The Fizz! Blog

HMRC pushing back on early furlough claims

In Spring 2020, a company called Carlick Contract Furniture Ltd furloughed much of their workforce, and began claiming funds from HMRC under the Job Retention Scheme to cover the cost. As part of that process, they did something that a lot of other employers will have done. They included a couple of new employees, who had been taken on in February 2020, but hadn’t been paid that month - as is often the case with people who start late in the month, it was agreed that they’d just be paid for their February hours on their March payslip.

However, the JRS rules were actually unambiguous on this point. Although people were quite understandably wanting to stretch those rules in the interest of fairness, it was made quite clear that to come under the scheme, an employee had to have formed part of a formal payroll report to HMRC prior to 19 March 2020. For most monthly-paying employers, that meant the person had to have been paid at the end of February. It wasn’t enough to have been an employee, you had to have had salary actually reported to HMRC. This isn’t something that emerged later on - it was widely discussed on accounting and payroll forums and everyone advising on claims and making them knew or should have known about it.

HMRC picked up the point, and demanded Carlick repay the money. The First Tier Tribunal has ruled (whilst expressing some regret) that they’re within their rights to do so, despite the claim having been in the spirit of the rules. This is obviously very unfortunate for the employer, who hasn’t benefited from the money and was really being kind to the employees, who otherwise they’d have simply cut loose. But it was always clear that the claim was not permitted by the letter of the law, so if you made a similar claim you should expect there to be a good chance that HMRC will come and ask for the money back at some point, and that if they do then you’ll have to pay.

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It's party time! Tax at Christmas 2022

After a party-free 2020 and a party-light 2021 perhaps it's going to be a party hard 2022!  If you're hoping to get the party started, here's a reminder about the tax rules around work Christmas parties and gifts.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are explicitly considered trivial by HMRC). Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67. Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax in full if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer, say, a bottle of whisky then that's still completely fine, and may well make great business sense! But a) you can only claim the VAT back on the gift if it costs less than £50 and b) you won't save corporation tax on it however much it costs. So a £49 bottle will cost a company £41 in the end (it can get the VAT back but can't save any corporation tax) and a £100 bottle will cost it £100 - it can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Should I make pension contributions personally or via my limited company?

Generally, via your limited company.  An exaggerated example explains why.

Imagine it’s the evening of the last day of your company year, and you’re so keen to get your year-end accounts done that they’ve been drafted already.  You can see you’ve got £10,000 of profits.  You’d like to get that into your pension pot.  There are two ways you could achieve that.

The first is for your company to make an employer contribution directly to your pension fund of £10,000.  That reduces the company profits and tax bill to zero (if you do it before midnight, anyway!), and gets £10,000 into your pension pot at a cost of £10,000.

The second is to take a dividend and make the pension contribution yourself.  If you decide to do that, you know that the company will have £1,900 of corporation tax to pay on its £10,000 of profits, so you take the maximum legally permitted dividend of £8,100, once more leaving the cupboard bare.  You contribute that £8,100 to your pension personally.  There’s basic rate tax relief on it, which means that the government gives the pension company another £2,025.  You’ve got £10,125 in your pension fund - that’s better, right?  It is until you do your tax return and have to pay tax on the dividend.  Assuming it sits in your basic rate tax band you’ll pay £700 of tax on it, so actually it’s cost about £10,700 to get that £10,125 into your pension pot (and there’s a similar marginal cost if the dividend is taxed at higher rates too, as higher dividend tax and greater tax relief cancel each other out).

One small caveat.  If you’re thinking of applying for a mortgage or a remortgage, you might choose to take higher dividends and make personal contributions, even though you’ll wind up a bit poorer that way.  That’s because it will maximise your personal taxable income, and that’s what a lender looks at when deciding how much to lend to you. But if you’re looking for the biggest pension pot at the lowest cost, company contributions are the way to go.

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Should my company buy stuff before 31 March 2023, or after?

At present, companies buying plant and machinery (computers, machinery, furniture, vans, that kind of thing - not cars, though) can claim the Super-deduction.  This means that for every £1 they spend, they save tax as if they’ve spent £1.30.  Since corporation tax is currently 19%, this means they effectively save tax at 24.7% on those purchases this year.

