The Fizz! Blog

I’m moving abroad - is this going to affect me and my limited company?

20 or 25 years ago, international tax was something you studied a bit when training as an accountant, but in practical terms only those advising the very wealthy really had to engage with it. There was far less global mobility, relatively few freelancers moving to and from the UK, and digital nomads hadn’t been invented yet.

How things have changed! Now it’s really common for people - especially knowledge workers - to move in and out of the UK. International tax is no longer a theoretical subject!

So, it’s very common for us to have clients who arrive in, or leave, the UK. If you’re a sole trader or an employee, it’s probably fairly straightforward; mostly, people making “clean”, permanent moves are going to get something called “split year treatment”. That means that in the year of arrival only their income post-arrival goes on their tax return, and in the year of their departure only their income pre-departure. There can be some minor friction where they’ve moved to a country that considers them to have become resident there before or after they’ve ceased to be resident here, they may have other things going on (like property or investment income) that are more complex, and when moves aren’t so clean the deceptively complicated Statutory Residence Test comes into play, but most cases are pretty simple.

But if you have a limited company it’ll be messier. In our experience, it’s vanishingly rare for the continued use of a UK company to be a good idea post-departure. If you were a non-UK resident starting a new business, the circumstances under which a UK company would be the best vehicle would be somewhere between rare and non-existent. Leaving the UK whilst in possession of an LTD doesn’t change that underlying reality. Sometimes you might need to persist with your UK LTD for a bit (perhaps there’s an ongoing contract in progress that you need to finish), but in the end you’re going to want to set up whatever structure is most advisable in your new home.

Unfortunately, it can be quite difficult to execute this at the other end! It seems to be very common for someone to go to an accountant in France, for example, only to be told to just keep their head down and pay taxes as if they continue to reside in the UK. As UK taxpayers, we are quite happy for people to pay tax money into UK coffers rather than those of another country! However, as Chartered Accountants, that can put us in a difficult position; we can’t collaborate on a setup where we know that taxes aren’t being paid appropriately, or National Insurance credits being built up by someone who is not really entitled to them, or UK pension contributions being made in excess of the modest “run-off” amount available for a few years to someone leaving the UK, and so on.

It can be further complicated because often people won’t know their plans for sure. Someone who expects to be in Portugal for a year or two might not want to go to great efforts to set up a structure that they’re soon going to dismantle. But that’s always been the case; we’re quite likely to advise someone who comes to the UK with the intention of staying for a couple of years differently to someone who intends it as their forever home.

So, if you’re leaving the UK, please go and see an accountant in your new intended home as soon as you can! Your accountant here may be able to tolerate a period where you’re getting things set up at that end and continuing to run things at this end as you have been. But they won’t be able to tolerate it indefinitely.

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Can my company get a grant towards an electric car charging point at home?

The government will provide a grant to an employer installing a charger for an electric car.  It’s only a maximum of £350 at present, and it involves filling a form and sending it to the not-always-tremendously-efficient DVLA, but every little helps.

What if you work from home, though?  Well, if your electric car is a company car, your company can definitely pay for, and save tax on, the installation of the charger there.  But you might not think it worth claiming the grant, because of the eligibility criteria.  To qualify, your home must either be a) the company’s Registered Office, which you probably don’t want, or b) registered with the council for Business Rates, which you almost certainly don’t want.  Given the modest grant and the prospect of dealing with the DVLA, you probably just want to move on!

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There is no new tax on “side hustles”

Unsurprisingly, there’s been a lot of irresponsible reporting about the news that online platforms like Ebay, Airbnb, JustPark and Deliveroo are going to be compelled to pass details of people they’ve paid on to HMRC. It’s been reported that this was a new side hustle tax. It isn’t! The rules on whether an activity is taxable or not haven’t changed for decades, aside from the introduction of the £1,000 Trading Allowance and similar Property Allowance a few years ago, which means people with very low levels of such income don’t have to report it or pay tax on it.

Further bad reporting stemmed from the de minimis levels below which the platforms *won’t* have to give any information to HMRC. If you sell fewer than 30 items and make less than 2,000 euros (it’s a global OECD campaign) then nothing will be passed on to HMRC. It’s been reported that selling 30 or more items a year is taxable but selling fewer is not. That’s wrong too! If you bought and sold 25 grandfather clocks in a year for profit it’s taxable. If you sold 150 of your old CDs it’s not. It’s just a threshold relating to the reporting from the platform to HMRC, nothing more. It has no relationship to tax legislation of any sort.

For more detail, the ATT’s explainer is really good.

