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Have laptop, will travel! The post-pandemic rise in remote working has triggered a realisation that many jobs can be carried out anywhere in the world. And with travel restrictions relaxed, it’s now much easier to head out of the UK. But moving abroad doesn’t mean you can forget your UK tax obligations. How does leaving the country affect your tax residency status and UK tax?
If you’re moving abroad with the intention of living outside the UK for at least one tax year, then you need to inform HMRC so that they can deal with your tax correctly.
If you don’t complete a self-assessment tax return, you will need to complete a P85 form. This can be done just before or just after you leave.
If you do complete a self-assessment tax return, you can use the residency section to let HMRC know about your move. However, this section is not available via the HMRC online tax return so you would need a paper version or to use some other tax software. Don’t forget, for the paper form the deadline is 31 October rather than 31 January.
You can still use the P85 form even if you do submit a tax return but want to let HMRC know about your residency situation straight away, rather than waiting until the next return is due.
HMRC will use the information from the P85 form or tax return to assess your residency and tax situation for the current tax year (and going forwards).
Tax residency is a complicated area and depends very much on your particular circumstances and your pattern of work and living in the previous few years.
Residency is not the same as nationality, citizenship or domicile. It’s a more temporary state and you can be resident in more than one place.
HMRC use the statutory residency test to assess whether you can be classed as resident or non-resident for UK tax in a particular tax year. You can use HMRC’s online test to check for yourself.
There are some automatic tests that determine if you’re automatically UK resident for the tax year or if you’re automatically overseas and therefore non-resident.
If you don’t meet the criteria for any of the automatic tests, then residency considers relevant ties such as family, accommodation, work or time spent in the UK in previous years.
You can also have a split tax year, where you are resident up to the point you leave the UK and then you become non-resident for the remainder of the year. For example, if you or your partner start full time work overseas or sell your UK home to move permanently abroad. Again, this depends on the individual circumstances.
Moving abroad during a tax year doesn’t automatically mean you are non-resident for that year or even the next. It depends very much on how far into the year you moved, how often you are back in the UK and many other factors too.
There are three ways to automatically be classed as a UK resident. Meeting any one of these three criteria will make you UK resident:
If you don’t meet any of these tests, you may still be classed as a UK resident on the basis of the number of ties you have. The number of ties required varies depending on how many days you’ve spent in the UK during the year. The longer in the UK, the fewer ties are required to be classed as a resident.
UK residents report and pay tax on both UK and foreign income and gains.
If you have foreign income to report, you usually have to register for self-assessment. The exception is foreign dividends, where there is no other reason to do a self-assessment and the total dividends (including those from the UK) are less than £2,000.
The UK has double taxation agreements with many other countries which means that for most types of income you can include some or all foreign tax paid on your UK tax return. This means that you’re not being taxed twice on the same income. However, it may be easier said than done, as tax periods can vary from country to country so it can sometimes be tricky to work out.
There are some different rules that can apply if you are resident in the UK, but your domicile is abroad.
This residency complexity can apply if you are resident in the UK but have strong connections in another country. Domicile is important for a number of taxes including employment income, foreign income, capital gains and inheritance tax.
Being a UK resident but having a domicile outside the UK gives you an additional option as to how your foreign income is taxed, so that only income remitted to the UK is included. It’s a very complex area and one that would need an entire blog post in its own right!
It’s possible to be classed as resident for tax in the UK and in another country at the same time if you are living and working between countries. If you’re living and paying tax in more than one country, then you may be classed as a dual resident.
Double taxation agreements allow you can claim relief on tax paid to avoid being taxed twice. But you need to decide which country will be your residence for the purposes of claiming relief. You can’t claim relief in both or as a mixture.
There are some tie breaker rules to use to determine your residence for claiming relief when you’re a duel resident. They consider aspects such as your permanent home, centre of vital interests, habitual abode (where you live most regularly or habitually) and your nationality.
If you’re dual resident and you want to claim relief from UK tax in your UK tax return, then you need to obtain a certificate of overseas residence to include with your UK tax return. No certificate is required if you’re a resident of the USA.
There are three ways to be automatically classified as be non-resident for UK tax. Again, you can use any of the following:
Non-residents don’t have to declare their foreign income in their UK tax return.
The only income that needs to be declared in your UK tax return is your UK income. This could include salary and pension (depending on the tax code), property, savings interest and dividends and some capital gains.
In many situations you will still be allowed the UK personal allowance, giving you a tax-free amount to use against your UK income.
For example:
You’re still liable for tax on income such as salary that is earned in the UK. If you’re non-resident but carry out some of your duties in the UK, then the UK duties would be liable to UK tax, unless they were “merely incidental” to the employment abroad.
If you work for a UK employer but carry out all of your work duties outside the UK then the income would not be counted as earned in the UK.
Depending on your P85 form or tax return information, you may find that HMRC issue an NT tax code. This would typically happen if all or almost all of your work is outside the UK. An NT tax code means that your UK salary (or pension) is no longer taxed in the UK. Instead, it will be taxed in your new country of residence. It prevents the same income being taxed twice.
If you complete a UK tax return for other UK income such as property, you don’t need to include any salary or pension with an NT code. However you need to make sure you are declaring that income where you are now resident.
If you don’t have an NT code (or not immediately) then your income will be taxed as normal, using your personal allowance if you receive one. It should be included in your UK tax return. Any tax deducted will need to be claimed as relief against the salary income in the tax return for your country of residence.
Any UK dividends and savings income does need to be declared on your UK tax return, however you may not have to pay any tax on it. You can choose to have certain types of investment income (including dividends and savings) disregarded for tax.
Doing this means that you lose your personal allowance for the year, but in many circumstances it can still save significant tax. However, it’s a very complicated calculation and one that’s best to work through with an accountant.
The disregard doesn’t apply to any years with split year tax residency. So, if you’re intending to take a large dividend and want to benefit from the tax disregard, make sure it’s in a year when you are non-resident for the whole year.
But beware if your dividends are from your own company and it’s a close company (five or fewer shareholders, some or all of whom are also directors). If you’re abroad for less than 5 years, the dividends could become taxable on your return under the temporary non-residence tax avoidance rules, depending on when the profits were generated. See below for more details on temporary non-residence.
Income from UK property is taxable in your UK tax return as a non-resident including Buy to Let and Furnished Holiday Lets.
If you have property income in the UK which is managed through an agency, then you need to let them know that you are a non-resident landlord. Non-resident landlord means that your normal place of abode is outside the UK or that you are absent from the UK for more than 6 months. The letting agents will register you as a non-resident landlord and deduct 20% tax from any payments that they make to you.
You can apply to have the payments made gross without the tax deducted and then settle any tax due in your tax return instead. Whether you have your payments gross or net, you still need to complete a tax return as well.
If you let directly rather than using a letting agency, then your tenant will have to operate the Non-resident Landlords scheme if the rent they pay is more than £100 per week.
Assets are normally taxable in the country where you are resident, so as a non-resident you should not be taxed in the UK on most capital gains. But there are some extra rules and exceptions around property.
If you’re non-resident selling UK land or property, then you need to report this within 60 days through the Capital Gains on UK property service and pay any tax due. You still also need to fill in the capital gain section on the relevant tax return.
This is another one to watch out for in terms of temporary non-residence If you return to the UK as a resident within 5 years, your untaxed capital gains could become taxable under the temporary non-residence rules. See below for more details.