This was put in place because corporation tax is going up in April 2023, and if nothing was done then companies would have deferred those purchases until then.  The Super-deduction was designed to put companies in a broadly similar position whenever they bought stuff, so as not to discourage investment.

So, with corporation tax going up in April, and the Super-deduction being withdrawn, does that mean it’s not worth thinking about when you buy new assets?  Not necessarily!  There are actually going to be three corporation tax rates in place:

• Companies with profits under £50,000 will still pay tax at 19%.  If you know your company will have profits of less than £50,000 each year, you should invest before the end of March.  You’re effectively saving 24.7% this year, not 19% next year, a big saving.
• Companies with profits over £250,000 will pay tax at 25%. If you know your company will have profits of more than £250,000 each year, it doesn’t really matter when you invest.  A 24.7% tax deduction this year and a 25% tax deduction a year later are more or less the same.
• Profits in between £50,000 and £250,000 will effectively be taxed at 26.5% - a “catch up” rate to go from 19% to 25%.  If you know a purchase will reduce your profits from less than £250,000 to more than £50,000, arguably you might want to wait until next year to invest, as saving 26.5% is better than saving 24.7%.  But it’s only a bit better, so you might as well just buy whatever it is as soon as it’ll be useful to you!

(Things are a bit more nuanced for companies that don't have a 31 March year-end, who won't get the full 130% deduction - but they'll still get more than 100%).

Of course, you should never buy anything solely to save tax!  You buy things to ultimately pay MORE tax, not less.  But if you’re going to buy something, the good news is that you’re not going to go far wrong by just getting it as soon as your company needs it.

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MTD for Landlords - what do you need to know?

UPDATE, DECEMBER 2022:  Nothing!  This initiative has now been postponed until (at least) 2026, and only landlords with revenue (initially) of £50,000 a year will now be affected.  But, here's what we said back in October anyway...

The government has a long-standing drive to make us report income to them a) digitally and b) more frequently - “Making Tax Digital”.  The initial phases of this forced all VAT registered businesses to submit their quarterly VAT returns online, with an unbroken link between the return and the source records.  This has basically worked well.  For businesses used to keeping paper or spreadsheet records, the jump they probably made to accounting software will have involved a bit of work, but most businesses were using software anyway, and many of those that weren’t have found life better with it.

The next phase will be a bit less smooth.  Making Tax Digital for Income Tax is going to force all sole traders and landlords with revenue of over £10,000 a year to make quarterly reports of their income and costs to HMRC, from April 2024 (partnerships won’t be brought in until 2025).  This won’t (for the time being, anyway) affect the calculation of annual profits, or the timetable for payment of tax, it’s just to give HMRC more timely in-year information to analyse.  Many or most of the sole traders will be using software already, so more regular reporting shouldn’t be too much of a burden for them.  Virtually none of the landlords will.

For smaller landlords - those with gross rents below £85,000 - the minimum required report will be rather simple; total revenue and total costs.  Not really enough for HMRC to do much analysis of.  Larger landlords will be required to file costs in more detailed categories.  99% (at least) of individual landlords are going to fall into the former category though; there aren’t many with rents of over £85,000 a year.

If you have gross rents under £10,000 a year, you don’t have to do anything in the first instance.  But if your revenue goes over that level, quarterly digital reporting becomes compulsory - and you can’t come out of the system unless you cease to have any such income, or it’s below £10,000 for three straight years.  Effectively, sole traders will be in until they retire, landlords will be in until they sell their properties.

It’s important to note that the £10,000 is revenue or gross rents, not profit.  So a sole trader with £12,000 of revenue and £9,000 of costs, making £3,000 of profit a year, must sign up, and so must a landlord with £13,000 of gross rents and £5,000 of costs.  And if you’ve both sole trader income *and* rental income, it’s the total that’s important.  So someone with £8,000 of sole trader revenue and a flat rented out for £500 a month must sign up - that’s £14,000 of income in total.

On the more generous side, if a couple own a rental property, then the £10,000 threshold is per owner - so if gross rents are £18,000, split 50/50, there’s no need to sign up to MTD (although, less generously, if the gross rents are £21,000, they will *both* have to make reports - a report is for a single individual).  And if you’ve income that doesn’t have to be reported on a tax return at all (like rent a room income below £7,500) then that’s disregarded entirely when deciding if you have to sign up or not (although, if you’re in for some other reason, the rent a room income *does* have to be disclosed in the MTD reports!).

