IPT tax guide 2020
Updated: Apr 12
Independent Practitioner Today’s latest guide aims to help you cut through the complexities of tax legislation with sensible advice and tips to help you maximise your take-home cash and get set for a secure future.
Our author, Vanessa Sanders, is a chartered accountant, ex-tax inspector and the tax director of Stanbridge Associates Ltd.
Phone: 01522 546606
Robin Stride, Editorial director, Independent Practitioner Today
This in our series of guides for private doctors is available of Independent Practitioner Today
Rishi Sunak, our new Chancellor presented his first Budget on Wednesday 11 March 2020. His speech heralded that ‘we are at the beginning of a new era in this country. We have the freedom and the resources to decide our own future’ and concluded: ‘It is a Budget of a government that gets things done’. To help hospital doctors wade through the items most relevant to them, their families and their businesses, we have produced this tax guide featuring the main Budget tax proposals and Pensions
The biggest and most welcome news is the change to the pension limits. This remains a complex area but in summary:
Tax relief is given by reference to contributions or pension savings’ growth in the tax year (depending on the type of scheme to which you are contributing), but the maximum amount attracting tax relief is capped at a maximum known as an annual allowance. This can be confusing if calculating unused annual allowances to carry forward. Alterations to pensionable pay also cause particular problems for consultants as the growth may fluctuates wildly when new salaries, pay adjustments or awards affect pension pots.
The pension annual allowance (currently £40,000) is the maximum amount of tax-relieved pension savings which can be accrued in a year. However, for those on higher incomes the annual allowance is reduced by £1 for every £2 were an individual’s ‘adjusted income’ exceeds £240,000, to a minimum annual allowance of £4,000 (previously £10,000). Adjusted income is primarily net taxable income plus pension savings’ growth. The tapering potentially applies to an individual with threshold income (taxable income from all sources) above £200,000. This is an increase on these thresholds of £90,000 and should cover the vast majority of cases where hospital doctors earn income from an NHS source only, and whose pension savings’ growth is below £40,000.
There is a change to the minimum annual allowance. The minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from 6 April 2020. This reduction will apply to individuals with adjusted income exceeding £300,000.
The NHS should send out employer statements which detail pension growth. It is essential to keep an eye out for these and to pass them on to your tax advisor as there is a tax charge arising if thresholds are exceeded. Each consultant will only know if the thresholds have been exceeded once their overall tax position for the year is quantified.
Doctors should not take drastic action and leave their pension scheme without taking advice because often it is a case of the scheme reward remaining valuable, maybe just not as valuable as in the past.
Intermediaries and IR35
Recently many hospital doctors will have received letters from the private hospitals and other large firms who contract with them, asking for specific details about how they operate. This is in readiness for the requirement to assess all individuals offering services through their own limited companies.
The changes to the off-payroll working rules (commonly known as IR35), which came into effect in April 2017 for the public sector, are to be extended to the private sector. The date for implementation was originally to be April 2020 however with the Coronavirus interruption this move has been postponed until April 2021. Draft legislation has been issued already mirroring that already in place for Public Bodies, so this reprieve is likely to be short-lived.
In January 2020, the government did announce a review of the implementation of reform, to address concerns from affected businesses and individuals. In light of the reduced help available to these off-payroll workers during the current situation there may be some radical changes of attitude, as the livelihoods of those operating this way are not covered by any of the legislative assistance such as furlough leave or self-employment demonstrating they are definitely not employees.
The current government position is that the proposed changes will go ahead but:
businesses will not have to pay penalties for errors relating to off-payroll working in the first year, except in cases of deliberate non-compliance; and
there will be a legal obligation on taxpayers to respond to a request for information about their size from either the worker or the contractor.
Current Intermediaries legislation and off payroll working
Off-payroll working rules apply where an individual (the worker) provides their services through an intermediary (typically a personal service company PSC) to another person or entity (the contractor). The contractor will be required to make a determination of a worker’s status and share that information with the worker. If the worker is deemed to be under IR35 rules, the contractor paying the fees to the PSC will be required to make deductions for income tax and NICs and to pay employer’s NICs.
Many locum doctors were taken by surprise when confronted with greatly reduced hourly rates for agency NHS contracts when legislation introduced in April 2017, made Public Bodies engaging such workers, responsible for deciding if the individual was in fact a pseudo employee. Whilst the rules state each assignment should be assessed on its unique facts, the NHS tend to err on the side of caution when assessing their relationships with workers and basically now employ (primarily through agencies) doctors as workers. This means the cost of employment: employers’ NI at 13.8%, employees’ NI at 2-12%, and PAYE at the individual’s rate of tax (applied via a notice of tax coding from HMRC), is being passed on to the worker.