If you’re only overseas for a limited time, then you need to be careful not to fall foul of the rules around temporary non-residence. These rules were designed to stop tax avoidance on large gains by people becoming non-resident for a short period. However, they can still catch you out even if you’re not deliberately trying to avoid tax.
If you were resident of the UK for at least 4 out of the 7 tax years before you went overseas, and you return as a UK resident within 5 years, then you’re classed as temporarily non-resident for the period that you were overseas.
If you had certain capital gains while you were abroad that were not taxed because you were non-resident, they may become liable to tax on your return if you meet the criteria for temporary non-resident.
As well as capital gains, there are some types of income that can end up being taxed under the temporary non-residence rules if you don’t meet the 5-year threshold. In particular these include some flexible pension withdrawals and distributions paid by close companies e.g., dividends.
Tax residency and its knock-on tax effects is a really complicated area. Your tax residency can change from year to year and should be assessed annually if you’re living abroad. It’s something that would definitely benefit from seeking specialist advice whether it’s for your current situation or for future tax planning. If you’re living or working in more than one country, having an accountant in both countries can be worthwhile, particularly if you have significant income or gains. You want to make sure you’re achieving the optimum tax solution for your situation.
If you have a tax residency query that you would like to chat about the please get in touch with us at tax@cooperfaure.co.uk.
If the series of updates and change of chancellor following the September Mini-budget have been enough to make your head spin, then today’s announcement was a real roller coaster. It reversed almost all of the tax cuts set out in the 23 September Mini-budget and Growth Plan 2022. So what’s going on with all the budget reversals and why are we all on this wild budget ride?
The initial Mini-budget swiftly resulted in a drop in the value of the GBP in the financial markets and concerns about how the budget would be funded. The reversals have been made to help re-balance the country’s books and hopefully, as a consequence, to improve market confidence and stability. The reversals are estimated to raise £32bn.
The Mini-budget changes have not yet been legislated through Parliament. So it’s still possible to reverse them at this stage, even if it’s rather unusual. Today’s announcement was bringing forward a number of measures that are part of the Government’s 31 October Medium-Term Fiscal Plan.
The first budget reversal announced on 3 October 22 was to scrap plans to abolish the 45p rate of income tax. The additional rate of income tax at 45% will now remain.
Basic rate income tax was due to be cut to 19% from April 2023. After today’s announcement this will no longer take place. The government still aims to proceed with the cut, but no future date has been given as to when it might happen. For now the basic rate remains at 20%.
Plans to cut dividends tax by 1.25% from April 23 have been reversed. The 1.25% increase which took effect from April 2022 will remain.
The Energy Price Guarantee for households will only be in effect until April 2023. This was originally put in place for two years but will now be limited to 6 months and will be reviewed next April.
On 14 October 22 the freeze on Corporation tax was scrapped. The Mini-budget announced plans to leave Corporation tax at the current 19% rate instead of the increasing to 25% from 1 April 23. This decision was reversed and the planned increase in April 23 will still go ahead.
The Mini-budget planned to simplify IR35 with a move back to workers determining their own employment status. Today’s announcement has reversed this and the 2017 and 2021 IR35 reforms will remain in place. Employment status will still be the responsibility of the business or public authority rather than the worker.
The freeze in alcohol duty rates will not go ahead.
The VAT free shopping scheme for non-UK visitors has been scrapped.
There are a few items that have survived intact from the Mini-budget.
On the individual tax side of things, the planned reversal of the National Insurance increase and scrapping of the Health and Social Care Levy will still take place. The extra 1.25% introduced from April 22 will be removed from 6 November 22.
The changes to the Stamp Duty Threshold also remain. No stamp duty is paid on the first £250,000 of a property’s value and the first £425,000 for first time buyers.
The £1m annual investment allowance has not changed.
When it comes to claiming business travel expenses, it really is all about the journey.
Once a trip is classed as a business journey, all the other travel expenses such as subsistence or motor costs can follow from there.
But this isn’t always straightforward. Whether something counts as a business journey depends on your particular circumstances and how you operate.
There are also some differences between sole traders / partnerships and limited companies. But before we get into the differences, let’s look at the key rules that are the same for all businesses.
The first important rule is that travel between home and work (your normal commute) is not allowed.
There are some differences as to how the workplace is defined, but the common factor remains that journeys between home and work are not classed as business travel. Therefore no associated expenses can be claimed.
The other important thing to remember is that for business expenses, the trade purpose must be the only purpose. This applies to all types of business.
So if there is a dual purpose to a journey (business and private), then the whole journey and all associated expenses could be disallowed. As ever are some exceptions and complexities, but as general advice it’s much better to avoid making dual purpose journeys if you can.
There are different sets of legislation and rules between sole traders / partnerships and limited companies which are similar, but not exactly the same.
The main reason for the difference is that directors of limited companies are considered employees of the company, so what they can claim for travel is covered by the rules around employee expenses along with any other employees.
A sole trader (or partner) is not an employee, so what they can claim is covered by a different set of rules. If the business has employees then the employees will be covered by the employee expense rules, but the sole traders or partners themselves won’t as they are not employees.
The main differences relate to how the workplace is defined.
The workplace for sole traders or partnerships is defined by the base of operations.
The workplace doesn’t have to be a building, office or shop that you own or rent. It can be anywhere that you regularly carry out your trade. So for a personal trainer, this could be the local gym.
Base of operations really depends on how you run your specific business. You need to think about your particular circumstances. Some areas to consider are:
Once you’ve established your base of operations then you should not claim any expenses for journeys made between home and that location. These journeys are classed as your normal commute.
This seems simple enough if you operate from a shop or an office, but what about other businesses that operate from home or don’t have a specific workplace?
Some traders are “itinerant”, meaning they don’t operate from a specific location. For example, a builder who travels to wherever the job is located and operates the business from their home. Admin such as bookkeeping and invoicing is done at home, tools are kept at home and the home address is used for the business correspondence. In this case the base of operations will be home and travel from home to the various jobs can be counted as a business journey.
Working from home sometimes doesn’t automatically make it your base of operations. If you sometimes or partly work elsewhere then this could well be counted as your base of operations rather than home. Particularly if it’s a regular location and / or the trips are predictable. This could include a location where equipment is stored or if you visit a depot to pick up items before starting work. The more regular and predictable the journey between home to a work location, the more likely it could be considered as part of your commute rather than business travel.
The base of operations doesn’t have to be a single building, in some circumstances it could be a larger geographical area, your general area of trade. If you live some distance from your area of trade, it gets more complicated. In this case, the journey from home to the area of trade could be counted as your commute. As the commute is not allowed, this part of the travel would be disallowed as a business journey.
Working out the base of operations can be tricky for certain businesses. If you aren’t sure, then this is something you can discuss with your accountant.
For a limited company, the director and other employees fall under the rules covering employee expenses. These rules look at which expenses can be reimbursed without being classed as a benefit in kind.
For an employee, the travel has to be necessary as part of the duties of their job. This could be because it is directly as part of the job itself or because they have to visit somewhere in the course of their job.
This is broadly the same as expenses having to be wholly business related for sole traders and partnerships. But the focus and detail is slightly different; you have to consider the person and the job role rather than the general business.
There is no concept of base of operations for employees, instead we look at whether it’s a permanent or temporary workplace.
