Class 2 NIC contributions to retain their credit. The voluntary contributions for 2024-25 will be frozen at the 2023-24 rate of £3.45 per week.
Self employed business owners also pay Class 4 NIC. The rate for Class 4 NIC will be reduced to 8% from 6 April 24, from the current rate of 9%. This rate applies to any self employed profits between £12,750 and £50,270.
Some of the anticipated changes to inheritance tax and stamp duty land tax were not included in the Autumn statement but may potentially form part of the Spring 2024 budget.
The director’s loan is one area that causes a great deal of confusion for limited companies. What is it and why is it so important?
Let’s start with what it isn’t. The director’s loan is not a real bank account. You don’t need to go and set one up.
It’s a “virtual” account that only exists on your company balance sheet. The director’s loan account is a way of recording all the interactions between you as the director and the company.
The director’s loan is needed because the company is a separate legal entity from you, as the company director and / or shareholder. The company’s money is not your money. This is different from a sole trader where the business money and other assets belong directly to the business owner.
There are some common types of transaction that might be recorded in your director’s loan account.
If you have salary being declared to HMRC via a payroll, but don’t actually pay yourself the money, it will show as money owed to you in the director’s loan.
If you pay for company expenses personally and don’t reimburse yourself, it will show as money owed to you in the director’s loan. This might be things like business use of home, mileage or cash travel expenses.
If you put your own money into the company bank account, for example if cashflow gets tight, then this shows as money owed to you in the director’s loan account.
When you’re a shareholder as well as a director, these transactions could also include dividends. If the company declares a dividend but you don’t actually pay yourself the money, it will show as owed to you in the director’s loan.
If you take money from the company that’s not payroll salary, expense reimbursement or dividends, then it will go to the director’s loan account.
This would also include paying for non-business items through the company bank account, whether accidentally or intentionally.
Ideally your money-in transactions will always outweigh your money-out transactions. At any point in time, your director’s loan should have a nil balance or a credit balance. A credit balance means the company owes money to the director. You have made a loan to the company.
If you lend money to your company, you can charge interest on the loan balance. However there are some tax and administrative implications in doing this.
The interest counts as part of your taxable income for self assessment. It’s paid to you with 20% tax deducted by the company.
The interest can count as a business expense for the company. The company will also needs to report and pay the 20% tax deducted to HMRC every quarter.
When the money-out transactions outweigh the money-in transactions, the director’s loan has a debit balance. It is considered to be overdrawn. This means the director owes money to the company.
If you do end up with an overdrawn balance then you are left with three choices.
This blog article gives you some more information about these options.
If the relevant payroll filing period has past and you don’t have personal funds to repay the balance, then dividends may be the only option. But dividends aren’t always possible.
Dividends are declared from profits after tax, so the amount of dividends is limited by the available profit. If your company can’t afford enough dividends to fully clear the balance, your director’s loan account is left overdrawn.
An overdrawn balance on the director’s loan account can result in extra tax for the company and for you personally as the director.
An overdrawn directors account (where the director is also a shareholder) is known as a close company loan to participators. A close company is one that is controlled by five or fewer participators (generally the shareholders) or one that is controlled by shareholders who are also directors.
If the company loans money to one of its participators, there is additional corporation tax to pay if the loan hasn’t been repaid within 9 months and 1 day of the company year end. The overdrawn loan balance (or any increase on the balance since last year) is currently taxed at 33.75%.
This also applies to loans made to associates of participators for example relatives such as your spouse, parents, siblings or children.
It’s not all bad news as it’s possible for you to get the extra corporation tax back. If you permanently repay the director’s loan during a future financial year, you can reclaim the extra tax.
However, the catch is that this can’t be done until 9 months and 1 day after the accounting period where the balance was cleared. So you get your extra tax back, but it’s not a quick process. Better to avoid having to pay it in the first place if you can.
You may be wondering, can’t I just repay the loan before year end, then take the money out again the next day?
Unfortunately if you’re repaying more than £5,000 this falls under the rules for what is known as Bed and Breakfasting. You can’t put money in and then take it out again within 30 days.
For example, you owe £6,000 to the company and decide to pay it back just before the company year end to avoid extra tax. A week into the new financial year, you withdraw the £6,000 again, creating a new loan. However under the Bed and Breakfast rules, the £6,000 repayment you made before the year end is allocated to the new loan. This is because it’s within 30 days. The old loan remains, leaving the director’s loan still overdrawn at year end.
These rules apply from 30 days before the year end to 9 months and 30 days after the year end date. So they cover the whole period you might need to repay an overdrawn director’s loan.
If your loan amount is more than £15,000, there are some additional rules that apply beyond the 30 days period.
Repaying your loan or withdrawing money through payroll salary or via dividends is fine. It’s not included as bed and breakfasting because both of these methods result in extra income tax. But you’re not allowed to put cash in and then take it back out again, without counting it as salary or dividends.
If I can’t bed and breakfast, can I just write off the overdrawn director’s loan as bad debt?
You can choose to write off a director’s loan but there are still tax consequences. The amount is treated as a deemed dividend for self-assessment and taxed accordingly. There would also be Class 1 national insurance to be paid by the company.
Having an overdrawn director’s loan can also result in additional personal tax. An interest-free (or reduced rate interest) loan over £10,000 is known as a beneficial loan. It’s taxable as a benefit in kind.
If the company charges tax on the loan using at least HMRC’s official interest rate, then it’s not classed as a benefit. The interest is counted as additional taxable income for the company.
Otherwise the average loan balance (end balance plus start balance, divided by 2) is used. The value of the benefit is the interest that would have been due on the average balance, using HMRC’s interest rates. If interest was partially paid or paid at a lower rate, then the benefit would be the difference between the two amounts.
Unfortunately there’s no way to reclaim any tax on benefits in kind once the loan is repaid.
The best way to avoid extra tax is to make sure that the director’s loan doesn’t get overdrawn.
This blog article goes into more details about how you can take money out of your limited company without ending up with director’s loan issues.
The most important thing is to plan up front about what you need and how you will take that money. You can only take what the company can afford. Nothing creates director’s loan issues faster than lots of random, unchecked cash withdrawals that add up much more quickly than you realise.
Speaking to your accountant and planning together is a great way to make sure that you are making the most tax efficient decisions for both you and your limited company.
On 1 April 2023 there were some important changes to corporation tax. The rate changed, increasing from 19% to 25% and marginal relief was introduced.
Now some companies will continue to pay 19%, some will pay 25% and others could pay anywhere in-between. What is marginal relief and how do you know what corporation tax rate to apply for your company?
For the 9 years from April 2015 to 31 March 2023 there was a single corporation tax rate for all companies. Most recently it was set at 19%. This rate was applied whether company profits were £100 or £100,000,000. Prior to that the rate of corporation tax depended on the size of the profits. Profits over a certain threshold were taxed at a different rate.
From 1 April 2023 we returned to this profit based approach, where not every company has the same corporation tax rate. Now there are effectively three corporation tax bands that your company could fall into.
If your profits are below £50,000 then you fall into the small profits rate and will continue to pay corporation tax at 19%
If your profits are above £250,000 then you fall into the main rate and will pay corporation tax at 25%.