If you’ve been regularly buying stuff in order to sell it on at a profit, it’s probably always been taxable. If you’ve been declaring it and paying tax on it, you might actually find the new system helpful, as the platform will be sending you the handy record of your transactions as well as sending it to HMRC! But if you’ve not been reporting it, either because you didn’t realise you had to, or you did realise you had to but didn’t do it anyway, tell your accountant! It’s better to go to HMRC before they come to you.

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Company income and expenditure to go on the public record

It’s recently been confirmed that, in a year or two, all limited companies will have to file a Profit and Loss Account at Companies House. For many years now, the vast majority have not had to do that, with only the largest of companies having to make details of the year’s income and expenditure publicly available. The snapshot of a company’s year-end position - its Balance Sheet - goes on the public record, giving a broad overview of assets, liabilities and solvency, but not the story of how that position was reached.

This is going to be unwelcome news to many company owners. Some may not want their rivals, customers or suppliers knowing the margins or the profits they’re making. Others may not want to give friends, family, staff or exes an insight into their personal finances! Your claim to be unable to afford to pay more than the National Minimum Wage is going to be undermined slightly if your staff can see you’re making £1m a year yourself.

There will also be people who don’t want the world to see how poorly they are doing! Maybe because they’re worried it’ll spook potential (or even existing) customers, or maybe they’re faking it until they make it at networking events and the like and would prefer the truth to remain obfuscated!

The change is a classic case of being seen to be doing something, even though anyone who understands the issue knows that the thing being done doesn’t actually address the issue. The idea is to try to take some action against rogues who hide behind companies. But those who file rubbish to conceal what they’re really doing will continue to file rubbish, of course, and Companies House will still lack the resources or mandate to do anything about it. And it’s argued that it’s important that the authorities can see in more detail what companies are doing - but HMRC have always received a full version of the accounts, with a far more detailed version of the P&L than is being proposed for the public record!

In any case, barring a u-turn by one government or another, the change is coming. So, if you’re concerned about it (and we should say that the majority of company owners we’ve discussed it with aren’t actually too bothered), is there anything to be done?

Some people will be perfectly happy and able to run their business without a limited company. The effective tax rates of limited company owners and those with unincorporated businesses aren’t that different these days (the main tax benefit of a limited company is the ability to shelter profits from higher rate tax if you don’t need them right now, whereas a sole trader or partner in a partnership pays tax on the lot in the year they make it). If you’re also comfortable giving up limited liability (which is no substitute for adequate insurance anyway), you might well just decide to operate as a sole trader or partnership instead.

Others won’t have the choice. They might be in an industry or a niche where a company is essentially compulsory as people won’t do business with you otherwise. Or sheltering income from higher rate tax might be important enough to them to outweigh any transparency downsides.

Finally, it’s just possible we might see the emergence of unlimited companies as a more popular choice. They give the tax regime (and therefore sheltering possibilities) of a company - but without the protection of limited liability. They don’t have to file accounts at all, but given that they offer no liability protection to their owners, they’re rarely seen in practice (the long-gone clothing chain C&A used to be the most prominent example!) - up until now, anyway.

We’ll all probably get used to it in the end. The exact format of the profit and loss account to be filed has not yet been set, and it may include less detail than people fear. In any case, looking at accounts at Companies House can already be highly instructive under the current regime, but it’s rare that anyone (aside from accountants, anyway) thinks to actually do it. Even if more information is made available, people probably will take less advantage of it than they could.

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The cash basis becoming the default for self-employed people’s taxes, why it’s happening, and why it’s stupid

The default for preparing accounts for sole traders and partnership is the accruals basis - or what we habitually refer to as proper accounts. That means they show how much profit you really made in a period, regardless of when you remembered to send an invoice, or when your customers actually paid you, or when you paid your suppliers and so on. Accounts are supposed to be a useful record of how a business is really doing, giving you important information about what’s working and what’s not working, and, in extremis, whether you’re wasting your life and should get a job. They’re not just a glorified bank statement or a reflection of the admin inefficiencies of you, your customers or your suppliers in sending out paperwork or making payments.

For a few years now, small sole trade and partnership businesses have been able to base their tax returns on cash in and out instead, so as to make preparing tax returns easier (and also as an acknowledgement that many of them were doing it already). Accountants will rarely use this cash basis, as preparing proper accounts isn’t hard and gives you useful information, though sometimes there can be some benefit to using it for a year or two in niche circumstances where the timing of payments happens to result in a worthwhile tax saving. But generally, proper accounting is the way to go. It’s nice if accounts can be useful AND as easy to prepare as possible - but if you have to pick one, it should be the first.