A permanent workplace is a place at that you attend regularly for the performance of the duties of the employment
The employment contract usually states the permanent workplace and this is normally a good indication. However for tax purposes, it’s the pattern of work that dictates the permanent workplace and sometimes it may not agree entirely with the contract.
Here are some other common indicators of a permanent workplace, although these will vary depending on the specific job:
Travel to your permanent workplace is your normal commute, so you can’t claim expenses associated with that journey.
HMRC have some specific measurements to determine whether exactly how much time must be spent for somewhere to be classed as permanent rather than temporary.
As with the sole trader / partnership, a workplace doesn’t necessarily have to be an office, factory or shop.
Your permanent workplace can be home.
It’s possible to have more than one permanent workplace. If you travel between two or more permanent workplaces, the trips between can count as a business journey. You can claim the expenses for this. What you can’t claim is the journey to and from home at either end.
A depot or similar base can be a permanent workplace even if you don’t spent that much time there (Depot and Bases rule). It can be classed as permanent if it’s the base from which you work regularly or are routinely allocated tasks.
The permanent workplace doesn’t have to be a specific building, it can be a larger area. If the duties of employment are defined by a specific geographic area then that whole area is the permanent workplace (the Area rule). If you live outside the boundary of your work area, then the journey to and from the boundary is your normal commute. Journeys inside the boundary are business travel and allowable.
A temporary workplace is somewhere that you attend in the course of your job that doesn’t qualify as a permanent workplace. The two key aspects are:
You can only claim for necessary attendance. If you chose to work at a temporary workplace because it’s preferable or easier, then no expenses can be claimed.
Travel to a temporary workplace in the course of your business duties is classed as a business journey. You can therefore claim any expenses associated with that journey.
However, if you’re going to a temporary workplace that has a similar journey to your permanent workplace, then you can’t claim those expenses. For example, offices in the same travelcard zone in London, buildings located close to each other, journeys in the same direction and similar length.
How about if you have to drive by or close to your permanent workplace on the way to a temporary workplace? Do you lose the commute part of the journey? If you don’t stop then you are fine and the whole journey can be claimed. However, if you do stop at your workplace and perform some duties, then you have to split the trip into two parts, the normal commute part and the permanent to temporary workplace part.
A temporary workplace can become permanent even if you haven’t been there for more than 24 months.
In the 24 month rule, it is the “expect to” part that becomes important. It doesn’t matter if your role at a particularly location is in month 1 or month 24. As soon you expect to be there for more than 24 months for more than 40% of the time, it becomes a permanent location.
So if you’re 6 months into a 12 month placement and it gets extended for another 2 years, then it immediately becomes your permanent workplace. It doesn’t matter that you’ve only been there 6 months, it’s how long you expect to be there that counts.
The reason this is important is because, as soon as it becomes your permanent workplace, the home to work trip is no longer a business journey and you can’t claim for any associated expenses. It has become your normal commute.
In many ways the rules around business travel are similar across all business structures as the overall intention is the same. However the workplace definition for employees is more rigidly defined and complex than for sole traders. So if you’re moving from one business structure to another, this is something to watch out for.
The first step is to work out your base of operations or permanent workplace (depending on your type of business). This gives you the basis for whether you’re making a business journey or just carrying out your normal commute.
If you’ve firmly established that you’re making a business journey then you can claim the associated expenses such as motor costs, meal or accommodation costs. These type of expenses are broad topics in their own right and will be covered in the future.
If you’re in doubt about your base of operation, your permanent workplace or whether something counts as business travel, then this is something you can discuss with your accountant. If you would like to chat to us then just email to tax@cooperfaure.co.uk.
Business motor expenses can be complicated and with rising fuel costs you want to make sure you’re making the right choice for your business. So, let’s take a trip through your options.
How you put your motor expenses through your business can depend on whether you’re a sole trader or limited company, if you have employees, whether you’re VAT registered, the type of vehicle and the nature of your journeys.
Whatever method you choose, you always have to start with the journey. You can only claim motor expenses for business travel; not for personal travel or commuting.
There are two main routes to claiming motor expenses, mileage or full cost.
This method uses a fixed rate per business mile so relies on keeping accurate mileage records.
The mileage rate is supposed to cover not just fuel, but all the costs involved with running a vehicle. It’s also supposed to account for an element of wear and tear that would reduce the value of the vehicle. If you’re using mileage, then no other motor costs can be included as business expenses for that vehicle.
With this method, you can claim journeys in different vehicles, for example if you have two family cars. The most important thing is that it’s a business journey.
For employees and directors of limited companies, any personal mileage reimbursed by the company is classed as a benefit in kind and is taxable. Similarly, if the mileage is reimbursed at more than HMRC’s approved rate, the difference becomes a benefit in kind.
How about if an employee is using a vehicle owned by the business but paying for the fuel personally? They still need to track their business mileage so that they can be reimbursed for their fuel costs.
They can claim the business mileage at the HMRC advisory fuel rate, which covers the fuel costs only (and not any of the other motor costs covered in the approved mileage rates).
Conversely, if the business pays for the fuel and the employee doesn’t want to end up with a benefit in kind, they can reimburse the company for their personal mileage, again at the HMRC advisory fuel rate.
This uses the actual costs of fuel and running the vehicle based on the expense bills and receipts.
If the vehicle is owned by the business, then it’s more common to use the full cost method. However, if there is any element of personal use this has to be taken into account.
For sole traders this would mean discounting a portion of the motor costs in relation to the personal use. The most accurate way to work this out is to log business mileage so that you can see what portion of the overall mileage relates to business. This can then be applied to the motor costs. Or if it’s mainly business use, then log personal mileage.
For limited companies this would mean looking at Benefits in Kind for the employees who are using the vehicle. Any personal use whatsoever in a vehicle owned by a limited company can potentially cause a benefit in kind. There are particularly strict rules around company cars, but company vans can incur benefits in kind as well.
There are some extra considerations for motor expenses if your business is VAT registered.
If you’re using the mileage method, then you have an additional calculation to do for VAT. Also, don’t throw away those fuel receipts!
VAT can only be claimed on the fuel element of the mileage allowance. HMRC provides an advisory fuel rate to apply to your mileage allowance; this depends on your particular vehicle and is updated quarterly.
You also need to ensure that you have VAT receipts covering enough fuel for the amount of VAT that you are claiming on the fuel element of your mileage.
Whatever method you are using, you also have to make sure VAT is not being claimed on any element of personal use.
This is easy enough if you’re using mileage, as only business miles are being claimed. It’s a bit harder if you’re using the actual cost and there are two options.
HMRC have scale charges – these are fixed rates, based on the CO2 emissions, that show how much should be deducted from the VAT. The amounts are given for a month, quarter or year depending on the VAT period.
Alternatively, if you have accurate mileage records, you can work out the actual percentage of personal use mileage and then deduct that element, with the associated VAT from your fuel costs.
There are also some VAT differences in what can be claimed for the cost of the vehicle depending on whether it is a car or a van and whether it is new or second hand. For example, you can’t normally claim VAT on the purchase of a car. This will be covered in more detail in a future post.
You can switch from mileage method to full costs and vice versa, but only when you change your vehicle. Once you’ve decided on a scheme for a particular vehicle, you should stick with it until you replace the vehicle.
Despite the rising price of fuel, the mileage rate remains at 45p per mile. The advisory fuel rate is adjusted quarterly in line with fuel prices, but the approved mileage rate has remained at 45p since 2011. This means that as fuel prices go up, you’re effectively being compensated at a lower rate for the other motor cost elements.