If you are over the main rate limit then the whole amount of your profit will be taxed at 25%. It doesn’t work like personal tax where different slices of income get taxed at different rates.
If you fall between the two limits then things get a bit more complicated. You start at the main rate but get to apply marginal relief based on your profit level, so the actual percentage ends up below 25%.
Marginal relief is a way of gradually increasing the corporation tax rate for profits between £50k and £250k. The closer the profits are to £50k the more relief you receive and as profits increase, the relief amount decreases. It means profits close to £50k are taxed at a rate that is closer to 19% and as the profits increase, so does the rate, up to £250k and 25%.
This should be calculated automatically in your tax software when you prepare your corporation tax return. However you may also want to calculate corporation tax to help you with financial planning or saving for tax.
HMRC have a calculator that lets your check the marginal relief and effective corporation tax rate based on your profit (or predicted profit).
You can also calculate the corporation tax yourself using HMRC’s formula.
The calculation for marginal relief takes into account not just the profits that are usually chargeable to corporation tax, but also distributions from unrelated companies. These are items such as dividends or assets.
If your company has associated companies then this affects the limits and thresholds for marginal relief. Associated companies are where one company controls the other or where both are under control of the same person or persons.
The upper and lower limits get divided by the total number of associated companies. So a company had 3 associated companies (so 4 companies in total) then the upper and lower limit would be dividend by 4. This would give lower limit of £12,500 and an upper limit of £62,500.
Additionally the small profits rate and marginal relief doesn’t apply to non-UK resident companies or to close investment holding companies. These type of companies pay corporation tax at the main rate of 25%.
If part of your financial year falls before 1 April 23 and part after, then the two parts of the year will be treated separately.
Your profits will be pro-rated based on the portion of the year before or after 1 April. For example if your year runs Jan 23 to Dec 23 then you have 3 months before 1 April 23 and 9 months after. With profit for the year of £120,000, you would have £30,000 before 1 April and £90,000 after.
The portion falling before 1 April 23 will be taxed at 19%. The portion falling after will be taxed under the new rates with marginal relief applied if necessary. In the example, £30,000 would be taxed at 19% and £90,000 would be taxed using the marginal relief calculation.
For the portion of the year falling after 1 April 23, the upper and lower limits are adjusted proportionally. In this example the lower limit would be 9/12 * £50,000 = £37,500. The upper limit would be 9/12 * £250,000 = £187,500.
If you don’t have any associated companies or distributions to take into consideration and your whole financial year is after 1 April 23, you can use the following quick formula to calculate your corporation tax at the marginal rate.
Multiply your profits above £50k by 26.5% and then add £9,500 (£50k at 19%).
For profit of £120,000 it would be (£70,000 * 26.5%) + £9,500 = £28,050 corporation tax.
When you get hit with HMRC’s self assessment payments on account for the first time it can come as a real shock. So how do you stay on the good side of payments on account, make sure they aren’t so bad for your cashflow and avoid those ugly surprises.
If you submit a self assessment tax return, you may have to make payments on account.
Payments on account are advance payments to HMRC towards your next self assessment tax bill. If you end up with a tax bill over £1,000 you may have to make payments on account towards the next tax year.
Payments on account are based on income tax and any Class 4 National Insurance (if you’re self employed). Capital Gains and Student Loans are not taken into account.
If your self assessment tax bill is less than £1,000 then you don’t have to make payments on account.
If you already paid more than 80% of the tax owed through your tax code via PAYE then you also don’t have to make payments on account. This applies even if the tax that you owe is more than £1,000.
The first payment is due by 31 January, the same deadline as your tax return.
The second payment is due by the following 31 July.
When your tax return is submitted, any balance not covered by the payments on account will be due by the following 31 January along with the first payment on account for the next tax year.
If your payments were higher than the tax owed then you will be due a refund. You can choose to put this towards reducing the first payment on account for your next tax year.
The payments on account are based on your previous tax bill (not including capital gains and student loans). So if your tax bill was £5,000 then the two payments on account for the next tax year will be £2,500 each.
If your tax bill is pretty consistent then payments on account should work nicely for you. Most of your tax is being covered by the January and July payments and then the difference is either a small payment or refund the following January. You’re making two payments each year, both of similar amounts. It’s all pretty good.
If you have inconsistent income then payments on account won’t work so well and may have a negative impact on your cashflow. If income drops, you might find yourself forking out for a large payment on account, just at the time when your cashflow is low. Or alternatively if income rises, you could have a large amount to settle in January along with a hefty first payment for the next year.
It can really be an ugly situation for your cashflow if you fall into payments on account for the first time. You’ve had no payments towards your current year tax bill so there’s the whole of that bill to pay in January. You also have the first payment on account for the next year due at the same time. It ends up with 1.5 times your tax bill due in January. Because of the almost 10 month time lag between the tax year end and the tax becoming due, changing circumstances can leave you with a large tax bill that you may struggle to pay.
If you know your tax is going to be lower, then you can reduce your payments on account for the next tax year.
When you submit the current year tax return it will show your payments on account for the next year and give you the chance to alter them. You can also make changes online via your tax account during the year or via form SA303.
But beware of setting them too low. It might seem like a good way to help your cashflow but it can have consequences.
If you reduced your payments on account lower than the amount of tax you end up owing in your return, HMRC will automatically revert them back to their original amount or to the total tax owed (whichever is lower).
They will expect anything underpaid to be settled straight away, rather than the next January. If it’s after July when you submit the return then any underpaid balance will be due immediately.
They will also charge interest on the underpaid amount, backdated to when each payment on account was originally due.
Altering your payments on account can be very effective to deal with changing income. However always take a conservative approach. You may benefit from chatting to your accountant to help work out an accurate figure rather than risk making a guess which turns out to be far too low.
There are three ways that you can avoid the uglier impacts of payments on account. They do all require a bit of organization, but it’s well worth it in terms of saving you stress at payment time.
Making sure you are on top of your income throughout the year can prevent surprises in January. Getting an idea how your taxable income is shaping up can help you make decisions and if necessary changes, before it’s too late. This particularly applies to company directors taking dividends who can have a bit of flexibility with dividend timing.
This follows on from the previous tip. If you know your taxable income then you can start to save regularly for your tax bill. Even if you don’t quite get it right, the lag between the tax year end and payment deadline means you have time to make up any shortfall. This is particularly true if you follow tip 3 and find out your tax figure nice and early. Spreading the cost more evenly across the year is definitely healthier for your cashflow than trying to find a large lump sum at short notice.
Your accountant can help work out your taxable income and an appropriate figure to save each month based on your income and estimated tax.
The sooner after the 5 April tax year end you prepare your tax return, the more time you have to deal with any consequences. Plus there may be some benefits. Submitting your return before 31 July could reduce your second payment on account if your tax is lower than expected. If the tax is higher than expected it gives you time to save before the balance becomes due in January.
If you need advice with personal tax planning and working out your taxable income or support with your self assessment tax returns, then maybe our personal tax team can help? Just get in touch via email on personal.tax@copperfaure.co.uk or give us a call.
Mobile phone expenses are an area where personal and business often overlap to cause some potential tax pitfalls.
No one wants to be without their mobile, but few people want the hassle of carrying a separate business phone. So it’s usually one mobile phone doing it all, business and personal. How do you separate out what mobile expenses can be claimed through your business?