Anyway, regardless of all that, from 2024 the cash basis will become the default for unincorporated businesses, with an option to use the accruals basis.

The reason for this is basically Making Tax Digital and the ongoing intention (which may or may not ever happen - we’re nine years into the process now) to make sole traders submit quarterly updates to HMRC of their income and expenditure. The government has realised that this will be easier to sell if people are just submitting what their bank statements say rather than having to properly account for their real earnings for the quarter. Part of the drive to this reporting is so as to be able to make more regular assessments of entitlement to things like Universal Credit and Tax-Free Childcare, and a sole trader with smooth underlying income but erratic payments from customers could have interesting problems with their claims if and when this quarterly reporting ever comes in. But for now, we’ll just need to watch this space. For avoidance of doubt, we (along with most or all other competent accountants, we imagine) will continue to default to proper accounts!

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Should my company pay for this?

A really common question asked by people who are new to limited companies - should I set up the direct debit for the company’s accounting fees from the company’s bank account, or my own?

The answer (which is - from the company’s bank account) is obvious to us, but it’s asked often enough that it’s clearly a reasonable question for a non-accountant to ask.

Extreme examples of companies paying for things might be helpful: you probably would not imagine that Richard Branson buys aeroplanes personally and then claims them back on his expenses from Virgin Atlantic, or that Mark Zuckerberg rents Facebook’s offices himself and gets reimbursed at the end of the month. Those companies happen to be very big, but it’s the same principle for smaller ones too. If an accountancy firm is providing services to a company, the company pays for the service. If the company needs a laptop for a director or employee to use, the company buys a laptop for them to use. If the company needs an office for directors or staff to work in, the company rents space for them to occupy. In fact, generally, directors need pay absolutely no company-related costs themselves at all. If you just set things up so that the company pays for all its own costs in the first place, you’ll have less admin to do - everything gets recorded once and once only. And you’ll have a better idea of where you stand financially - you’re not temporarily impoverished until your expenses are reimbursed, and your company doesn’t look richer than it really is because you’ve temporarily borne a bunch of costs yourself.

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Why isn’t PAYE perfect?

For people earning less than £50,000 who stay in employment all year and who have no other income, PAYE is a great system - it’ll usually collect the exact right amount of tax, spread evenly over the year.

For people earning between £50,000 and £100,000 with no other income, PAYE might get it exactly right, but it might not. Even in the absence of any other income, there are many other things that could affect your tax bill, in that bracket, including High Income Child Benefit Charge, higher rate tax relief on charitable donations and higher rate tax relief on pension contributions.

For people earning over £100,000, it’s highly unlikely that PAYE will get it exactly right. From that point you’ve got all the potential problems from the previous bracket, plus the gradual tapering away of the tax-free personal allowance, which the PAYE system does not cope with well.

For people earning over £125,000, the chance of PAYE getting it exactly right is close to zero. At lower levels, you’ve got a savings allowance, meaning £500 or £1,000 of interest is tax-free. Over £125,000, there’s no allowance, so £1 of interest is going to trigger a tax charge.

And if any of those people have some other form of taxable income, they’re going to have tax to pay. The PAYE system can’t possibly collect the right amount of tax on that, because it doesn’t know how much it is, or even if it exists. The PAYE system *will* try and collect an estimate of how much tax it thinks might be due based on previous years, but unless nothing changes, it won’t be right.

For high earners, the best way to look at PAYE is as a system that tries to collect approximately the right amount of tax, with the final bill to be established via your tax return (or an HMRC calculation if you don’t have to file a return). You can keep an eye on your PAYE coding notices (if you learn how to read them!) to check that HMRC’s estimates are reasonable in the light of what you know about your expected reliefs and other income, but don’t expect the deductions to be objectively correct - just see them as 12 reasonably estimated payments on account towards the eventual bill. And, if you do a tax return, try and get it done as quickly as you can after the end of the tax year so that you know about any shortfall (or receive any refund!) as soon as possible!

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On fiscal drag

Fiscal drag is the process by which a government can stealthily increase the tax they collect by leaving the thresholds and bands unchanged (or insufficiently changed) as incomes rise with inflation. If that happens for one or two low-inflation years, you’ll hardly notice it. But if it happens over a long period, or in a year of high inflation, you will notice. Unfortunately, both of those things are now the case! The important tax thresholds have been frozen for five years, and inflation is no longer trivial.