It is definitely something to consider if you’re replacing your vehicle or bringing a new vehicle into the business.
If you have a new or low maintenance vehicle with good fuel consumption, this may not be an issue. However, if you have a vehicle with a high portion of business use (or wholly business use), that’s expensive to run in terms of fuel and other motor costs, then using the actual costs may be better value.
The method you choose will largely depend on whether you’re using your own vehicle and the proportion of business miles and personal use.
If you have any element of personal use then logging business mileage is important, even if you are using the full cost method, so that you can make sure all your expenses are business-only.
If you’re thinking about a new or replacement vehicle then it’s always good to discuss the possibilities with your accountant, particularly if you’re VAT registered. Every business is different, and you need to find the best option for your particular circumstances. If you’d like to chat to us about this, then just send an email to tax@cooperfaure.co.uk.
Chancellor Kwaski Kwarteng’s growth focused September 2022 Mini-Budget announced some significant changes.
The main aim of the Mini-budget is to boost growth in the UK, supporting the government’s Growth Plan 2022. This growth is being achieved through a balance of tax cuts and incentives for investment, some of which are undoing previous plans or current legislation. Here are some key areas which may affect you or your business.
The reversal of the National Insurance increase was already announced in advance of the budget as well as the scrapping of the new Health and Social Care Levy. This means the extra 1.25% that was introduced in April 22 will be removed from 6 November 2022.
The basic rate of income tax will be reduced from 20% to 19% from April 2023. This change was already planned but originally for April 2024, so it has been brought forwards a year.
At the top end of income tax there are also changes. The additional rate of 45% will be removed from April 2023. Earnings under £50,270 will fall into the basic rate of 19% and above that they will be taxed at the higher rate of 40% for 2023-24. There will be no additional rate.
These changes do not apply to Scotland where the income tax bands are different.
Just as the Heath and Social Care Levy increase in National Insurance has been removed, as will the 1.25% increase in tax on dividends that happened at the same time. From April 2023 the dividends will go back to being taxed at 7.5% and 32.5%.
If you are buying a home then you can benefit immediately from a doubling of the stamp duty threshold from £125,000 to £250,000. This means there is no stamp duty due on the first £250,000 of the property value and this change is effective straight away. This change gets rid of the 2% rate that used to be charged between £125,000 and £250,000 of the property value. Now the whole value up to £250,000 is at 0% and then £250,000 to £925,000 is charged at 5%, the same as previously.
First time buyers now pay no stamp duty up to £425,000 and then 5% up to £625,000. This used to be 0% to only £300,000 and then 5% to £500,000 so they are getting an extra £125,000 with no or reduced stamp duty.
The planned rise in Corporation tax rates to 25%, due in April 2023, has been cancelled and it will remain at the current 19%.
The IR35 rules for off-payroll working that affect many contractors will be simplified. There will be a move back towards workers determining their own employment status (rather than the business or public authority that they are working for). The 2017 and 2021 changes will effectively be undone.
The recent announcements about the Energy Price Guarantee, (caps the unit price for electricity and gas from October 2022) and Energy Bills Support Scheme (£400 support for energy bills) helped to support domestic households in relation to the high energy prices.
The budget outlined further support for businesses in relation through a new six month Energy Bill Relief Scheme. This will provide a discount on energy prices for businesses (and other non domestic energy users).
The government will also make interventions in the energy market to try to bring down the wholesale prices, reduce disruption to the market and generally introduce measures of reform. There will also be increased support available for energy efficiency measures and renewable heating investments.
The annual investment allowance is to remain at the current level of £1m.
The government is aiming to encourage investment in infrastructure by changing the planning system and restrictions in relation to certain types of projects.
Regional investment zones will have reduced taxes or additional tax benefits over the next 10 years to encourage investment and growth in specific geographical areas.
Don’t worry I’ll put it on expenses! A familiar comment on TV as the high-flying entrepreneur treats their friend to lunch in an expensive restaurant. What you don’t see, is what happens to that receipt later when it gets to their accountant. Many clients are disappointed to discover that the tax rules for entertaining are much less generous in real life.
Business entertainment is the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.
Entertaining can involve eating, drinking, accommodation and other hospitality. It could include tickets for sporting or cultural events, entry to clubs or nightclubs, use of an asset such as a yacht. Entertaining includes subsidised events as well as free events. It can also involve gifts (such as Christmas presents to customers).
It’s fine to have expenses for business entertaining and include them in your accounts. Entertaining is a legitimate and important part of many types of business. It needs to be recognized as business expense in terms of the business profit.
Apart from a few exceptions, there is no tax benefit to be gained from entertaining. Most entertaining expenses are disallowed for VAT, corporation tax and income tax.
Similarly expenses related to the entertaining event are also disallowed. For example travel, meals and accommodation costs to attend an entertaining event.
However if providing hospitality and entertainment is your business trade (or part of your trade) e.g. hotel, restaurant, events company etc. then this is different and expenses are allowable.
Sometimes an element of entertaining is expected as a normal part of a service e.g. a tea or coffee at the hairdresser. That is fine as long as it’s not excessive. It’s assumed to be factored in as part of the cost of the service that’s being provided.
Both entertaining and travel & subsistence costs often involve eating, drinking and accommodation but travel is allowable for tax whereas entertaining is not. So how do you tell them apart?
The main difference is that entertaining involves paying for people who are not business employees such as customers, suppliers or new prospects.
Staff can claim travel and subsistence costs for a trip away from their normal place of work that is necessary for business. This expense is allowable for VAT and for income tax and corporation tax. But if you pay for a non-employee, even if it’s related to business, that cost becomes entertaining.
A hotel stay and overnight meal for an employee on the way to a customer meeting is travel and subsistence. Meeting the customer and paying for lunch is entertaining.
The other thing to think about is whether the costs are directly related to the trade of the business. Meals and accommodation costs for non-employees can sometimes be allowed if they are directly involved in the trade of the business and the cost is not excessive. For example a construction company could pay for the travel expenses for its subcontractors as well as its employees to work on a non-local building project.
There are a few specific situations when entertaining can be included as an expense for tax and these relate to entertaining of business staff and also gifts.
Staff entertaining is all allowable as an expense for tax providing it is wholly and exclusively for the purposes of the trade and is not incidental to entertaining being provided for customers. This is the case for income tax, corporation tax and VAT too.
This means that the main purpose of the expense has to be entertaining the business staff. Business staff means payroll staff and does not include subcontractors and volunteers. If an entertaining expense meets these criteria it’s allowable for tax.
However, businesses need to be careful as too much generosity to their staff can actually be a disadvantage. There’s a limit to how much entertaining staff members receive before it becomes a benefit in kind and is personally taxable for them.
There are also some VAT complications to be wary of.
Businesses can provide an annual party for payroll staff as long as it’s available to all employees (whether as one event or various events across sites) and does not cost more than £150 per head, including VAT.
There can be more than one function e.g. a Christmas party and a summer BBQ, providing the total costs don’t exceed the £150 limit across the year.
This limit includes VAT and covers all costs such as travel to the event and accommodation that may be provided. If staff members bring invited guests, such as family members, then they fall under the £150 limit of the relevant staff member. If the conditions are not met or the £150 limit is exceeded then staff will end up with a taxable benefit for the entertaining event.
Sadly if it’s only directors on the payroll and no other staff, then the exemption doesn’t apply.