As ever, there are differences depending on whether you’re self employed or employed (including company directors).
The rules here are relatively simple. You can include your mobile phone costs as a business expense, but you can’t claim for any non-business use.
There’s no set method to work out your non-business use. But whatever you use has to have a logical basis and be appropriate for your business. You need to be able to justify your figures if they’re checked by HMRC. Keep your mobile phone statements / records and calculations to back up whatever method you use.
One method would be to look at a few months’ worth of phone statements and work out business use percentage. Then use this percentage to apply to the rest of the year. You should re-check the percentage on a regular basis, at least once per year, ideally every few months.
It may be easier to have a separate mobile or SIM that’s only used for business purposes. This would allow you to claim all of the costs.
If you buy your phone handset separately then you can claim some or all of that cost. Personal use would have to be taken into account here too. You could potentially use the same personal use percentage for the calls and apply it to the handset.
Remember, if you’re VAT registered you can only claim VAT on the business use element of any mobile costs.
This covers company directors as well as employees of all types of business.
As with other employment related expenses, we’re thinking about what mobile expenses the business can provide without being a classed as a benefit in kind. Benefits in kind incur additional personal tax which may be paid via payroll or through your personal tax return.
For mobile phone expenses it makes a big difference whether the contract is in the business name or your personal name. There are different reporting requirements, and more importantly some significant tax differences and tax traps for the unwary.
The business can provide each employee with one mobile phone or SIM card without any benefits in kind being incurred. The phone contract must be with the business (not the employee) and the business must pay the bill directly.
The most important thing, which is unusual, is that private use of the phone is allowed. This makes it a very good option for company directors and employees with a mixture of work and personal use. Particularly where they don’t want two separate handsets or SIM cards.
Additionally, if the business is VAT registered, it can claim VAT on all of these cost as long as there is some reasonable element of business use.
If there is more than one mobile (or SIM) provided, then the second one would be a benefit in kind unless it any personal use was not significant.
If the mobile contract is in your own name and you are reimbursed for the mobile phone expenses, you do have to worry about business use versus personal use. The business can only reimburse the actual cost of business calls. Anything beyond this will result in a benefit in kind.
It can be tricky to work out the business calls element. HMRC advise that you should “approach the matter in a reasonable way and give an appropriate deduction that reflects the actual cost to the employee of business calls”.
This “actual cost to the employee of business calls” is important. It means, if making the business calls doesn’t cause you to pay any more each month, there’s nothing you can claim. For example, if you’re on a tariff with unlimited minutes.
This is different to the sole trader who can split the whole bill based on percentage of business use and personal use. For an employee it’s only the extra cost of business calls that can be claimed and not any element of the line rental.
You need to be able to provide some sort of evidence to back up what you claim. This applies whether that’s based on actual calls or increase in costs. You don’t necessarily need to count every call, every month, but you do need to be able to justify your logic or calculation.
If your employer pays for the mobile phone itself, the fixed monthly charges or any element of personal use, then there will be a benefit in kind. That’s the case whether they reimburse you for the costs or pay the bill directly. There will be some income tax and Class 1 National Insurance to pay. This may be via payroll or through your self-assessment tax return.
Paying for the mobile phone handset or the fixed monthly charges incurs a benefit because the phone is available for personal use as well as business use.
HMRC’s guidance doesn’t mention anything specific about data costs. It’s only the business phone calls that are listed as being exempt from benefits in kind.
This is an area where you do need to proceed with caution and review regularly. As many mobile contracts now include very high or unlimited minutes, you could end up without any additional costs related to your business calls. Anything you reimburse in this situation would therefore include an element of personal use and could be a taxable benefit.
VAT can only be claimed on the business calls, not on anything else that may be paid for or reimbursed.
If you’re self-employed, it’s pretty straightforward. You just need to focus on the best way to work out your percentage of business use.
If you’re employed then the rules are surprisingly lenient if the business provides the phone, but very strict if the contract is in your own name.
If you’re claiming for your personal mobile expenses through your limited company, you need to be very careful to make sure you’re not accidentally incurring a taxable benefit in kind.
If you’re self-employed and working from home, you could claim some use of home expenses for this.
This might include business support activities such as marketing and social media, quotes and invoicing or admin as well as your actual day to day self-employed work.
There are two main ways that you can include expenses for working from home: actual cost and simplified expenses.
Before we go any further, this information only applies to sole traders or partnerships. If you’re a company employee or company director, check out this post for more information as you have different guidance.
The first method is to use your actual home office costs and claim a portion for your business use.
These costs would typically include:
Generally water costs aren’t included unless you have a metered supply and the trade that you’re carrying out from home uses a lot of water. Otherwise water costs wouldn’t be significant.
You can’t claim the full cost of these expenses, only the portion that relates to your business use. So you need to work out the business percentage and personal percentage.
There’s not one specific way to work out business use. HMRC will accept any reasonable way of working out your business costs as long as it’s logical and can be justified in relation to your situation.
The most popular way is to combine the portion of the house and the amount of time spend working there.
For example:
If you have 4 rooms in the home and use one as an office, that would be ¼ or 25%. So if your annual bill was £400, you would divide it by 4, giving £100 in relation to the business. If you know floor area, you could use this rather than number of rooms.
If you work at home full time, that would be 5 days per week or 5/7th of the time. You would apply this to the £100. This means that the total you could claim from your annual £400 bill would be £71.43.
If you only work from home one day per week then that would be 1/7th of the time. Here you could only claim £14.29 from your annual £400 bill.
This method works well for costs that relate directly to the property, such as heat and light, mortgage interest, rent and council tax.
For other costs such as home broadband and telephone, you may need to use a different percentage. This could be based on checking your call statement or any other logical estimate of the business use that you could justify to HMRC.
Here are some different examples from HMRC.
If you’re using the actual cost method then you should keep records in relation to the expenses that you claim.
If this all seems like far too much work, then you can use simplified expenses as an alternative for your home office costs.
HMRC have a simplified expense scheme for use of home that lets you use a monthly flat rate instead of working out a portion of actual costs.
You can use this if you work more than 25 hours at home each month. There is a flat monthly rate ranging from £10 per month to £26 per month, based on how many hours of business use at home per month.
Depending on the hours worked you can claim between £120 and £312 per year. This may work out better or at least similar to the actual cost method, particularly if your work-use area is small in relation to your home.
You don’t need to keep records for use of home expenses claimed under the simplified scheme, apart from tracking how many hours you are working from home.
The simplified scheme doesn’t include business use on your home broadband or phone. You can still claim this in addition to the flat rate. However, you’ll need to do this using the business portion of the actual cost. There’s no flat rate scheme for these costs.
If you’re organised and have all your expense records, then you could use the actual cost method. This would also work well if you use a large portion of your home for your business or spend a significant amount of time there.
If you want ease, don’t have all the costs handy or don’t use a large portion of your home for work, then the simplified costs method may work better for you.
And remember, this only applies to sole traders and partnerships. It doesn’t apply to employees or company directors.
“Clothes make the man. Naked people have little or no influence on society.”
Mark Twain
I think most people would agree that clothes are pretty important. Clothing is a basic necessity of life, as HMRC describe it, “for warmth and decency”. This necessity is also why very few clothing expenses are allowable.
