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What is a director’s loan account?

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?

What is a director’s loan used for?

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.

Money-in director’s loan transactions

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.

Money-out director’s loan transactions

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.

Credit balance

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.

What’s an overdrawn director’s loan?

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.

Extra corporation tax

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.

Bed and Breakfasting

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.

Writing off the loan

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.

Benefits in Kind

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.   

Avoiding extra tax

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.

Self Assessment payments on account, the good, the bad and the ugly

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.

Who has to make payments on account?

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.

Who is exempt?

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.

When are the payments on account due?

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.

How are the payments calculated?

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.

The Good

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.

The Bad

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.

The Ugly

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.

Can I change my payments on account?

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.

How do I avoid nasty surprises?

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.

Keep track of your income

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.

Save for your tax bill

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.

Find out your figures early

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.

How can CooperFaure help?

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.

2023-24 new tax year round up

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.

Personal tax

National Insurance

Dividends

Capital Gains Tax

Stamp Duty Land Tax

Corporation tax

National living wage

Summary

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.

How do I take money from my company (and avoid director’s loan stress)?

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?

Whose money is it anyway?

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. 

How can I take money out of my company?

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

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.

Pros of salary

  • Salary can still be paid even when the company is making a loss.
  • Reduces corporation tax for the company.
  • An effective way to use the personal allowance (save corporation tax without incurring any personal tax).

Cons of salary

  • Only payable to employees. Requires setting up a payroll and monthly filing to HMRC.
  • May not be worth doing if you have other employment with higher income.

Dividends

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.

Pros of dividends

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.

Cons of dividends

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.

How does it work in real life?

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.

What is the director’s loan account?

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.

Where do the dividends come in?

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.

The risks of once-a-year balancing

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.

What is an overdrawn director’s loan and why is it bad?

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.

Insolvency risks

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.

Additional corporation tax

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.

Additional personal tax

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.

So how do I avoid an overdrawn director’s loan?

Here are some top tips to help you keep your director’s loan in check and prevent unwanted tax shocks.

1. Pay salary and expenses like an employee

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.

2. Keep it consistent

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.

3. Start with a budget

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.

4. Keep your accounts up to date

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.

Summary

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.

Homeworking expenses have got stricter again

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?

Pandemic rules for 2019-20 and 2020-21

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.

What are the rules now?

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:

Employer does not reimburse homeworking expenses

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.

Employer reimburses homeworking costs

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.

What homeworking expenses can be paid?

There are two main methods for paying home working expenses, the HMRC flat rate or the actual costs

Flat rate

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.

Actual costs

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.

Equipment expenses

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.

Employer buys 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.

Employee buys and employer reimburses

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.

Employee buys and is not reimbursed

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.

Summary

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.

Tax residency – what happens to my tax if I’m moving abroad?

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?

How do I let HMRC know that I’ve left the country?

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).

Will I still be a UK resident?

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.

UK tax residency

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.

What do I need to report and pay if I’m a UK tax 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.

Domicile

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!

What if I’m resident in another country too?

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.

Non-resident for UK tax

There are three ways to be automatically classified as be non-resident for UK tax. Again, you can use any of the following:

What do I need to report as a non-resident?

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.

Will I still get my personal allowance if I’m non-resident?

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:

What is taxed differently as a non-resident?

Salary and pension income

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.

Dividend and Savings income

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.

Property income

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.

Capital Gains

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.

Planning on coming back? Rules around temporary non-residency

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.

Reassess your residency every year

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.

Net pay or relief at source pension? And why you should care.

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.

Tax on pensions

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

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

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.

Can I ask for the method to be changed?

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.

Which method is most common?

Different types of scheme may be more likely to use one particular method, for example:

People’s Pension and NEST

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. 

Other workplace pension schemes

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.

Private Pension

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.

Why should I bother including my pension contributions on the self assessment?

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.

What figures should be included?

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.

What do need to I ask my payroll or pension provider?

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.

How can CooperFaure help?

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.

Self Assessment is changing. Will you be affected by Making Tax Digital for Income Tax?

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.

What is Making Tax Digital?

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.

Progress so far

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.

Next Steps – Income Tax

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?

Who will Making Tax Digital for Income Tax affect?

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.

MTD ITSA on 6 April 2024 will affect sole traders and landlords with business or property income over £10,000.

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.

When will my income be assessed?

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.

What does it mean if I’m in scope for Making Tax Digital for Income Tax?

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.

This all sounds hugely complicated!

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.

What do I need to do now?

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.

Can I start with Making Tax Digital for Income Tax now?

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.

What about Partnerships?

Partnerships where each individual has income over £10,000 need to sign up by 1 April 2025.

What about Limited Companies?

These will be further down the line with no specific date provided yet for Corporation tax.

Wait, what, I need to know more detail!

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.

How can we help?

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.

Making Tax Digital Delayed until April 2024

The government announced yesterday that they will delay Making Tax Digital for the Self-Employed and Landlords until April 2024.  This is a year later than originally planned.