Sole traders are not considered employees, so although they can claim for staff, their own costs would not be covered.
Another spanner in the works is that VAT can only be claimed on the employee costs. So if your employees bring guests, although the guest may be covered under the £150 per head limit, you can’t claim the VAT on their costs. This might mean dividing up costs in terms of number of employees and non-employees for your VAT return.
One very odd anomaly is that VAT can be claimed on entertaining overseas customers, as long as it’s a “reasonable” cost. However for corporation tax or income tax purposes the expense would still be disallowed.
Unfortunately not everything in life is neatly clear cut. Some events may be a mixture of business and entertaining. Other events might be entertaining but for a mixture of staff and clients. How should the business deal with these?
For mixed events it’s important to work out what is the main purposes of the event and what is incidental. Is it a work event with some incidental entertaining or a entertaining event with some incidental work?
If it’s primarily a work occasion and entertaining expenses are incidental and very minor, they can usually be included. A basic lunch provided at an office meeting to enable the meeting to carry on without interruption would be OK. Lunch with customers in a restaurant, particularly if alcohol was involved, would not. If entertaining expenses at a work event are significant or substantial, they should be separated out and disallowed.
Similarly, if it’s primarily an entertaining event with a minor work element, the direct work related expenses can be separated and included. This would not include expenses related to employees attending, it would be expenses like an advertising display stand, business leaflets etc.
If it’s an occasion with both employees and guests attending, then you can think about whether the business would still have paid for the event without the guests being there e.g. just for employees. If the event would not have been paid for without the guests then it should be considered to be business entertaining rather than staff entertaining and all expenses (guests and staff) would not be allowable.
This is a very grey area with lots of complexity. I think the general advice for mixed occasions would be to avoid them if possible. If that’s not possible, consider the main purpose of the event and if in doubt, separate out. Don’t forget, your accountant is there to help out and provide advice and guidance on these tricky areas where answers might require a bit more thought or research.
Generally gifts are considered entertaining and not allowed as a taxable expense, but there are a few exceptions.
Free samples of trade goods aren’t considered to be entertaining.
Small gifts of less than £50 (not food, drink, tobacco or a voucher or token) are allowed providing they contain a conspicuous advertisement for the donor. So giving a customer one of your branded golfing umbrellas or a mouse mat is fine and not considered to be entertaining.
Business can also give gifts to staff providing they are less than £50 in value and not cash or a cash voucher. These fall under the trivial benefits exemption and don’t have to be declared as benefits in kind. The gift must not be provided as part of a contractual obligation or in recognition for services or employment duties. The exemption is design to cover things like birthday celebrations, Christmas presents or wedding presents.
The VAT rules on gifts are similar with a £50 annual limit on business gifts whether to customers or employees. Any more than this and the gift has to be treated as if it was a sale for VAT purposes.
Although the rules on entertaining are covered by a number of different areas of legislation and various HMRC manuals, they are actually pretty consistent across VAT, corporation tax and income tax. There are some differences or clarifications in relation to particular taxes. However overall the outcome is usually the same.
Generally you should consider that if a particular expense is disallowed as entertaining for one tax, then it would also be disallowed for the others as this will most often be the case.
There are exceptions of course (nothing in tax is ever 100% straightforward) and this article can only give a brief overview. So if your business does have a particular situation where more complex tax treatment may apply or you need further advice or clarification, this is something that your accountant can help you with. If you’d like to chat to us about this then just send an email to tax@cooperfaure.co.uk.
Is it a bird, is it a plane, is it normal capital allowances? No it’s super deductions!
If you’re planning on investing in new plant and machinery assets for your business you could save tax if you buy them before 31 March 2023 and take advantage of capital allowance super deductions.
In the March 2021 budget the government introduced capital allowance super deductions as a way to encourage businesses to invest in plant and machinery assets. It was part of a number of measures to encourage business growth after the Covid-19 pandemic. Extra tax relief is available on qualifying assets purchased from 1 April 2021 to 31 March 2023.
Before we get to the super deductions, let’s look at how capital allowances usually work.
Normally when a business buys assets, such as tools, equipment, machinery or vehicles, the cost of the asset can be claimed in the tax return using capital allowances.
Assets live in pools and the portion of the asset value that can be claimed in the tax return each year depends on which pool. The majority of assets live in the main rate pool which allows 18% to be claimed each year. However some assets, like cars, have pools at a lower rate e.g. the Special Rate pool only allows 6% of the value to be claimed each year.
18% or 6% per year doesn’t sound that great, but the majority of businesses can actually claim the whole value of the asset in year one. This is done through the annual investment allowance (or first year allowances for certain assets). It applies to most new assets except cars, and gives 100% of the value in the year of purchase. If it’s not claimed in that first year (or not entirely claimed) the rest of the value reverts to the standard 18% or 6% per year.
Capital allowance rates and rules can be changed and are a way for the government to encourage particular activities e.g. favourable rates on electric cars, unfavourable rates on high emission cars. In the case of the super deductions, it’s an incentive to encourage investment and growth.
The super deductions give 130% first year capital allowances on most new main rate pool plant and machinery investments. You are able to claim more than the actual cost of the asset.
So instead of the usual 100% for annual investment allowance / first year allowance or 18% for standard writing down allowance, you can claim 130% of the value in the first year.
For special rate assets where only 6% of the value can normally be claimed each year, the super deductions allow 50% of the value to be claimed in the first year.
Sadly the super deductions don’t apply to types of business, only to limited companies.
Capital allowances can be claimed by sole traders, partnerships, furnished holiday lets and limited companies. However only limited companies can claim the super deductions.
These are typically moveable plant and machinery type assets including computer equipment, commercial vehicles such as tractors, lorries and vans, tools and machinery such as ladders, drills, cranes, office equipment such as desks and chairs.
Integral features in a building such as the heating and lighting systems may not qualify for the 130% but could qualify for the 50%. This also applies to long life assets (with a useful life of at least 25 years), thermal insulation added to buildings and solar panels.
There are a number of exclusions, but some of the main ones include:
Second hand assets – it must be a new, unused asset.
Assets given as a gift.
Cars (but commercial vehicles and vans are allowed).
Plant and machinery purchased for leasing, i.e. bought in order to lease out to other people. The exception to this is background plant and machinery within a building.
Buildings and structures
Additionally if you are ceasing your business, you can’t claim the super deductions in your final accounting period.
The super deductions are claimed in the same way as the standard capital allowances on the company corporation tax return.
Assets where super deductions have been claimed will need different treatment on sale or disposal.
If you’re disposing of the asset in an accounting period that ends before 1 April 2023 (so still during the super deductions period) then it’s more straightforward. You claimed 130% of the asset value, so you give back 130% of the disposal value (as a balancing charge).
If you’re disposing of an asset in an accounting period that begins after 1 April 2023 (so falls entirely outside the super deductions period) then the disposal value stays as it is, no adjustment required.
If you dispose of an asset that starts in the super deduction period but ends after, then it gets tricker as you end up with a hybrid approach. The disposal value is effectively pro-rated based on the amount of time inside and outside the super deduction period. The super deduction part of the value is at 130% and the rest at 100%.
There are more complexities if you only claimed super deductions on part of the asset value. There are also differences in how the disposal is dealt with in relation to the rest of your existing assets.