Business expenses have to be wholly and exclusively for business. It’s very hard to prove your clothes are wholly for business, when going without them wouldn’t be a practical option.
There are a few types of clothes that HMRC do recognise as potential business expenses. The three areas that are allowable are
HMRC defines a uniform as something that identifies the wearer as belonging to a particular profession. A person on the street should be able to recognise that someone is wearing a uniform rather than everyday clothes.
Think fancy dress for the most obvious examples. Police, nurse or firefighter uniforms are all favourites for fancy dress as they’re clearly identifiable. A waiter’s dinner jacket or evening dress would also be seen as a uniform for their profession. Similarly with a chef’s checked trousers and white hat.
The other aspect that can make something a uniform is if it carries branding or a logo for the business. If you get your company logo embroidered on a standard polo shirt, it can become an item of uniform as it clearly identifies you as working for that business.
Your clothing needs to have a permanent and conspicuous badge (or logo) if it’s going to be considered as a uniform. A removeable badge doesn’t count and you can’t claim for other – non branded items of clothing. Employees or staff all wearing similar design or colour clothes, is not enough to make that a uniform.
One type of protective clothing is something that goes over the top of your everyday clothes. This might include aprons, overall, lab coats etc. These are worn in addition to your everyday clothes and are protecting them.
If the main purpose of the protective clothing is to protect you from the elements, such as a coat, then it’s not allowed. It’s considered as something that you’d need to wear anyway.
Other types of protective clothing you can include are items that are necessary for safety or general protection. For example, heavy duty gloves, hardhats, steel toe-cap boots, hi-vis vest. You could also include trousers with reinforced knees if they were bought from a specialist workwear retailer. These type of items are designed as workwear and aren’t suitable for everyday wear.
The final category relates primarily to actors and entertainers. Clothing that you buy specifically to wear in a performance is considered as part of a costume and is allowed. This could apply to items that would normally be considered as everyday wear.
You can also include expenses that relate to the repair and upkeep of your uniform or protective equipment, where necessary. Upkeep can also include cleaning or a contribution towards laundry costs.
Repair or cleaning costs for your everyday clothes aren’t allowed, even if they were damaged through work or only worn for work.
Company directors, you need to make sure any clothing you are claiming as business expenses meets one of these criteria otherwise there could be some personal tax liability.
Any clothing that your employer provides or pays for, which doesn’t fall into one of these categories, could potentially be considered as a benefit in kind.
If the clothing doesn’t fall under one of those categories then it’s not allowable.
Everyday clothing is not allowed if you could wear it outside of your work environment. It is the COULD that’s important, regardless of whether you DO actually wear it outside work.
If you buy a suit to wear at work in order to look professional and conform to the general image of your workplace, it’s not allowable.
If you have clothes that you only wear at work, they are not allowable unless they are branded and become a uniform. This would apply across many professions where clothes might get dirty, or where a particular type of clothing is required e.g. gym wear.
If clothes aren’t uniform , protective or a costume and you could wear them outside of your work (even if you don’t) then they’re not allowable.
However you can turn everyday clothes into a uniform by adding a conspicuous badge or branding to the item.
After all the budget drama of 2022, it was quite nice to have a budget without too many big reveals or surprises. The Spring Budget 2023 was all about encouraging economic growth. In amongst the announcements about investment and employment, there were a few tax related updates which were mostly positive in nature.
There was no reversal of the planned increase in the corporation tax rate from 1 April 23 from 19% to 25% for limited companies with profits over £250,000. This will also affect limited companies with profits over £50,000 and under £250,000 who will pay corporation tax at a marginal rate between 19% and 25%.
Super-deduction capital allowances are coming to an end on 31 March 23. These have been in place for the past 2 years, since 1 April 21. They were designed to encourage investment in equipment post-Covid. The rules allowed limited companies to claim 130% in capital allowances on qualifying main pool plant and machinery.
With the theme of growth, encouraging continued investment in assets and equipment remains important. The super-deductions are being replaced by full expensing for qualifying plant and machinery for the next three years.
This allows the full value of qualifying main pool plant and machinery to be claimed in the year that it’s purchased. It applies to expenditure from 1 April 23 to 31 March 26.
This will primarily benefit companies who want to make significant investment in plant and machinery that would exceed the current £1 million annual investment allowance and doesn’t qualify for first year allowances.
As with the super-deductions, it only applies to capital allowances from limited companies, not to sole traders.
As already announced in 2022, from 1 April 23 the rates of R&D relief that are available for SMEs (Small or Medium Enterprises) will be significantly reduced. The 130% rate will reduce to 86% and the credit for loss making SME’s will reduce from 14.5% to 10%.
The Spring Budget 23 gave a partial reversal for R&D intensive loss-making SMEs. R&D intensive means SME’s where the R&D expenditure is more than 40% of the total expenditure in the period. They will still be able to use the 14.5% rate for their payable credit, rather than the reduced 10%.
However this credit will be based on a calculation which uses the new reduced rate for calculating the enhanced expenditure (so 186% rather than the previous 230%).
The VAT threshold is frozen at the current level of £85,000 to 2026. It will have remained the same for 9 years since 2017. With recent inflation, more businesses are likely to exceed the threshold.
After 9 years without a rise, the pension contributions annual allowance will increase from £40,000 to £60,000 from 2023-24. This means more can be invested annually without incurring addition tax.
The pension lifetime allowance has been abolished. This capped the total value of the pension pot and was set at £1,073,100. From 2023-24 there will be no limit on how large the total pension savings can be.
There were no significant changes to other personal tax rates and allowances . They will mainly remain largely the same in 2023-24 as they were in 2022-23.
The main areas of change are the previously announced decrease in the dividends allowance, decrease in the capital gains annual exempt amount and decrease in the additional rate tax threshold.
Some other key areas that don’t directly affect personal or business tax include:
All good things must come to an end and limited companies are no exception. Whether you’re switching to employment, retiring or starting something new, there may come a point when you want to shut down your business. What are the options to close your limited company and how does it affect your tax?
Here we’ll be looking at the process of shutting a solvent limited company. This won’t cover sole trader or partnerships businesses. It won’t discuss selling the company or dealing with an insolvent company that’s no longer able to pay its debts.
Whatever method you chose to close your limited company, there are some actions to take in preparation before shutting down your business.
If you work with an accountant, it’s beneficial to discuss your plans with them as far in advance as possible. They’ll help you make sure everything is done correctly and may be able to offer some tax saving advice.
You need to make sure that all company debts are settled. This may include any suppliers, bank or other loans, and tax owed to HMRC. Settling any director’s loan balance would also be advisable, particularly if it’s overdrawn.
If you have a payroll running, you’ll need to issue P45’s to all staff. You can notify HMRC that the payroll is ceasing through the RTI process.
Where you’re VAT registered you’ll need to de-register for VAT. If the business owns significant assets or how large amounts of stock, there may be VAT to pay on these items at deregistration.
If you’re a CIS contractor or subcontractor in the construction industry, you’ll need to notify the CIS helpline .
You’ll need a final corporation tax return, to the date you are closing the business.
If you claimed capital allowances on your business assets, you may end up owing part of them back on any assets that still have value when you cease the business. This applies whether you sell the assets or just kept them for your own personal use.