One thing that on the face of it seems problematic is that owners of Furnished Holiday Lettings (FHLs) will have to make a different report in more detail - but you don’t always know if your property qualifies as an FHL until after the end of the tax year!  Presumably the suggestion will be to report as if it were an FHL.  At least owners of those properties are pretty likely to already be in the habit of keeping decent contemporary accounting records.

There will be some practical problems.  There’s supposed to be a digital link between the report you make and the underlying records.  But what if the underlying records are necessarily kept in different places?  Perhaps you own one property outright and 25% of an unconnected one with a group of other owners.  You’re going to have to aggregate those figures somehow and then report them to HMRC.  There’s a fudge called “bridging software” that can report from Excel records, not from accounting software, and it may come into play.

So, what should you do in terms of changing your record keeping?  At the moment, probably nothing.  Previous phases of MTD were repeatedly delayed; the general feeling is that this phase of MTD is 99% likely to happen, but maybe only 50% likely to happen in 2024 as planned.  When it does happen, we’ll be helping clients set up a system that will work for them.  FreeAgent have introduced a special version of their excellent bookkeeping software just for landlords, and for portfolio landlords who could actually benefit from more advanced tracking of multiple properties there are products like Hammock.  And for very simple cases, it might be that Excel and bridging software is fine.  For now, the important thing is just to know that it’s (almost certainly) going to happen!

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What can you claim for charging your electric company car at home?

Thanks to the incredibly generous tax rules that apply to them, the vast majority of new company cars now are electric.  Most of them are probably charged at home.  If you’re charging your electric company car at home, how much can you claim back from your employer to cover the cost?

HMRC’s guidance from the outset has been that you can claim back the cost of electricity relating to business miles but not private miles.  You could do that by trying to figure out the actual cost, but most normal people are going to use the shortcut of HMRC’s approved rate; 5p a mile (a recent increase from 4p a mile).  Using that kind of basis with an approved HMRC rate has always been the way it’s been done with traditional fuels.

However, a cat has recently been put amongst the pigeons.  The ICAEW has pointed out that, per the legislation, electricity *isn’t* fuel, so treating it as such is wrong.  It’s just one of the general costs of running the car.  That being the case, it’s legitimate for the employer to pay for *all* the electricity that goes into the car, not just the business part (just as it can pay for all the servicing, all the insurance and so on).  And at this moment, there seems to be general agreement that HMRC’s guidance on this is wrong.

There are a few things to say about this:

• We’re only talking about fairly modest amounts here!  A driver who was going to claim back 5p a mile for her 2,000 business miles but not her 8,000 private ones can now be reimbursed £500 by her employer, not just £100.  Nice, but not life-changing.
• Employers may not actually pay an employee the whole lot; in fact, they probably won’t on the whole.  Just because an employer *could* reimburse an employee for the cost of her private motoring doesn’t mean they will.  They’ll probably quite reasonably think that the employee can pay for their own life themselves.  Who is going to be reimbursed?  Company owners themselves, that’s who.  They’ll definitely claim as much as they can tax-free!
• It’s possible HMRC might be bloody minded and try to cling on to their guidance!  In any case, it’s pretty likely the government will legislate to close what’s perilously close to being a loophole - let’s be honest, electricity really is analogous to fuel in every way.

For now, though, the advice for directors with an electric company car is going to be - claim 5p a mile for all mileage from your company until HMRC slam the door again!

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Can my limited company pay for my counselling or therapy sessions?

As ever with these questions, the "can" is a red herring that tempts a literal but unhelpful answer.  Your company can pay for anything, the real question is whether there will be knock-on tax consequences that make it a bad idea.

In this case, perhaps surprisingly, there probably aren't any adverse consequences.  The rules, HMRC's guidance about them and HMRC's internal manuals are clear - an employer can pay for counselling for employees with no tax consequences for the employee, and though HMRC say the exemption is tightly drawn it actually covers a lot of areas.