This may well be one for your accountant to grapple with. However, in terms of what you would need to know as a business owner, it saves tax to dispose of the super deduction assets outside of the super deduction period and particularly to wait until a business financial year that begins after 1 April 2023.
If you aren’t ready to buy new assets right now, but are worried about missing out on the super deductions savings, then don’t worry, all is not lost.
Corporation tax rates are increasing from April 23 to a rate between 19% and 25% (depending on profit levels) for businesses with profits over £50,000. Claiming normal capital allowances with a 25% tax rate gives similar tax savings to claiming 130% at a 19% tax rate.
If the asset cost £1,000 then under 130% super deductions you can claim £1,300 which saves tax of £247 at 19%.
If you claim capital allowances on an asset costing £1,000 with a tax rate of 25% then you save £250 tax. This might all be in year one if you can claim annual investment allowance, or more spread out if you have to claim writing down allowance.
So if you have profits over £250,000 and know that you’re going to be at the 25% tax rate, you don’t necessarily need to rush. Waiting until the corporation tax rate goes up will give you similar tax savings on your capital allowances.
However for those businesses with profits over £50,000 but under £250,000 who will end up on a hybrid rate between 19% and 25%, it may be more advantageous to go for the super deductions depending on your profit and therefore the tax rate applied.
Working in the construction industry and registered for VAT; are you clear on how the VAT Domestic Reverse Charge for Construction affects you?
The VAT Domestic Reverse Charge for Building and Construction Services came into force on 1 March 2021, but despite being around for more than a year now, there’s still a lot of confusion around this scheme.
HMRC recognize the scheme is complex and have given a “soft landing” for errors but eventually they will tighten up, so it’s important to get it right.
The reverse charge scheme was introduced as a method to combat Missing Trader VAT fraud in the construction industry. Specifically, where a business charges VAT to their customers, gets paid and then disappears before accounting for the VAT to HMRC.
There is a similar scheme already in place for mobile phones, computer chips and wholesale gas and electricity.
If you’re curious as to how this scheme actually helps HMRC – check out the extra section at the end.
Are you working in the building or construction industry and report through CIS (Construction Industry Scheme) as a contractor or subcontractor?
Are you VAT registered?
If both of these apply to you then you will need to deal with the VAT domestic reverse charge in certain circumstances.
If you are working for a VAT registered CIS contractor and issue a sales invoice that falls under CIS, then it also falls under the domestic reverse charge for VAT.
You will need to makes some changes to the way you prepare your sales invoice.
Include zero rate (0%) VAT on both labour and materials, instead of the usual 20% or 5%.
VAT still needs its own line but your invoice should also show wording stating that the domestic reverse charge for VAT has been applied. HMRC gives some guidance on the wording and invoice layout.
CIS is calculated and deducted from the net labour amount as normal and should still have its own line on the invoice.
But there might be times when the reverse charge does not apply and it’s back to the normal rules of 20% VAT (or the appropriate reduced rate). For example:
Domestic – If you invoice a domestic consumer then reverse charge doesn’t apply as this invoice wouldn’t fall under CIS and they are not VAT registered.
Non VAT registered – If you invoice a CIS contractor who isn’t VAT registered, then reverse charge doesn’t apply.
Services outside CIS – If you invoice a VAT registered CIS contractor for a service that that falls outside CIS, then reverse charge for VAT doesn’t apply either. Reverse charge for VAT follows along with CIS. Some examples include: installing certain elements of security systems, blinds and shutters. If you aren’t sure then the best starting point is the CIS guidance.
End User or Intermediary Supplier – If you invoice a VAT registered CIS contractor and they’ve informed you in writing that they are the “End User” or an “Intermediary supplier” then reverse charge for VAT doesn’t apply.
If you aren’t sure then HMRC has some handy flowcharts to help.
It’s important to be clear about when the reverse charge applies for your subcontractors so you know if you’ve been invoiced correctly. You may also be working as a subcontractor as well as a contractor, in which case may need to apply the reverse charge to your own sales invoices.
If you receive an invoice from a subcontractor that falls under domestic reverse charge, you should not be paying out VAT to the subcontractor. You also need to make sure the invoice is processed correctly for your VAT return.
In your VAT return you need to account for the VAT as if you are both the customer and the supplier so that reverse charge VAT amount appears in your sales VAT and your purchases VAT, but overall the net effect is zero. This is the reverse charge method.
If this sounds horribly complicated, don’t worry, as your digital bookkeeping software should hopefully deal with the domestic reverse charge VAT automatically. However, you may have some initial set up to make sure everything works correctly.
You’ll need to make sure that you or your accountant are familiar with the set up and updates to the invoice and VAT process. You may need to contact your software provider if the process isn’t clear.
By now most people have got to grips with the basics of the scheme but there are still a number of areas that frequently cause complications. This list is by no means comprehensive, as it’s a complex subject, but here some of the most common errors.
If the domestic reverse charge VAT of 0% applies, then it applies to the whole sales invoice, including both the labour and materials elements. This is a common source of confusion as the CIS deduction applies only to the labour element on the invoice and everything else about reverse charge follows along with CIS.
But……., if the labour element is 5% or less of the value of the whole invoice, then there is a 5% disregard and normal VAT rules would apply to the whole invoice.
Hire of equipment and machinery falls outside scope of CIS if it’s equipment only but inside CIS (and therefore subject to reverse charge) if there is an operator or some sort of labour element.
A digger hired with a driver would be under CIS and reverse charge, but a digger hired without a driver would not be under CIS or reverse charge. This can be confusing as bills from the same supplier could be inside or outside CIS and reverse charge depending on the circumstances.
One very common area of confusion is scaffolding. If the scaffolding is supplied, erected and dismantled then it does fall under CIS and reverse charge as there is a labour element involved even if it isn’t explicitly mentioned.
The reduced rate VAT of 5% is used for certain construction projects, such as conversions from non-residential to residential use.
The domestic reverse charge can apply to both standard VAT and reduced rate VAT sales.
The domestic reverse charge applies to UK goods and services. It is not to be confused with the reverse charge for cross border services which is used to account for VAT on non-UK services.
If you use services from outside the UK, for example software and apps, then you may receive some bills with 0% VAT showing the wording “reverse charge”. This reverse charge works in a very similar way, but is a different scheme. It’s likely both types of reverse charge will be set up in your bookkeeping software tax rates.
If you are doing your own bookkeeping, you need to make sure you pick the correct VAT rate in your software. If you accidentally select the wrong type of reverse charge, the transaction might not be processed properly and the relevant rules applied. Again, if in doubt here, speak to your accountant or software provider.
Many businesses use cash accounting for their VAT return. This means sales and purchases are included in the VAT return based on when the money is received or paid, rather than included based on the invoice or bill date (accruals basis VAT accounting).
Cash accounting for VAT can’t be used for sales invoices or bills that are subject to the domestic reverse charge.
But don’t worry. If you do use cash accounting, this doesn’t automatically mean you have to switch to the accruals basis. Many software providers are now able to cope with this rule and your VAT return may end up as a mixture of cash basis for your normal items and accruals for your domestic reverse charge transactions.
However it’s important to check this is the case for your particular digital bookkeeping software and whether there is anything you need to set up to make it function correctly.
Retention payments are common on large-scale construction projects. If you are making or subject to retention, you also need to ensure that these are being dealt with correctly in your VAT software.
The VAT on the retention element is allowed to be delayed until the retention is paid, even if they fall under the reverse charge. This might require changes to the way you manage your retention invoices depending on how your software is set up.