If you sell any assets that have increased in value since you bought them, there may also be corporation tax on the capital gains.
If you have a solvent limited company (can pay its bills) there are two main options for closing down. These are Strike Off or Members Voluntary Liquidation. The best option for you will largely depend how much retained profit is left in the business.
You can apply to have the company struck off the register at Companies House through an informal or voluntary strike off. It can be done if the company has not traded (or changed its name) for three months. The company director completes a DS-01 form which is submitted to Companies House.
Companies House publishes notice of the proposed striking off. During the next two months any interested parties can contact Companies House and object to the striking off. This most commonly happens were there are unpaid debts, in particular to banks or HMRC.
You don’t need to submit any final accounts to Companies House, but you will need to submit a final corporation tax return to HMRC. You must settle any corporation tax due before the company can be struck off.
Once the company has been dissolved, the bank account will no longer be accessible, so make sure all remaining funds are withdrawn before the DS-01 form is submitted.
Up to £25,000 of retained profits at closure can be treated as a capital distribution. This means it is taxed at the capital gains rates of 10% (basic rate) or 20% (higher rate). If the business qualifies for Business Asset Disposal Relief, the tax rate on the gains is 10%.
Retained profits above £25,000 are taxed as dividends. Dividends that fall outside the basic rate are currently taxed at 33.75% (higher rate) or 39.35% (additional rate).
If your company has retained profits below £25,000, the voluntary strike off process would usually be the most appropriate option.
Advantages of this option are that it’s a lot less expensive and doesn’t require a liquidator or even an accountant. It’s usually a quicker process providing all creditors have been settled.
The Members Voluntary Liquidation (MVL) process has to be carried out by a professional insolvency practitioner and can’t be done by your tax accountant. Most accountancy practices have insolvency practices that they work with regularly or can recommend, if you aren’t sure where to start.
The insolvency practice will deal with all aspects of the company closure, although they may work with your accountant to obtain any relevant information. They effectively take control of the company in order to deal with the liquidation process and will then distribute the remaining proceeds.
The main tax advantage of an MVL is that all the retained profits left in the company can be treated as a capital distribution, not just £25,000. Taxing all the retained profits as capital rather than dividends can make a significant tax saving on a larger amount.
If Business Asset Disposal Relief can be applied, the tax rate is 10% rather than 20% which can save even more tax.
If the company has significant financial assets, a Members Voluntary Liquidation (MVL) may be more tax efficient.
One disadvantage of this option is that you can’t have a significant interest in a similar company within 2 years. This applies to not only you, but connected parties such as your spouse, parent or child. This is part of the Targeted Anti Avoidance Rules (TAAR) which aim to stop phoenixing. It’s where companies wind up in order to avoid income tax and then immediately restart.
The MVL process is slower than the voluntary striking off, taking around 6 months. It is more expensive with insolvency firms charges of around £2,500 and upwards.
Business Asset Disposal Relief used to be known as Entrepreneur’s Relief until 2020. It allows a capital gains tax rate of 10% to be applied across the whole of the eligible gain.
It applies in a number of situations including when you sell shares in limited company or when capital distributions are made on the winding up of a company. This could include the £25,000 capital for a voluntary strike off, or the entire capital distribution in a Members Voluntary Liquidation.
There are a number of criteria that must be met in order for you to claim the relief. For the last 2 years it must have been a trading company and you must have held an office (such as director) or been an employee. You need to own at least 5% of the shares to be eligible for the relief.
The rules around Business Asset Disposal Relief are complex. It’s definitely worthwhile seeking further advice and support if you think it may apply to your business.
A third option is to become dormant rather than close your limited company completely.
Dormant has slightly different meanings from a Companies House and HMRC perspective, but the overall principle is the same. You would go through the same preparation process with your company as if you were closing down, but instead of taking the next step and striking off or liquidating the company, it remains open.
There will still be some accounting and administrative overhead each year. You would still need to submit an Annual Confirmation Statement and accounts to Companies House. If you’ve closed down your bank account and have no significant business transactions at all, then you can use the dormant accounts format with Companies House.
You should inform HMRC that the company is dormant for corporation tax and file a final return. After that there should be no further corporation tax returns required unless you start to trade again.
This route allows you to retain the company name. It gives the ability to restart the company again at a future date, rather than opening a new company.
It can be useful if you aren’t sure of your future plans. For example, you could start employment but keep the company open for a few years in case it doesn’t work out. It can also be useful if there is some brand or special significance to the company name.
If you withdraw your company’s retained earnings, these funds would be considered to be dividends and taxed at the current dividend rates.
Sometimes companies are kept as non-trading rather than dormant, with the bank account still open. The retained profits are taken as dividends over a number of years rather than in a single tax year.
If you’re considering whether to close your limited company and aren’t sure which option would be most appropriate, speaking to an accountant and a insolvency practice is a good starting point. They’ll be able to advise you from both perspectives and help you make the right decision for your particular situation.
The further in advance you can obtain advice, the better. There may actions you can take over the next few tax years that will help to reduce the tax due on closure.
The new tax year of 2023-24 is approaching rapidly.
With only one month to go now until the new tax year, it’s a good time for a round up of some of the changes in store for 2023-24 tax year for both individuals and companies. With so many updates that were announced, then reversed or altered at the end of last year, it’s been easy to lose track of the final outcomes.
There may be changes which affect the decisions you make in the final tax month of 2022-23. For example, around the timing of dividends, capital gains or company profits.
The personal tax thresholds and rates relate to England, Wales and Northern Ireland.
These changes for 2023-24 tax year could mean more or higher tax, especially for dividends, capital gains and corporation tax. You should potentially consider what’s going to fall in March and what will fall in April. A few days difference in timing could make a significant difference to tax.
My company, my money. Think again!
One common way to run into trouble with your limited company, is to take out more money than the company can afford. It’s easily done, particularly now with the impact of Covid on profits, combined with the increased cost of living. When household bills need to be paid and there’s money in the company bank account, it’s very tempting to just withdraw what you need to get by. Why is this so bad for both you and the company and what are the alternatives?
When you’re both a director and shareholder, it can seem natural to think of the company’s money as your own. Particularly if you’ve come from employment or running a sole trader business, it’s not always clear how a limited company is different.
If you’re a sole trader, then you and the business are classed as the same legal entity. That means, the assets and the profits of the business all belong directly to you as the owner.
A limited company is a separate legal entity to both its directors and its shareholders. The assets, the money in the bank and the profits all belong to the company itself. As a director or shareholder of a company, you can’t just take out money whenever you like. That money belongs to the company, not to you personally.
If you’re both a director and shareholder, there are two main ways to “pay” yourself from a limited company: salary, dividends or more commonly, a combination of both.
Salary can be paid to employees of the company. Being a company director means you’re classed as an employee and if there’s a payroll, you can pay yourself a salary.
Salary comes out of the company’s taxable profits. Taking a salary can be beneficial because both salary and employer national insurance contributions will reduce the company profits and so reduce the corporation tax. However, employment salary does attract personal income tax and employee national insurance.
For a director with no other employment income the salary amount is usually optimised at a level around the personal allowance (avoiding any personal tax on the salary) and avoiding significant amounts of national insurance.