Now, this exemption is plainly not intended for owner-managed businesses.  For a big employer, claiming that they're only providing the therapy because of their needs as an employer, and that long-term personal benefit to the employee may well be created as well but it's not the reason for their footing the bill, is a reasonable assertion.  If it's your own business, then that dividing line between employer and employee is not so clear.  But HMRC are pretty unambiguous about it, so if you’re comfortable that the counselling you’re contemplating falls within HMRC's guidance as tax-free, then you should feel confident going ahead.  Your company must provide the therapy, so should contract with the therapist itself - it's no good arranging it yourself and claiming the costs back if you want the setup to be robust.

If you're a sole trader or a partner in a partnership, then this doesn't apply; these are employment tax rules.  A sole trader or partner will probably find it difficult to impossible to sustain the argument that the cost is tax-deductible - it's have to be incurred wholly and exclusively for the purpose of their trade.

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Should I sell my rental property now to avoid a bigger tax bill later?

If you’ve got a rental property that you’ll eventually sell for more than you paid for it, then there’s a good chance you’ll have some Capital Gains Tax (CGT) to pay when you come to sell it. Sometimes people worry that the longer they keep the property for, the more profit they’ll make when they sell it (because of rising house prices), and therefore the more tax they’ll pay. It’s worth remembering, though, that the highest rate of tax on capital gains is currently 28%, so if waiting for a year meant making an extra £10,000 of profit, your tax bill would increase by £2,800, but you’d still be £7,200 better off!

Things can seem a bit more complicated if you’ve lived in the property for part of the time you’ve owned it. When you sell your own home for a profit, the gain is generally exempt from tax. When you sell a property that was your home for part of the time you owned it, but has been let out for the rest of the time, then the gain is split into two. The portion of the gain that relates to the time you lived there is exempt from tax, and the portion that relates to the time you were renting it out is taxable.

It’s quite common in these circumstances for people to worry that they’re holding onto a property for “too long”, and creating an unwanted tax bill. In the majority of cases, though, it’s very unlikely that keeping the property for longer will leave you worse off. For example:

If you bought a property for £200k in 2018, lived there for three years, rented it out for one year and then sold it for £240k, you’d make a gain of £40k. You lived in the property for three out of four years in total, so ¾ of the gain (£30k) would be tax-free*. So only one year’s worth of gain (£40k x ¼, i.e. £10k) would potentially be taxable. Worst case scenario, you’d pay tax on that at 28%, so a little under £3k, leaving you with £37k profit after tax.

Of course, the longer you own the property for and continue to rent it out, the bigger the portion of the gain that attaches to the period it was rented, leaving a higher proportion of the gain exposed to tax. So if, for example, you held onto the property until 2028, you would have lived in the house for three years out of ten years in total, so only 3/10 of the gain would be tax-free, instead of ¾ of the gain in the first scenario. But having owned the house for an additional six years might mean that you sell it for quite a bit more – let’s say £300k, meaning a gain of £100k. If that were the case, then the tax-free portion of the gain would be £30k, and the taxable portion would be £70k. Worst case scenario, you’d pay tax on that at 28%, so around £20k. But you’re still left with £80k of profit after tax. So despite the fact that you’ve got a much bigger tax bill, you’ve still got £43k more in your pocket.

One situation that could result in you being worse off is if you kept the property for 10 years, but the value didn’t increase in that time. If you sold it in 2028 and still only got £240k for it, then 3/10 of the £40k gain (£12k) would be tax-free, and 7/10 of the gain (£28k) would be taxable. Tax on that could be up to £8k, leaving you with £32k in your pocket, i.e. £5k less than if you’d sold it in 2018 for the same amount.

But the key point is that the potential size of the tax bill alone is a red herring. Whether or not you keep or sell the property should really be an investment decision, and not be driven by concerns about tax. If renting the property for a few more years means you’ll be able to sell it for a higher price in the future, then although you’ll have a bigger tax bill, you’ll still be left with more in your pocket in the end. The only time the tax can make you worse off is if you hold onto the property for longer and the price stays around the same or falls. But if you thought that was going to happen, you probably wouldn’t hold onto it anyway! So in the vast majority of cases, it’s fine to make your decision based on when you think it’s a good time to sell the property in terms of your expectations about the housing market and whether you feel the property is a good investment for you, rather than being driven by worries about CGT.