Therefore, from 6th April 2024, for all self-employed businesses and landlords with a turnover of over £10,000, the government will replace the Self-Assessment Tax Return with Making Tax Digital.

General partnerships must join Making Tax Digital from the tax year beginning in April 2025.  The government will confirm the date for other types of partnerships in the future.

How do I become Making Tax Digital compliant?

Making Tax Digital will require five filings a year in an electronic format.  Four quarterly reports and a year-end final declaration. 

Whilst HMRC have approved a range of filing formats, submitting these reports on paper will not be an option.

Therefore, if you are not already using systems for your record-keeping and accounts preparation you will need to do the following:

Hence, you can configure the software to remind you when to file and there will also be a cumulative calculation of the tax due for the year based on the data submitted.

What are the payments and when will they be due?

The tax payment due date for 2024-25 will remain the 31st January of the following year.  However, HMRC are indicating that there will be a method to make voluntarily payments based on each submission.

A likely outcome of Making Tax Digital for the Self-Employed and Landlords is that, at some point, these payments will become compulsory.

For the first year there will be additional complexity because your 2023-24 tax return will still be due by 31st January 2025.

The first submission under Making Tax Digital will be due, the government expects, in the fourth month of the accounting period, followed by submissions on a three-monthly basis.

An example Making Tax Digital scenario

If your trading year aligns to the tax year, you must submit your report in August 2024 and the overall calendar will be:

We appreciate that “Making Tax Digital Delayed” may seem an age away with an additional cost in terms of time and money. However, our advice is to embrace the change now.  Ultimately, Making Tax Digital will give you a better overview of your business.

We are already implementing cost-effective solutions for clients to get them ready for Making Tax Digital.

Wondering if you need to submit a tax return? Please see our blog post here to help you answer this question.

If you have any queries or would like any assistance to ensure you are ready, please do not hesitate to contact us on tax@cooperfaure.co.uk.

You can find the official gov.co.uk new release here.

Tax relief available to employees working from home

You are eligible for working from home tax relief if your employer requires that you work from home on a regular basis. This applies to both part time or full time home working scenarios. You may calculate your expenses based on the additional costs you incur as a result of working from home. 

However, you cannot claim tax relief if your employer has either directly reimbursed your expenses or paid you an allowance to cover them.

Many offices have been closed since the start of the 2020-21 tax year due to COVID-19. This means that millions more employees are now eligible.  You may make a claim as part of your Self-Assessment Tax Return if you are already obliged to submit one.

You can claim tax relief on:

What can I include in my working from home expenses?

You may claim the full annual allowance whether you have worked from home for the full year or only a small part of it. Theoretically this applies even if you worked from home for just one day. You just need to show that your employer requests that you do so.

The areas where you may be able to claim working from home tax relief are:

Where you claim the actual costs, you will need to be able to provide evidence to the HMRC. This will be in the form of invoices, receipts or contracts.

In addition, for the costs of equipment, you have two key considerations in determining whether it is eligible for tax relief:

For instance, if you have purchased a laptop and your employer has a policy restricting private use, this would support it was purchased for work purposes.

Do I need to submit a tax return?

Unlike many other countries, not everyone in the United Kingdom has to submit an annual personal tax return.  However, more and more people do. Have a look over the list below and keep in mind that you must submit a return if you;

At CooperFaure, we will work with you to ensure that you know your tax position as soon as is practicable after the end of the tax year. 

Are you eligible for tax relief?

You may be entitled to a tax relief that you are unaware of.  For instance, many employees will be entitled to a rebate against the costs of working from home in the 2020-21 and 2021-22 tax years.  Details of what you can claim are here (link to blog).

As of 2021 we will be sending out an online questionnaire which will guide you through the process step-by-step.

If you have a rebate due, HMRC usually makes the payment within four weeks of the submission of your tax return.

If you have tax to pay, the deadline remains 31st January irrespective of when you submit your tax return .  Early submission enables you to plan your cashflow.

If you have earned between £2,000 and £10,000 from share dividends or between £1,000 and £2,500 in any other untaxed income, such as airbnb or eBay, you need to inform HMRC here – https://www.gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees

Change is coming, are you ready?

From the 6th April 2023, Making Tax Digital will replace tax return submissions for all self-employed businesses and landlords with a turnover of over £10,000.

This will require five filings a year in an electronic format.  If your trading year is aligned to the tax year, your first report will be due in August 2023.

Whilst this may seem like an age away, we are implementing cost-effective solutions to get you ready for Making Tax Digital. 

How to Claim Income Tax Relief on Venture Capital Investments

For individuals with disposable income, making Venture Capital investments is growing in popularity, mainly through the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS).

Under the schemes, the government is encouraging investment in eligible companies by offering a range of tax reliefs to investors who purchase new shares in those companies.

The initial tax relief is on Income Tax and this is usually claimed through your personal tax return.

A crucial point is that claiming Income Tax relief is a requirement to be able to apply the Capital Gains Tax exemption should the investment make a return in the future.