Another limitation of reverse charge invoices and bills is that they are outside the flat rate VAT scheme. They are included in the VAT return separately as if you were on the standard scheme.
Again, this is something that your digital bookkeeping software may be able to deal with automatically but it’s always worth knowing the rules and double checking.
It would also be valuable to work with your accountant to see whether using the Flat Rate scheme is still worthwhile for your business. This will depend on how many reverse charge invoices you are sending or receiving.
There’s no way to cover the full complexity of reverse charge VAT in one blog article, so if you are stuck and need accounting support with your construction VAT, then maybe we can help? Just send us an email to tax@cooperfaure.co.uk to arrange a chat.
Reverse charge is a bit of a strange one and it’s not really intuitive how these changes are actually helping HMRC.
Let’s imagine that Business C and Business S are both VAT registered construction businesses. Business S is working as a subcontractor for Business C, who is the contractor.
Business S charges VAT on their sales invoice to Business C. This shows up on their VAT return as Sales VAT (Output VAT) that they owe to HMRC.
Business C includes the Business S invoice on their VAT return as a Purchase and claims the VAT (Input VAT) from HMRC. Overall Business C has no net gain or loss from the VAT on the invoice, they pay it to Business S and claim it back from HMRC.
If Business S was a Missing Trader, they could collect the whole invoice value from Business C and then disappear without paying their sales VAT to HMRC. Meanwhile Business C has claimed that VAT and HMRC would be left out of pocket. Business S would have stolen the VAT amount from HMRC.
Both businesses have to do things differently under the domestic reverse charge. Business S charge 0% VAT on their sales invoice so only get paid for the net amount from Business C.
Business C applies the reverse charge which means that they include the VAT as both a sale and a purchase.
Before, the Sales VAT (Output VAT) was on the Business S return and the Purchase VAT (Input VAT) was on Business C return. Now Business C is now accounting for the both the Sales VAT and the Purchase VAT (Input and Output VAT) on their return and Business S is not accounting for any of the VAT.
If Business S was a Missing Trader, there is now no benefit for them. Business S doesn’t get paid the VAT because they are charging 0%, therefore there is no VAT for them to steal.
Business C still has no net gain or loss on the invoice from Business S. They didn’t pay any VAT to Business S and don’t claim any VAT back from HMRC.
So the Missing Trader issue is avoided and HMRC doesn’t lose money.
Do you know if your workplace pension scheme contributions are net pay or relief at source?
I suspect that most people can’t answer this off the top of their head! But it’s a question that’s important for the self assessment tax return, particularly if you pay tax above the basic rate. There may be tax savings here if you’re a higher rate or additional rate tax payer.
The important thing to remember is that pension contributions are not taxed. The government wants to encourage you to save for your pension, so this is an incentive. Later, when you take the money out in retirement, some of it will be taxed (but that’s another story).
There are two ways to make sure the pension contributions are not taxed, you can either take the contributions before any tax is paid, or you can take them after tax is paid and then give that tax back. Net pay and relief at source are the most common names for these two basic methods.
Net pay, gross tax basis, salary exchange, salary sacrifice all work in a similar way for income tax. Pension contributions are taken out of the salary before tax.
Salary exchange / salary sacrifice schemes are a bit different in terms of some other aspects of how operate, but that is outside the scope of this article which is just looking at the income tax.
This means that tax relief is direct. No matter what rate of tax will be applied to the salary, the pension contributions are being taken out before that tax is deducted. They are made from untaxed income.
If your workplace pension scheme uses this method for making contributions then there is nothing further that you need to do in your self assessment tax return. You’ve already received all the tax relief.
Relief at source is also very confusingly known as net tax basis. This method is more complex as pension contributions are taken out of the salary after tax and then the tax is effectively given back.
The contributions are taken from your taxed income and then basic rate tax (currently 20%) is added back by the pension scheme provider. You might hear this referred to as the contributions being “grossed up”. The pension scheme provider claims the tax back from HMRC.
Even employees who don’t earn enough to pay tax, get their contributions grossed up so this method can be beneficial for low earners.
Conversely this method is not ideal for higher earners who pay tax above the basic rate. They are making contributions from income that is taxed at 40% or 45% but are only getting 20% tax back automatically. The additional 20% or 25% has to be claimed via the self assessment tax return.
The method applies to the whole workplace pension scheme and can’t be altered for individual employees. It’s unlikely to be something that you can change, unless it’s your own business.
Different types of scheme may be more likely to use one particular method, for example:
The default for these workplace schemes is relief at source (net tax basis) where contributions are taken from the pay after tax and the pension provider adds back the basic rate tax. The employer can choose to use other methods if they want, but the vast majority of People’s Pension or NEST schemes will be relief at source.
Your employer may choose the contribution method based on the salaries levels across the workforce. If most employees are paying higher rate tax then the net pay would be a better option. But in general there are more schemes that use the relief at source method. Some workplaces may operate salary sacrifice / salary exchange which works like net pay in term of the income tax, but slightly different for the national insurance contributions.
If you have a private pension that is not deducted via a workplace payroll, it will be relief at source. This is because when you make personal contributions, they are from your taxed income. If you pay tax above the basic rate, the additional tax relief will need to be claimed in your self assessment.
A limited company can make direct contributions to a director’s private pension. This is different to having a workplace or company pension. It’s also different to using the company bank account to make personal contributions to a private pension. To set up company contributions usually requires completing a specific employer contributions form with the pension provider. In this case there is no personal tax relief to be claimed; instead the pension contributions are a taxable expense for the company which is gaining corporation tax relief.
If you’re a higher rate tax payer on a relief at source scheme, then claiming that extra 20% or 25% via your self assessment will save you money. The tax relief is offset against the tax that you owe on other income to reduce the tax that you owe. Depending on your particular circumstances it will reduce your tax bill, give you a refund or result in a change to your tax code (to reduce the tax paid on your salary).
One thing to note is that you will only get the extra relief on the income that has been taxed above basic rate e.g. if you pay £15,000 into your pension but only £10,000 of your salary has been taxed in the higher rate, then you will only get the extra 20% relief on that higher rate £10,000.
If you are not registered for self assessment then it’s also possible to claim the additional tax relief on your pension contributions by writing to HMRC.
If you’re a basic rate tax payer then it won’t be necessary to enter the contributions in your self assessment as there is no tax benefit to be gained. You’ve already had the 20% tax relief from your pension provider.
However, if you do work with an accountant for your tax return, you should always provide them with the pension figures if you can. Until they’ve done a full assessment of your income, it’s not always clear whether or not the pension contribution information will be required.
You need to include your gross pension contributions on the self assessment tax return.
This is just the contributions that you made, don’t include those made by your employer.
The figure should include the basic rate tax relief element that has been added by your pension provider. You are looking for the grossed up figures for the employee contributions.
If you know what you contributed before the 20% tax relief element (net figure), then you can work out your grossed up figure.
Divided the net figure by 80 then multiply by 100 for the gross figure e.g. £200 net would give £250 gross including the 20% tax relief.
Step 1 is to find out what scheme you are on.
We’ve found that when our clients go to speak to their payroll or pension provider about their pensions it can have varying success because the terminology is pretty confusing. There are many different names, net pay and net tax basis sound similar but are different methods.