There are a couple of situations where tax *might* be a consideration, though:

• If the government announced a change to the rate of CGT, that could be a legitimate reason to consider the timing of selling a property. If you knew that the rate was going to increase significantly next year for example, you might prefer to sell now.

• The first £12,300 of capital gains you make in any tax-year are exempt from tax, so if you’ve already sold other assets that are subject to CGT in the current year, you might want to wait until the next tax year to sell the property, so that you can make use of the following year’s exemption.

But those things aside, the overall message is that you’re always likely to be better off by selling your rental property when you can get a good price for it and it’s the right decision for you from an investment point of view. Selling at the time that makes you the most profit will likely mean a higher tax bill, but you’ll still have more in your pocket in the end.

* This is a slight oversimplification, because the final nine months of ownership are also tax-free (this is always the case for a property that was your only or main home at some point), but we’ll set that to one side for now as including it would make the examples more complicated, and it rarely changes the overall picture.

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Which umbrella company should I choose?

An umbrella company offers a simple service.

A business is going to pay an individual to do some work for it. The business judges that the individual’s role amounts to that of an employee, who should properly be paid via PAYE. The business doesn’t want the admin of doing that themselves. The umbrella company offers to employ the individual instead, and invoice the employer for the salary and the other associated employment costs (NI, pension).

Or, a business is going to pay an individual to do some work for it. The business, considering it to be an employment role but being unwilling to put the person on PAYE, tells the individual that they must invoice them via some other entity, most commonly a limited company set up by the individual themselves for that purpose. The individual can’t be bothered doing that, or knows that in the hands of her own company the income will fall under IR35 and be subject to full employment taxes anyway. Instead she decides to sign up with an umbrella company, who will receive the fees, operate PAYE on them, and pay her the net.

What’s in it for the umbrella company? A fee (most commonly suffered by the employee, even if the business insisted upon the arrangement, naturally!).

They’ve had a chequered history. You can see that in theory they’re simply a vessel to get fees from A to B, with the appropriate employment taxes paid. So they should all end up with more or less the same split of money between the worker and HMRC, with their commission being the only variable.

However, market forces meant that they began to compete with one another, to try and offer a bigger share of the split to the worker and less to HMRC. This was never achieved by legitimate means. A favourite trick was based on a wilful misunderstanding of the rules on something called dispensations. A dispensation was an arrangement with HMRC, where HMRC said - for example - “If you reimburse an employee for legitimately incurred and legitimately tax deductible travel costs of up to £30, don’t bother telling us about it, we don’t want to record it as both income and deduction for the individual, it’s a waste of time as it ends up at zero”. Then, regardless of whether any such costs were actually incurred or not (they weren’t) the umbrella company would include a tax deduction of £150 on every week’s payslip, with a consequential suppression of the tax deduction truly due.

Eventually, HMRC got wise to this. Those schemes were exposed and shut down. Any time you read anything promising you materially greater take-home pay than similar providers, it should always have been clear that this could not be achieved legitimately, but now - crossed fingers - we’re back to an acceptance that umbrella companies are machines that process the same inputs in the same way and should, consequently, churn out the same outputs.

A rather long-winded way of saying - it shouldn’t matter, they should all be pretty much the same!

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Trivial benefits revisited

Some years ago now, HMRC surprised everyone by quantifying the level at which they considered a non-cash benefit given to an employee to be trivial and disregarded for tax purposes.  £50 was much higher than everyone had imagined up to that point.

It doesn't represent carte blanche to give people an onslaught of things worth £50 in lieu of taxable pay!  If the provision of benefits becomes regular enough that it's effectively become just part of the deal with the employee and therefore contractual, it'd just be taxable as normal.  So a £50 John Lewis voucher every Friday or every month isn't going to work.  But sporadic £50 vouchers are fine.

The rules are tighter for directors - there's also a tax year cap of £300.  But that's still six £50 vouchers!  Or, if you're particularly prone to getting the wrong card out of your wallet and accidentally using the company one from time to time, the trivial benefits allowance can be used as a backstop so that you don't have to repay the company when that happens.

A small win perhaps, but small wins at the expense of HMRC can be disproportionately satisfying!

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