These contracts usually carry no rights to pension, sickness or holiday pay, and although many of you will be familiar with the headline case of Uber, who are being forced to consider their employment status for the accrual of employment rights, there is no parallel in the tax system; you are either selfemployed or employed.
Proposed legislation means that accountability for deductions is being extended to the private sector. Small businesses will not have to comply and thankfully HMRC have stated they will not look at retrospective action if a worker now decides they should have been complying with the IR35 legislation since its original inception in 2000! A small company is one which meets two of these criteria:
Annual turnover is less than £10.2 million;
No more than £5.1 million on balance sheet;
Employs 50 or fewer employees.
Umbrella companies and locums
Doctors employed as locums using offshore intermediaries, (not employment agencies) who exploit the tax system to reduce their own costs, are likely to face a tax liability. Working through umbrella companies who abuse tax reliefs on travel and subsistence can easily disappear leaving you in the firing line. Abuse of the ‘wholly & exclusively for the purposes of the trade’ rule has long been a bug bear of all professionals. There are a myriad of tax cases examining what constitutes the deductibility of expenses. For example, the Samadian decision on travel between habitual work places and home having a dual purpose, restricts considerably the definition of a tax deductible business mile.
Digitalisation is now in place… but currently only for VAT-registered businesses, and the plan for other taxes has been postponed.
Digital record-keeping is still on its way and should be considered to assist all businesses to maintain adequate records. HMRC can charge up to £3,000 per year if your records are “inadequate” and many advisors are assisting with the transfer over to digital software packages before it is necessary, to help iron-out any problems. Unfortunately, there is no legal definition for adequate records but certainly you will need the following:
receipts for all expenses
credit card statements
bank account statements (preferably a dedicated account for business)
Clearly defined dividends rather than withdrawals of ad-hoc cash
If you are found wanting you can be fined up to £3,000 for inadequate records to support your tax disclosure. Ask your accountant to perform a health check and to help with how your records are maintained!
HMRC now have access to massive amounts of data from employers, banks (overseas included), share dealings etc. and they are using this knowledge to open aspect enquiries looking at specific items on a tax. For example, if you moved jobs during the year and were issued with a form P45, check if you received any further payments on a late payslip as these will be picked up by HMRC under Real Time Information reporting but may not have been reported by you on a tax return.
Penalties are charged on errors between 0% and 100% of the tax mis-stated (this could mean even if you have paid them too much!). If it can be shown that you were in any way negligent then the penalties start at 30%. If you are a doctor then the bar of compliance is higher than for say a manual worker as you are expected to understand what you are returning on your self-assessment form or if you do not to take proper advice.
Do not forget that the relationship is between you and HMRC not your advisor and HMRC. If you do not understand an entry on your return the onus is on you to seek an explanation.
Incorporating your business into a limited company is planning for future growth it is not entering into a tax avoidance scheme. After much discussion HMRC concluded there are no issues with a company offering professional services. The company must however be operated properly with the veil of incorporation descending over the business assets with income and expense transactions being separately identifiable from you as owners of the business. This is an important matter to consider when looking at future growth plans; for indemnity protection; and controlling cash flows. Are your records up to scratch?
Companies Taxation on dividend income
Corporation tax rates were to be reduced to 17% by April 2020, but they are now going to remain at 19% however small business owners are facing increased taxes on dividends and restrictions to pension contributions. This has had an effect on those of us who have grown a business as the personal reward is reduced the incentive to work harder disappears.
Tax free dividend allowance is £2,000.
Dividends above this level will be taxed at:
7.5% (basic rate), 32.5% (higher rate), and
38.1% (additional rate).
For those independent practitioners who have incorporated there are still distinct advantages. For example the limited liability, evening out profits over periods of uncertain times and changing rates of personal taxation, allowing investment within the corporate environment, sharing the family business; to name but a few.
Shareholders with access to basic rate bands which are up to £50,000 from 6 April 2020, remain in an efficient position because of the £2,000 tax free allowance, a full personal allowance (of nearly £12,500 at 0%) and the 7.5% dividend tax. Students tend to be in this bracket.
A higher rate taxpayer will pay tax at 32.5% on any dividend income in excess of the basic rate threshold, and an additional rate payer will be taxed at an eye-watering 38.1% rate but both receive the tax free dividend allowance.
Creating a family company allows the distribution of profit reserves on a reasonable commercial basis to all shareholders, and provided this is not artificially manipulated to gain a tax advantage rather than as a genuine reward to investors, profits can be shared making the most of any lower rates of tax available.