What you need to try and find out is whether your pension contributions come from your salary before tax is deducted (net pay / gross tax basis / salary sacrifice) or after tax is deducted (relief at source / net tax basis). You (or your accountant) may be able to work this out by looking at your pay slip, depending on how it’s formatted.
If it’s a Relief at Source scheme, Step 2 will be to get the figures you need for your return.
You need to find out the gross pension contribution figures for the tax year. Again, your accountant will be able to help interpret any reports or information you receive.
If you need support claiming pension tax relief in your self assessment, or aren’t sure whether you need to, then maybe our personal tax team can help? Just get in touch via email on personal.tax@cooperfaure.co.uk or give us a call.
Maybe you’ve never heard the term Making Tax Digital for Income Tax?
Unless you’re a VAT registered business, Making Tax Digital might be something that has never crossed your path. But for many people who submit a self assessment tax return, it’s a name you’ll have to get familiar with very soon.
If you’re a sole trader or property owner, the decisions you make about your business in this tax year (2022-23), could affect whether or not Making Tax Digital will be looming on your horizon.
Making Tax Digital (MTD) is a government initiative and forms a key part of their plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC’s ambition is to become one of the most digitally advanced tax agencies in the world and the Making Tax Digital programme is part of this transformation.
Stage One was Making Tax Digital for VAT (MTD VAT). After a few false starts and delays, the first part of MTD came into force on 1 April 2019 for VAT registered businesses with turnover above the VAT threshold (and any other VAT registered businesses who wanted to join the scheme voluntarily).
This year on 1 April 2022 the scheme was extended to cover all VAT registered businesses whether above or below the VAT threshold.
MTD for VAT involves submitting the quarterly VAT returns electronically via MTD compatible software. For many people this means using cloud software such as Xero or Quickbooks, but there are also many other software solutions.
But HMRC are not content to rest on their VAT laurels, despite some additional delays. They’re very busy working away to get things ready for the roll out of Making Tax Digital for Income Tax (MTD ITSA) on 6 April 2024.
“But that’s ages away”, I hear you say. It may feel that way now, but time has a nasty habit of ticking on very quickly. There are definitely some things that you need to think about now, the most important being, will you be affected?
If you’re a sole trader or a landlord then definitely read on. This is also useful for partnerships too, as you will be included in the next stage. If you just have employment or pension income and/or investment income without any self-employment or property, then MTD ITSA won’t apply to you.
Before you decide that you are below this threshold, there are a few things that you need to bear in mind:
The £10,000 is income, not profit. It’s how much you make in sales or rent, whether or not you make a profit or a loss.
If you have self-employment and property then the £10,000 income is the combination of both. So if you have £6,000 self-employment as a sole trader and £5,000 property rental income then you will be under the threshold for the individual areas, but still in scope overall.
There are some exemptions: people with income under £10,000, trusts, estates, trustees of pension schemes and non-resident companies. Also individuals who can show it is not reasonable or practical for them to use computers or the internet.
Anyone else is in scope. If you are domiciled or resident outside the UK and complete a self-assessment then only the UK self-employment and UK property is in scope.
The initial income assessment to determine if you are over the £10,000 threshold will be made based on the tax year whose filing deadline falls immediately before the start date of MTD ITSA.
This means that if you are currently running a business or renting out property, then it’s this current tax year from April 2022 to March 2023 that will be used for the income assessment. The filing deadline for 2022-23 is 31 Jan 24, so this is the filing deadline immediately before the MTD start date of 6 April 2024.
So business and property decisions and performance in this tax year, will be what affects whether you are initially in scope of MTD ITSA in 2024-25.
The assessment will continue to be made each tax year and you would join in the tax year that starts immediately after the filing date for the year that you go over the threshold.
If you were out of scope initially in 2022-23 but your income grew over £10,000 in 2023-24, then the filing deadline for that year would be 31 Jan 2025 and you would have to join MTD ITSA from April 2025.
If you are in scope based on your income for the tax year 2022-23, from 6 April 2024 you’ll need to:
Keep digital records.
Use MTD compatible software for your submissions.
Send quarterly summary updates of the business income and expenditure to HMRC.
There will be an End of Period statement for each business (self employed and property) at the end of the fourth quarter in March.
There will be a Final Declaration submission for each individual by 31 Jan (similar to the existing self-assessment deadline).
The MTD ITSA quarters will be 5 July, 5 Oct, 5 Jan and 5 April (or can be 30 Jun, 30 Sept, 31 Dec and 31 Mar).
There are separate reports each quarter for each income type and tax. So if you have a VAT registered self employed business and a rental property, that is three quarterly submissions: one for self employed income, one for VAT and one for property income. The VAT quarter timing may be different to the income quarters.
Another thing to note is that different types of property count as different businesses. If you have UK rental property, that is considered to be a separate business to UK furnished holiday let. Other separate property businesses are EEA holiday let (European Economic Area) and overseas rental property.
If you have 3 rental properties and one holiday let then you would have two business to report. One rental property business with the total figures of the 3 rental properties and one holiday let business with the figures from the one holiday let property.
Well – yes and no.
A lot will depend on how organized you are with your business finances (or how organized you can get before your MTD ITSA start date) and whether you are already using compatible software.
Most of the larger accounting and bookkeeping software packages already have an MTD VAT solution in place and are currently trialing their MTD ITSA solutions in conjunction with the HMRC pilot scheme. You can check with your software provider or ask your accountant if you aren’t sure about the product you are using.
If you are already using compatible software and updating your records on a regular basis, then you’ve got a head start. At this stage there is not much more that you need to be doing. Just keep up to date with the latest MTD ITSA developments and software progression so that you’ll be able to learn how to use any relevant new features and how to make the submissions (if you plan to do them yourself).
If you’re used to doing your books annually (either yourself or with your accountant), then this is going to be a big change for you. It would be really beneficial to get into the habit of doing your books more regularly, at least quarterly but ideally monthly. This will set you up for Making Tax Digital and you’ll see other benefits, such as helping to manage cashflow and making more informed business decisions.
If you aren’t currently using any software for your business or property, then now is the time to start investigating your options. If you work with an accountant they’ll be able to help and advise on this and suggest what might be suitable for you. Ideally you want to be using a software solution from April 2023 so that you’re comfortable and familiar with everything well in advance of the roll out date in April 2024. It gives time to overcome any initial teething problems.
If your accountant does your bookkeeping then hopefully they will have plans in hand for the transition and will be able to give you more information.
HMRC is already running a pilot in conjunction with many software providers. Currently the only way to sign up for the pilot is through a software provider. So if you’re keen to get on board now and see what it’s all about, then check your software provider and talk to your accountant.
Partnerships where each individual has income over £10,000 need to sign up by 1 April 2025.
These will be further down the line with no specific date provided yet for Corporation tax.
MTD ITSA is still very much a work in progress with HMRC. The general scheme framework and deadlines have been set and the pilot is underway, but there are currently still some grey areas and finer details to be resolved. As the deadline approaches more and more of the detail will be clarified so it’s worth keeping up to date with MTD ITSA developments through your accountant or software provider. If you have a question that can’t be answered right now, there may be an answer in a few months time.
If this article has got you thinking that you might need to make some changes, then maybe we can help? We’re already working with our self assessment clients to prepare them and make sure they will be fully compliant for Making Tax Digital for Income tax. If you’re ready to take the first steps towards going digital, then we’re ready to support you. Just send us an email to tax@cooperfaure.co.uk and we can chat further.