Five years ago, someone with a sufficiently profitable limited company might have looked with their accountant at the tax landscape, and their domestic income requirements, and decided to draw £50,000 a year from their company. They’d have known that they’d get a tax bill themselves of around £3,000, leaving them with effective net pay of £47,000 (or a little under £4,000 a month). That might have been fine to meet their requirements both for current spending and personal saving, and they’d stop there, given the sharp increase in tax rates if they paid themselves more.

Similarly, someone else might have figured out they’d draw £100,000, knowing they’d wind up paying tax of £20,000, leaving them with a net for the year of £80,000. Again, if that was enough to meet their aspirations they’d probably stick there - above that level of income you begin to lose your tax-free personal allowance, leading to some brutal tax rates between there and about £125,000.

If the bands don’t move for a year or so, it’s no big deal. If inflation is 2%, the things that used to cost you £47,000 now cost you £48,000. You might not even notice, and if you did notice you could manage it by just cutting down on treats, or rebalancing between saving and spending, allocating a bit more of your income to now, and a bit less to the future.

But if there are two years of 2% inflation, a couple of years of 4%, and then a year of 10%, you’ve got a problem. The things that used to cost £47,000 now cost £58,000! Maybe you can still cope by saving less, or saving nothing, or digging into savings. But even when all the treats are long gone most people will find that the maths doesn’t work and that they’re going to have to change something, and most likely pay themselves more and move into a higher tax bracket.

There’s more to it than tax, though.

Our £50,000 person has a couple of kids. If they can cap their income at £50,000 (and they don’t have a partner earning more), then the household gets to keep all its Child Benefit. But if their income goes above that level, they’ll have to start giving it back. Taking that and the increased dividend tax rate into account, the effective tax rate on the next £10,000 is nearly 55%! £5,500 for the government, £4,500 for the household (if they've got a Student Loan, then the effective rate will be even higher - 64%).

Leaving the bands unchanged for so long has really made a punishing difference, as more and more people are dragged into higher bands. If that Child Benefit threshold had risen with inflation over the years, the kind of employees who were originally deemed to not be earning quite enough to repay any of it would, obviously, still not be earning quite enough to repay any of it. Because the threshold has not changed at all, but their salary has, they’re having to repay all of it! The higher rate tax threshold has been frozen for five years - that Child Benefit threshold has been unchanged for 10.

Our £100,000 case could have even bigger problems. They gave up their right to Child Benefit long ago, but at least that “only” meant losing £2,000 in total in respect of their two kids. There are another two child-related issues though:

1. If someone in a household has income over £100,000, then the right to 30 hours a week free childcare for 3 and 4 year-olds is lost! That’s worth much more than £2,000.
2. And you also lose the right to a Tax-Free Childcare account, which could be worth up to £2,000 a year *per child*.

If one takes into account the value of the childcare hours, this person is actually going to find themselves with an effective tax rate way, way in excess of 100% on the first chunk of income over £100,000. This is not an obscure edge case; every year we’ll spot a couple of cases where people have to be careful not to jeopardise free and Tax-Free childcare by creeping over the £100k mark (you can sometimes recover the situation after the event with carried-back charitable donations, if you’re alive to it).

The issue doesn’t just affect people with their own company, making choices about personal income, of course. It applies to anybody managing a balance between consumption and saving, and trying their best to avoid cliff edges where entitlements are lost. Someone with a job could have been managing those issues by making pension contributions to keep their effective income below £50,000 or £100,000 - but the point will come where they no longer have enough money for the present day if they do that.

A government can really only employ fiscal drag as a tactic for a limited duration before things just don’t add up any more. For many people, things are not adding up any more.

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Can Artificial Intelligence provide tax advice? An experiment

The business current account provider Anna recently launched an experimental “tax advice bot”, Terrapin.  In fairness to them, they’re not holding it out as the finished article, or as a substitute for real-life advisers!  But it’s a good illustration of something we often say - the skill in our work often doesn’t lie in just answering the question we’ve been asked, but in identifying what the correct question to ask actually is.

Obviously, what one wants to do is to pick a question where there’s a good chance of getting the wrong advice.  And actually the first one we picked to ask worked perfectly. 

We asked: “Can I save tax on a bike I've purchased to travel to my studio?”

Terrapin replied: “Yes, you can save tax on a bike you've purchased for commuting to your studio through the Cycle to Work scheme. This scheme allows your employer to loan you a bike and safety equipment as a tax-free benefit. The cost of the bike and equipment is deducted from your salary before tax and National Insurance contributions are calculated, resulting in a tax saving. The amount you can save depends on your tax band, with basic rate taxpayers saving 32% and higher rate taxpayers saving 42%. For example, if you purchase a bike and safety equipment worth £600, as a basic rate taxpayer you could save £192 in tax.”