In a scenario where you have invested £5,000 each under EIS in four companies in the tax year, this gives you potential Income Tax relief of £6,000.  However, your Income Tax paid in the year is £3,000 with nothing in the preceding year.  As a result, the maximum relief you can claim is £3,000 to bring your Income Tax paid back to zero.

Whilst including the details of two of the investments would meet the arithmetic goal of clearing down your Income Tax, you need to include the details of all four venture capital investments and split the relief across them.

In order to claim the Income Tax relief on venture capital investments, you must have received a Compliance Certificate from the company that you have invested in which will provide the following information for your tax return:

The Compliance Certificates do not need to be submitted with your personal tax return but should been kept safely as HMRC make ask for them in the future.


You can find more information about SEIS/EIS using the following links:

Our blog post on EIS – https://cooperfaure.designmindshost.com/enterprise-investment-scheme/

Tax relief on investments (EIS)

An interview with Jon Cooper regarding tax relief on investments (EIS).

Here at CooperFaure we’re always trying to think of exciting new ways of how to engage with our clients. That’s why we’ve launched a video series called ‘Making Accounting Simple’ which aims to cut through the complexity of accounting, including this very important topic – Tax relief on investments.

This episode we sat down with our director, Jon Cooper and talked through the ins and outs of the EIS from a company’s and investor’s point of view (Tax relief on investments).

The Enterprise Investment Scheme (EIS) has been made available by the government to help small to medium sized companies grow by acquiring investments. It is one of four schemes available and it provides Tax relief on investments for investors who purchase shares. Therefore, it acts as an incentive for individuals to invest into small to medium sized companies and in turn assisting the government’s goal of growth. It is a win-win situation for both parties.

We at CooperFaure believe that EIS is a great scheme for most companies to attract investors in order to grow their company. We have assisted numerous clients with the EIS process and have found that as long as all the information is correctly provided to SCEC and all conditions are met there is no reason for the company not to be eligible for EIS.

We at CooperFaure can assist in compiling all of the following which is required for an Advanced Assurance Application:

There’s more for you to read regarding EIS in our blog – https://cooperfaure.designmindshost.com/enterprise-investment-scheme/

If you would like to arrange an initial consultation that is free and without obligation to discuss your circumstances, please email us at welcome@cooperfaure.co.uk.

Enterprise Investment Scheme (EIS)

Here is a useful an overview which should help you to better understand what the Enterprise Investment Scheme is and whether or not your eligible to apply for one.

 

Enterprise Investment Scheme provides the investors with a tax relief on their investment and has been made available by the government to aid growth. The investors receive a tax relief for the amount invested and in turn acts as an incentive, easing the process to attract investors. It is one of four schemes available under the venture capital schemes.

The following applies under EIS:

There are certain rules that you must follow to ensure your investors receive their tax relief. These rules must also be followed for at least 3 years after the investment has been received.

The money received from the investor is limited to be spent on qualifying business activities:

If more than 20% of you trade includes any of the following it does not qualify:

The money raised through EIS must be used within 2 years of the investment or if trade has not commenced it is on the start date of trading. The key is to use the money to grow your business, it cannot simply be used to purchase another business. Therefore, growth can be for example an increase in revenue, client base or the number of staff. This is part of the risk to capital condition that was introduced this summer. This condition also includes that the investment should be a risk to the investor’s capital and therefore within the agreement between the company and the investor there cannot be arrangements in place to reduce the risk. If the investment is in any way protected, for example by assured future income streams or capital repayment, the investment is unlikely to meet the risk condition. For more information regarding the risk to capital condition please click here – https://cooperfaure.co.uk/risk-to-capital-condition/).

Additionally, in order to qualify for the scheme your business must be permanently established in the UK without being on the stock market. Additionally, the company cannot be controlled or control another company.

To apply for EIS a compliance statement (EIS1) along with the following documents must be submitted, per share issue once a minimum of 4 months qualifying business activities has occurred:

If successful you will receive the authority to issue certificate (EIS2) and compliance certificate (EIS3) from HMRC. The EIS3 certificate must be passed on to the investor as without it they will not receive their tax relief.

In the past we would have strongly recommended to apply for Advanced Assurance as it provides you with a confirmation if you will be eligible for EIS before submitting EIS1. However, the HMRC has recently amended the requirements and you are no longer allowed to provide speculative plans within the Advanced Assurance application (EIS(AA)). Therefore, you must have particular investors in mind before submitting the EIS(AA). This has removed the ability to use the Advanced Assurances as a mechanism to attract investors by showing that you will be eligible. Nevertheless, if the investor is reluctant to commit we would still recommend to use EIS(AA) but you should bear in mind that this will prolong the process.

For further information please visit the HMRC’s website: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme

You can also listen to an interview of Jon Cooper on this topic, in our blog, here – https://cooperfaure.designmindshost.com/eis-tax-relief-on-investments/(opens in a new tab)

At CooperFaure, we have vast experience of helping businesses to secure investments and, in particular, benefit from government schemes. If you have any questions regarding Venture Capital Schemes, please email us at welcome@cooperfaure.co.uk.