Dividend are paid from the profits of the company after corporation tax. If the company has a negative balance sheet (it owes more money than it has in assets), then no dividends can be paid.
Dividends are paid to all shareholders in proportion to the number of shares that they own. So if there are 10 shares and you own 5 of them, that’s half the shares, so you get half of any dividends.
It’s possible to pay different dividend amounts to shareholders by using different classes of share. But this is more complex to set up and the majority of companies are formed initially with one class of share.
Dividends can be formally declared at any time, however it’s most common to see a single large dividend declared at the company financial year end. There might also be an interim dividend during the year, often to coincide with the personal tax year.
Most director / shareholders take the majority of their income as dividends to benefit from the lower dividend tax rate. This is a successful strategy when the company is profitable, but can cause issues if profits drop.
Taxed at a lower rate than salary (currently 8.75% , 33.75% and 39.35%).
Some dividends are not taxed. Currently the dividend allowance is £2,000. This is due to reduce to £1,000 from 6 April 2023 and £500 from 6 April 2024.
Have to be distributed in relation to the shareholding. Can’t easily be adjusted in relation to income if there are multiple shareholders (without creating additional dividend classes).
No profits = no dividends.
Can be hard to keep track and taking too much can cause an overdrawn director’s loan.
Having a lower salary and higher dividends can be a tax efficient strategy in theory, but in real life it can be tricky to organise. How do you know how much to take out of the company each month? What about if you pay for some company expenses such as travel or mileage?
This is where the director’s loan account comes in.
The director’s loan account often causes confusion because it doesn’t actually exist except in the balance sheet of your accounts. It’s not a real bank account, it’s a “virtual” account that’s a way to keep track of financial interactions between the company director and the limited company.
When you pay personal money into the company or takes money out for personal use, it’s recorded into the director’s loan account. But it’s not just bank transfers that are included.
Paying for personal expenses with the business bank account is treated as if you’re taking money out of the company. You are effectively borrowing that money from the company.
Not paying yourself salary or dividends that are owed to you is recorded as if you’re putting money into the company. You are effectively lending that money to the company. Paying for expenses personally, such as mileage, subsistence etc. and not reimbursing yourself is another way to lend money to the company.
So what happens if your director’s loan account ends up with more taken out then owed? This means that you’re left in a position of owing money to the company.
If you’re both a director and shareholder, the debt can be covered by declaring a dividend. This is generally done at company year end or at the tax year end. The idea is to bring the director’s loan back to a position with a zero balance or even a credit balance where the company owes you money.
It’s common for directors not to withdraw their payroll salary or reimburse expenses during the year. They assume that at year end, the money owed to them will more or less balance off against what they’ve taken out of the business.
However, this once-a-year strategy is can often backfire. When the numbers are added up at year end, the director can be in for a shock. The amount of dividends needed to balance the director’s loan ends up much higher than anticipated.
At best this means more personal tax than expected, but at worst this can mean an overdrawn director’s loan account.
If the company doesn’t have enough profit after tax (or retained profit) to cover the balance on your director’s loan account with dividends, it means you’re left owing money to the company at the year end. The director’s loan account is overdrawn and this is risky to both you and to the company.
If the company becomes insolvent, for example through a creditors liquidation, then your director’s loan debt is considered as part of the company assets. The liquidators will expect you to pay some or all of it back so that creditors can be repaid. By owing the company money, you lose one of the main advantages and protections of setting up a limited company, which is the separation between the company debt and your personal debt.
If the director’s loan is overdrawn at year end and it is not repaid within 9 months of the year end, this incurs additional corporation tax. It is known as a close company loan to participators. HMRC will charge 32.5% tax on the outstanding balance (or on any increase on the balance since the last tax year).
If you later repay the overdrawn balance, you can claim the extra tax back from HMRC, however it’s not an immediate process. The claim can’t be made until 9 months after the financial year end date which includes the clear director’s loan. If you cleared an overdrawn directors loan by year end 31 March 20×4, you would not be able to reclaim any additional tax paid until after 1 Jan x5.
Maybe you’re thinking that you could just settle the loan at 9 months, and then take the money out again straight afterwards? But unfortunately not, this is known as bed and breakfasting and is not allowed for significant amounts.
A director’s loan with a balance over £10,000 (at any point in the year) is considered a benefit for the director unless interest is being charged. This is because you are borrowing money at a beneficial rate that’s better than you’d be able to find if you borrowed that money commercially.
You can calculate the interest that would be due on the loan using HMRC’s offical rates and the average balance across the year. This interest can be added to the director’s loan balance and will also be considered as additional income for the company.
If the company doesn’t charge interest, or the interest is below the official rate, you must declare the beneficial loan as a benefit in kind. The value of the benefit is the amount of interest that you should have paid (based on HMRC’s official rates). Or, if you did pay some interest, the difference between what you should have paid and what you did pay.
If no provision is made then HMRC could decide to treat the loan as additional employment income and tax it accordingly, with implications for income tax and national insurance.
Here are some top tips to help you keep your director’s loan in check and prevent unwanted tax shocks.
You (hopefully) don’t pay your other employees as-and-when, so it’s good to apply that same principle to yourself as a director. Pay your salary as per the payslip amount each month. Reimburse any expenses that you’ve incurred on a monthly basis as well. Ideally at month end when you pay any other employees.
This means that any money taken out of the company over and above these payments is clearly dividends. It’s easy to see where you stand with your dividends at any point in the year, not just at year end.
Try to take a consistent single dividend payment from the company at the same time each month. Taking £50 here and a couple of hundred £’s there is the easiest way for the director’s loan to get out of control. It’s amazing how quickly small amounts can add up.
Start by sitting down and working out a personal budget so you know how much you money you need each month. Then you need to look at whether this is possible with your company profits.
Your accountant can help you with the process to determine what the company can afford. They can help structure the best split between salary and dividends and also give you an idea how much tax you would pay.
Information out is only as good as information in. If you keep your business accounts up to date on a weekly or monthly basis, it’s much easier to see how things stand with the business. This allows you to be proactive rather than reactive. You can spot if profits are dipping and maybe adjust your salary and dividends accordingly.
Treating yourself like an employee, staying organised throughout the year and planning up front with your accountant. This is the best way to maximise the tax benefits of the low salary, high dividends strategy, without getting into trouble from an overdrawn director’s loan account.
With Christmas on the way, I’m sure you’re firmly on Santa’s nice list and never submit any late VAT returns. For those unlucky businesses on HMRC’s VAT naughty list, the new year brings some important changes to the VAT penalties scheme.
The current VAT penalties scheme is based on surcharges. A late return or late payment is classed as a default. They are both penalised in the same way.
For a business with less than 150k turnover, one default triggers a warning letter. Two defaults starts the clock on a surcharge period. Every subsequent default within the next 12 months results in a penalty based on the amount of VAT due. For example, the 6th default within a 12 month period results in a surcharge of 15% of the VAT due or £30 (whichever is more).
Businesses with turnover over £150k go straight into the surcharge period on the first default.
If no return has been submitted, HMRC will estimate the VAT due in order to work out the surcharge.
The business needs a clear 12 month period with no defaults in order to reset the clock and leave the surcharge period.