Salary packages have to be commercially justifiable not merely when considered in isolation, but as part of a total reward package. Reward includes all items stemming from participation in a small owner-managed business including salary, pension contributions, benefits in kind and dividends which are typical for professional service companies. Whilst shareholdings alone are not subject to commercial justification a court would be allowed to compare who takes what size of reward, and review if the primary reason appeared to be to gain a tax advantage. For example consider the following circumstances:
Spouse 1 generates the fees for the business by providing the medical service; spouse 2 supports this provision by carrying out all of the administrative tasks associated with the business. Spouse 1 has another income source from an NHS employment meaning any reward they receive is subject to tax at the highest rates.
As directors both spouses decide on a minimum salary to review what other forms of reward they could take depending on the profitability of the company throughout the year. The best way of achieving this is considered to be by way of dividend.
Spouse 1 is the controlling shareholder by virtue of the fact s/he is the primary decision-maker and income-generator. In commercial terms this should mean that s/he holds more than 50% of the share capital, regardless of class of shares. This ensures other family members cannot gang up and take over the business in the event of disputes such as during divorce. Hence the controlling shareholder would always receive the majority (albeit small) of the reward from dividends.
Advice is received suggesting that spouse 2, who does not work outside of the family company, should consider their pension arrangements. As this spouse 2 does not have the benefit of the NHS pension they may have available annual allowances of £40,000 (if their total taxable income does not exceed £200,000) and understandably the directors may consider making pension contributions from the company as the employer of spouse 2. Spouse 1 however, is subject to restrictions on their annual allowance because of the growth on the NHS scheme of which they are a member and so do not want a pension contribution.
The questions to ask can be condensed into the following:
How can a total reward package for an administrative non-fee-earning employee be commercially justifiable if greater when compared to that of spouse 1, than that of the fee-earner and controlling shareholder?
Would spouse 1 be content to provide the same package to someone totally unconnected to them?
Is the action wholly and exclusively for the purposes of the trade?
Different advisors will have differing opinions and doctors need to ensure the advice they take is backed up by indemnity and expertise.
Be careful to follow commercial principles when considering reward packages as HMRC may require commercial evidence of the amounts paid for salaries, benefits in kind and pension contributions plus dividends where there is an imbalance between connected persons. There are many tax cases considering commerciality and business owners should be ready with a robust response.
Dividends do not have to be paid out in the year in which the profits are earned unlike the profits of a sole trade. If the company did not pay out all of its profits this is acceptable as it allows for future planning such as to ensure continuity of the business in the event of a downturn; or if the trade wished to invest in some equipment, or a property, or stocks and shares, then the company could still declare a lower amount say, £150,000 of dividend but keeping the lower earner under the additional rate limit. This could be used to manage personal taxes at more punitive rates of tax. This flexibility is not available within a sole trade as the individual pays taxes on the profits as they are earned at the rate of tax applicable during that period.
As you can see the effects are not disastrous. You can leave some of the profits as reserves in the company to invest in the longevity of the company. These reserves can be maintained in the lower tax environment and invested for future growth.
The company can continue beyond its natural trading life and the growth and income distributed when you and other shareholders are not paying such large percentages in personal tax for example, when you retire. It is important to remember that a reasonable rate of return in the form of dividends to shareholders is necessary if the trading company is profitable.
The use of a company is particularly helpful when there are fluctuations in trading income as profits are not subject to differing rates of personal taxation and NI unnecessarily. There are also other potential shareholders to be considered; do not forget anyone can own shares in their own right provided they are at least 18 years old.
Some doctors may still be considering dis-incorporating their business. This is possible but you cannot access Entrepreneurs’ Relief if you intend to carry on the same or a similar business. A business continuing essentially the same trade is known as “phoenixing”. If your business has valuable goodwill then you will need to buy this before you can continue the trade in another form.
If you decide to dissolve your company you need to ensure you are seeking clearance from HMRC before you treat the return of funds or assets to shareholders as capital. If you have used your company as a “money pot” to protect the trading profits at the lower corporation tax rates and not paid out a reasonable return in the form of dividends to shareholders, you are open to an accusation of tax avoidance. If your company holds more than £25,000 on its balance sheet, it will need to appoint a liquidator. The liquidator does not provide advice they take instruction from you. If the intention to close your company and withdraw the funds or assets at a lower rate of tax by turning income into capital, then this may be viewed as aggressive tax avoidance. HMRC can investigate such action and the directors would be held responsible as individuals even if the company is dissolved.
Areas where the self-employed can make savings on tax:
Can you pass the wholly and exclusively test?
Section 34 of the Income Taxes, Trading and Other income Act states that
(1) In calculating the profits of a trade no deduction is allowed for:
(a) expenses not incurred wholly and exclusively for the purposes of the trade, or
(b) losses not connected with or arising out of the trade.