But how does Terrapin know that the questioner is an employee?  There’s nothing in the question to imply that’s the case (in fact, “I”, “I’ve” and “my” all suggest it’s not, though to be fair it’s entirely possible someone working via a limited company could thoughtlessly phrase the question that way).

So, we followed up with a clarification: “Those are the rules for employees - I'm self-employed.”

Terrapin replied: “As a self-employed individual, you can claim tax relief on the cost of buying a bike if it's used solely for your business purposes. The cost of the bike can be claimed as a capital allowance, which allows you to deduct the value of the bike from your profits before calculating your tax liability. For example, if you purchase a bike for £500 and use it exclusively for your business, you could claim the entire amount as a capital allowance. This could potentially reduce your tax bill by £100 if you're a basic rate taxpayer.”

Useful links:

1: https://gov.uk/hmrc-internal-manuals/tax-credits-manual/tcm0126220
2: https://gov.uk/hmrc-internal-manuals/tax-credits-manual/tcm0118180
3: https://gov.uk/working-for-yourself/print

There’s a new problem here, though!  Terrapin has now understood what set of rules it should be looking at.  But, a non-accountant is clearly going to quite reasonably imagine that getting to their workplace is a “business purpose” in this context.  It’s not, though.  So we nudged Terrapin towards the right answer once more:

“I think you're overlooking that I use it to commute to my place of work. I understand that's not a qualifying business trip.”

Terrapin replied: “You're correct in your understanding. For self-employed individuals, travel between your home and a regular, permanent place of work is generally not considered a business journey, and therefore the costs associated with this travel cannot be claimed as a business expense. This is often referred to as 'ordinary commuting' and is the same rule that applies to employees. The cost of a bike used for such commuting purposes would not be allowable as a capital allowance. The rules are different for travel to temporary work locations or for journeys that are all at once part of the performance of the work duties. As a self-employed individual, you cannot claim the cost of commuting to your regular place of work as a business expense, including the cost of a bike used for this purpose. This is considered 'ordinary commuting' and the costs associated with it are not allowable as a capital allowance.”

Useful links:

1: https://gov.uk/hmrc-internal-manuals/business-income-manual/bim37600

This is a pretty good answer - but it was only reached by repeated questions from someone who knew the right answer to begin with.  It’s effectively doing the job of an unskilled accountant, who can only get to the right answer with the guidance of a very sophisticated client!.  To repeat, this is not a knock on this particular tool, which is an explicitly experimental one.  But tax and accounting advice very often involves figuring out what the real issue is, rather than simply addressing the initial question.  Of course, it might be that AI quickly catches up with the experience, thoughtfulness and pattern recognition of good advisers.  It’s some way off it at present though.

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Travel and subsistence scale rates are an estimating technique, not an allowance!

Although the rules around the tax-free reimbursement of travel and subsistence costs to employees and directors are complicated, it’s often very appropriate for an employer to pay such expenses. When it is, it’s common for the individual to make an expense claim for the costs they’ve incurred, backed up by receipts (though if it’s your own company it’s easier for the company to just pay the costs in the first place, of course).

There’s an alternative system - fixed “scale rate” expenses, based on typical costs in the place being visited. HMRC are content for these to be used instead of actual costs, as long as there’s some reasonable review process in place before the expenses are paid out. There are costs for accommodation, along with the costs of meals, drinks and travel within the city (the total of those last three things being known as the “residual” costs.

However, this is a shortcut to making a reasonable but admin-light reimbursement of costs that really were incurred. It’s an estimating technique that HMRC are content with, not a flat-rate allowance. If no costs have been incurred, there’s nothing to estimate!

There are only a couple of exceptions to this.

• If the individual is having their accommodation and meals provided for them by a customer, HMRC will permit a payment of 10% of the residual costs. It’s the same if they’re staying with a friend.
• If the individual is being provided with self-catering accommodation, then they can claim 80% of the residual costs for the first week, and 50% thereafter.

HMRC have a bunch of other examples, which are quite helpful if you’re dealing with these situations.

If you’re not paying for your own accommodation and meals, you cannot legitimately be paid the full scale rates tax-free! The daily scale rate for someone paying for their own accommodation and meals in New York is $318.50. If you’re not paying for your own accommodation and meals, then the 10% of the residual costs that you’re allowed to claim is $10.25. Quite a difference! Be careful.

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