There is no surcharge for a late return if you’ve paid the VAT on time, have a repayment due or there is no VAT to pay.
The new penalties will apply for VAT periods starting 1 Jan 2023. So if your 31 March 23 return is late, it will be the first one with penalties under the new scheme. 31 Jan 23 and 28 Feb 23 returns will still have penalties based on old scheme.
The new scheme splits up the penalties for late submission and late payment and deals with them in different ways.
All VAT returns will be affected, including nil or repayment VAT returns where no VAT is due.
There are no changes in relation to the penalties for inaccurate returns. They will remain the same.
Returns that are submitted late will accrue penalty points. Each late return results in one point.
There are penalty point thresholds which vary depending on whether you submit your VAT returns monthly, quarterly or annually.
If you cross the penalty points threshold there is an initial fine of £200. Any further late submissions result in further fines of £200 for each late return.
The submission penalties apply even if it’s a nil return or a repayment return. This is different to the old scheme where you could submit a late return without penalty, providing there was no VAT due.
Submitting all your return on time for the relevant compliance period will reset your points to zero. For example, if you submit quarterly you need 12 months (so 4 returns), all within the submission deadline to clear your slate with HMRC.
If you’re unable to pay your VAT on time then HMRC is giving you 15 days from the submission and payment deadline to either pay the VAT due or arrange a payment plan with them.
If you’ve not paid the VAT or agreed a payment plan by day 16 then there is an initial late payment penalty. This is calculated as 2% of the VAT due at day 15.
If it’s still overdue at day 31 then there is a further penalty added of 2% of the VAT due at day 30.
After that there is an additional penalty (on top of the previous ones). This is 4% per year for the period that the balance is outstanding, calculated on a daily rate. The total is determined once you pay the VAT.
In addition to the late payment penalties, HMRC will also charge interest on the overdue balance. This will be charged at the Bank of England base rate plus 2.5%, from the day that your VAT is overdue.
So although the late payment penalties don’t apply until day 16, there will still be interest to pay from day 1.
There will still be interest applied, even if you make a payment arrangement to avoid the late payment penalties.
The good news is that HMRC are giving businesses chance to get used to the changes. There will be no first late payment penalty charged until December 2023 providing you pay within 30 days of the payment due date. If you pay later than 30 days there will still be penalties charged.
There is no soft landing planned for the late submission penalties.
The main businesses that could be caught out by these changes are those that submit nil returns or get VAT repayments. You may have got into the habit of not worrying so much about being on time as previously there was no surcharge penalty if there was no VAT due. Under they new scheme there will be penalties and no soft landing period for this part of the changes.
So your new year’s resolution is to make sure that those VAT returns are submitted on time. Remember if you can’t afford the VAT, you can make a payment arrangement with HMRC to avoid late payment penalties.
Were you one of the many people who claimed homeworking expenses as a result of the coronavirus pandemic lockdowns? If so, you need to know those rules have now changed and reassess whether you can still claim.
The coronavirus pandemic lockdowns changed working almost overnight, with many employees having to adapt quickly to working from home. This was supported by some temporary tax changes that allowed many more people to claim tax relief on their homeworking expenses. But those changes came to an end in April 2022 and we are now back to the previous rules.
Although the rules have reverted back to pre-pandemic, working patterns may not have. Since Covid-19 many people have changed the way that they work. Remote working and hybrid working (at home for part of the week) have becoming increasingly common, so the homeworking situation is not always clear cut. What are the current rules around homeworking expenses and how do they apply to different working patterns?
For the tax year 2019-20 HMRC took a lenient view on homeworking expense claims for employees. If you were working at home, on a regular basis, for all or part of the time, as a result of coronavirus, you could claim tax relief on homeworking costs.
You didn’t have to be working from home for the whole year. However, the homeworking had to be required as a result of coronavirus e.g. because of lockdowns or because the workplace was closed, for at least part of the tax year, rather than by choice.
Even a single day working from home was sufficient to claim for the whole year, providing it was required as a result of coronavirus.
Most people claimed the HMRC flat rate of £6 per week (£312 per year) against their tax, or alternatively could claim additional actual costs. This could be done via the self-assessment tax return or using online microservice launched by HMRC in October 2020.
During the pandemic employees could also claim tax relief on equipment purchases for work. Your employer could reimburse the cost of equipment, without deducting income tax and national insurance. There was also no issue of taxable benefits in kind if you kept the equipment at the end. The purchase just had to meet the following conditions:
The rules were expected to return to normal in 2020-21, however during that year there were still many workplaces impacted by Covid-19. Therefore, HMRC allowed homeworking expense claims and equipment reimbursement to continue for that tax year on the same basis.
For 2021-22 onwards we are back to the original pre-pandemic rules, which are stricter in many areas.
There are two scenarios to consider, which have slightly different rules:
The majority of pandemic homeworking claims made in 2019-20 and 2020-21 were employees claiming tax relief from HMRC for homeworking expenses that hadn’t reimbursed by their employer. Claims were made directly through the self-assessment tax return or through the HMRC microsite.
It’s still possible to claim tax relief for the homeworking expenses that haven’t been reimbursed, but now under much more limited circumstances. The following factors must apply
You cannot have chosen to work from home, it must be necessary as a result of the factors above, rather than a choice.
If you have a voluntary working from home arrangement and aren’t being reimbursed for your homeworking expenses by your employer, it may be hard to claim tax relief from HMRC. You would likely no longer meet the stricter post-pandemic criteria.
If you do meet the criteria to make a direct claim, it can still be done through the self-assessment tax return or HMRC’s microservice. If you aren’t registered for self-assessment and use the microsite, HMRC will generally give you tax relief through a change to your tax code for the current tax year.
Your employer can choose to reimburse some or all of your additional homeworking expenses through payroll. The rules around these payments are much less strict than if you are claiming directly and apply to voluntary homeworking arrangements as well as necessary homeworking.
In order for the payment to exempt from tax you need to:
You can be fully home working or hybrid, working from home part of the week. The homeworking must be frequent and follow a pattern e.g. two days per week (although they don’t have to be the same two days each week).
Informal homeworking does not qualify. This includes working from home occasionally or doing work at home in the evenings or at weekends.
There are two main methods for paying home working expenses, the HMRC flat rate or the actual costs
The simplest method is to use the HMRC flat rate of £6 per week for employee homeworking. This is £26 per calendar month or £312 per year.
Employers can pay this without any further evidence of individual expenses as long as you meet the criteria for homeworking.
If you’re a hybrid workers, only working from home part of the week, you can still be paid the full £6 per week. You don’t have to pro-rata in amount.
Instead of the flat rate, you can be paid for any direct increase in home costs as a result of homeworking. This would be for expenses such as heat and light, insurance, metered water, telephone and broadband. You need to be able to provide evidence of the original cost and the increase.
Any costs that would stay the same whether or not you worked from home, can’t be included e.g. rent, council tax.
Actual costs can be difficult as providing evidence of the increase that can be attributed to homeworking is not always straightforward. The rapidly rising prices can add further complexity to this situation.
An alternative is a scale rate payment that your employer agrees with you based on average costs. This rate can then increase each year in line with inflation.
The rules around equipment expenses have also reverted back to their pre-pandemic form. If you need home office equipment, you can no longer just go out and buy it, then claim the money back. There are now tax consequences depending on who pays for the equipment.
If your employer purchases the equipment and there is no significant private use, then there are no adverse tax consequences for you as the employee. However, if you make use of the equipment personally as well as for work, you may end up with a taxable benefit in kind. You might also have a benefit in kind if your employer lets you keep the equipment during or at the end of your employment.
If you buy the equipment and your employee pays you back, this is treated as additional employment income and is subject to tax and national insurance. This is different to the situation in 2019-20 and 2020-21 where there were no tax consequences.
If you buy the equipment but your employer does not pay you back, then you can claim tax relief on that expense. Claims can be made through the self-assessment or via HMRC’s microservice. However, the rules around what can be claimed are quite strict. The equipment needs to be necessary for the performance of your duties, with strong emphasis on “necessary”. A laptop would be fine, but office furniture is not viewed as necessary. Again, this is different to during the pandemic when it was possible to claim for a much wider range of equipment as long as it was being used primarily for work.
The homeworking expenses and equipment rules are now much stricter than they have been over the last couple of years.
Handy Hint – if you aren’t sure whether you can claim or not, HMRC have an expense claim tool as part of their microservice.
As the dark, damp November days start to draw in, Chancellor Jeremy Hunt’s Autumn Statement seems oddly appropriate with its stark tax forecast. A contrast to the bright and breezy mini-budget tax cutting exercise in September. This budget with spending cuts and higher tax brings us down to earth with a much darker outlook in the face of impending recession.
The current income tax personal allowance of £12,570 will now remain frozen at this level until April 2028 (rather than 2026 as previously planned).
The threshold for the 45% additional rate tax has been reduced from £150,000 to £125,140. This will also be frozen until 2028.
This means as wages increase to keep up with inflation and cost of living over the next 5-6 years, a larger portion of the wages are taxed. At the higher earner end, more will be taxed at 45%.
The annual exempt amount for capital gains will decrease from the current level of £12,300 to only £3,000 by 2024-25.
Lower thresholds will mean that more gains need to be reported, either because tax is due, or because proceeds are more than 4 times the annual exempt amount.
The current level of £2,000 dividends that can be taken without tax will decrease to only £500 by 2024-25.
The tax-free amount for dividends was put in place in April 2016 when the tax rules for dividends changed. It was seen as a compromise measure at the time and there has been much speculation as to how long it would last.
This is on top of the existing dividend tax rate increases that look place in 2022-23, when all rates of dividend tax increased by 1.25%. The combination of these factors will increase the tax burden for company directors who take the majority of their income in dividends or people who rely heavily on investment income.
This is another freeze that will result in larger employer national insurance bills as wages rise.
Small to medium enterprises will get less generous R&D tax relief from April 2023. The deduction rate for the Research and Development (R&D) SME scheme is being cut to 86% and the credit rate to 10% as an attempt to combat abuse and fraud in R&D tax relief. This is a significant reduction from the current deduction rate of 130% and credit rate of 14.5%.
On the other hand, larger companies have a more positive outlook. Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%. This is the scheme applicable to larger enterprises.
This budget was a painful but necessary exercise to try and combat the national budget deficit and very few taxes are actively going up. But with reductions or freezes to tax free or exempt amounts, in the face of a recession and cost of living crisis, it’s still a chilly proposition.
You’re at work, you buy some food, it must be a travel and subsistence expense. Simple, surely? Think again!
Travel and subsistence expenses are one of the areas of business travel that causes the most confusion. So, what are your options for claiming these expenses and how do you get it right?
Put simply, travel and subsistence expenses are the costs for your journey, your accommodation and your food and drink during a business trip. Motor travel expenses have already been discussed in a separate post. This blog will focus on the other types of travel costs, and in particular, the subsistence side of things – meals, food and drink.
Being at work is not enough for a meal to be counted as a subsistence expense because, as HMRC argues, “everyone must eat to live”.
As with other types of travel expenses, we are looking at what is allowable as a business expense for sole traders or what can be reimbursed without being a benefit in kind for employees and company directors.
Generally, food and drink are allowable expenses on journeys that are away from the base of work and outside the usual pattern of work travel (for sole traders) or to a temporary workplace (for employees). So, that daily coffee you buy on the way to work, would sadly not count as a subsistence expense. But the latte at the train station on the way to a client meeting in another town, may be allowed.
Establishing whether a journey can be counted as a business trip, is always the first step because the other travel expenses follow from there. No business journey, no travel expenses. Business journeys are a complicated area and there is a whole blog post covering this topic.
But just because a meal is part of a business trip, doesn’t always mean that it’s subsistence. If you pay for other people, such as customers or suppliers the meal would be classed as entertaining rather than subsistence. Again, this is another complex area which has implications for corporation tax, income tax or VAT.
Alcohol on its own would be classed as entertaining, although limited alcoholic drinks can still be included as subsistence when drunk as part of a meal.
You can claim any actual costs incurred. These costs need to be evidenced e.g. with receipts, bills or other proof.
This applies to sole traders putting expenses through their business, to employees claiming travel expenses from their employer or directors claiming travel expenses from their limited company.
HMRC doesn’t care whether you travel first class or if you dine in MacDonalds; any reasonable expenses are allowed. The only limits HMRC sets are if the expense is lavish enough to be considered as some kind of employee reward rather than purely a travel expense, or if it doesn’t meet the criteria as a wholly business expense.
If you’re an employee making a journey that meets the criteria as business travel, but you aren’t reimbursed for the full cost by your employer, then you can claim the balance. This can be done directly to HMRC or via a self assessment tax return.
Employees (and company directors) have an alternative option for claiming some travel expenses. Instead of using the actual cost, you can claim meals at HMRC’s benchmark rate. These rates unfortunately don’t apply for sole traders or partnerships.
The rules around these benchmark rates changed from April 2016. Previously there were amounts set for specific meals. Now the rules are based on minimum journey time rather than meals.
The benchmark rates are the maximum that can be paid to an employee without incurring tax or NIC on the payment and without using the actual costs. Employers can pay less than these rates if they wish.
However, this doesn’t mean that you can just chuck all of those travel receipts in the bin. The employer has to have a checking system in place to make sure benchmark payments are being claimed legitimately. This could still mean hanging onto some receipts as evidence.
You can only claim one allowance per journey. If you had a 12 hour journey you could only claim £10, not £5 and £10.
A meal can only be reimbursed once. For example, if a hotel bill included an evening meal, you couldn’t claim the £25 allowance as well. But you could claim the £10 allowance for the other meals during that day.
There are no benchmark rates for overnight accommodation or for staying with friends and family. For these expenses, you use the actual cost.
There is however, £5 per night that can be paid for overnight stay incidentals (such as phone calls and newspapers).
Instead of using the standard rates, a business can also agree its own bespoke benchmark rates with HMRC. They can also apply to use an approved industry scale rate, if one exists.
Remember – these benchmark rates apply only to employees, not to sole traders or partners.
Start by establishing whether it’s a business journey. If the journey is not allowed, then the expenses won’t be allowed either.
Think about whether it might be classed as entertaining rather than travel and subsistence.
Sole traders and partners can only use actual cost.
Employees and company directors can use benchmark scale rates as an alternative method for meal costs.