(2) If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is wholly and exclusively for the purposes of the trade.
As a self-employed individual, or indeed as a company, there are many deductions from profits that are allowable, as the rule to be applied is that the expense must be ‘wholly and exclusively’ but not ‘necessarily’ for the purposes of the trade being carried on. This is very different from the test applied to employees claiming deductions from their earned salaries.
Some of the tax-saving deductions are as follows:
Employing family members (see below);
Private secretarial fees – but beware of those who you think are self-employed (see below);
Meeting costs – do you have an agenda or are you just having lunch?
Uniforms – when are clothes allowed?
Motoring expenses –when and what?
If HM Revenue and Customs (HMRC) disagree with your claims and seek to adjust these, let me remind you that the onus is on you as the taxpayer to provide the evidence to substantiate your claim.
You are guilty until proven innocent! However the burden of proof is only on the balance of probabilities, not beyond reasonable doubt.
Employing family members
Not everyone has a personal allowance now: if your taxable income exceeds £100,000 you will lose £1 for every £2 over. BUT some can still benefit from a 0% rate of tax - family members who may not be higher earners and who could be paid tax-efficiently for doing work for you.
This can range from your spouse answering the 24-hour emergency calls, taking cheques to the bank or debt-chasing, to your teenage child setting up spreadsheets or following any blogs about you on social media web sites. Whatever job they are doing make sure that it is appropriate for their level of experience.
Beware; you must pay them as an arm’s length transactions. Basically, you should be able to justify the amount paid as if to an unrelated employee.
For example, how much would a 24-hour telephone answering service cost; or a debt collection service, or even following bloggers on websites or Twitter ensuring your name is not besmirched without response? Ask your employee to keep a timesheet of activities undertaken over a specimen period of time as evidence of their work.
Also make sure you actually pay them the amount stated on the payslip otherwise no deduction is allowed. This is particularly important now as all employers are required to operate under Real Time Information (RTI) which aims to ensure that all employees have their actual data processed and provided to HMRC at the end of every month. This includes students who work regularly for you.
You should also have at least a basic contract of employment demonstrating that you acknowledge your responsibilities as an employer. You may also need employers’ liability insurance. Speak to your accountant.
You may also be forced to offer your employees a work-place pension which could be a useful tax relief when considering a salary package for your employees. The rules here are complex and must be continually monitored and records maintained. This is for all employers not just those operating a business, so think about taking advice if you employ domestic staff as well.
On another note – but using the same premise – you can also utilise capital gains tax exemptions by ensuring that any capital assets you own are shared with your spouse or civil partner.
As there are annual exemptions available on capital gains of around £12,300 per individual for each tax year, this is a significant potential saving. However if you are owning property jointly then make sure that there is evidence to support the transfer of land to both parties in writing. For example
write a letter to your spouse or partner telling them that this is what you have done and have it witnessed and dated
change any mortgage or loan documentation to include them on it
alter the title deeds to show that you both own the property (check your tenancy status – joint or in common)
if you own it jointly then ensure you are returning any income in the specified proportions on your individual tax returns. If you wish you may vary this percentage ownership (the default for married couples is 50% each), but a form is required to be submitted to HMRC and this may cause issues with inheritance because it may change the nature of the tenant ownership.
Watch out for minor children, however. They can earn money from a job and this remains their own, but anything you give them which earns £100 or more a year will have to be reported on the parental tax returns. This includes ownership of any shares on which dividends are being paid out if the initial capital was provided by you or if the benefits of which are passed onto you.
However, a gift from grandparents is not caught by this restriction, and individuals can give up to £3,000 a year away each year without it affecting their estate for inheritance tax (IHT), so any birthday or Christmas presents of shares can be used to fill up their allowances.
Secretarial or assistant fees
When contracting anyone else’s services, you need to consider their status from a practical perspective. There is a difference between employed and self-employed which is governed by the facts of reality rather than by what you agree.
It is therefore important for you to understand that with self-employment there are a number of practical aspects which you need to consider:
Do they provide their own equipment or use their own premises?
Do they do the work in their own time or do you prescribe when the work is done?
Do they take any financial risk (for example, if the job is not satisfactory, do they have to correct it at their own cost? Do they charge a fee regardless of time spent?) ?
Can they offer a substitute or carry out work using their own staff?
Do they carry their own insurance?
Do they provide services for others?
In fact HMRC have a tool kit which helps you to assess the status of people with whom you work. If you decide to use this then you could be asked if you have taken the findings and applied them; so beware before using any such tools as their provenance may skew in favour of a pre-determined result.
Many things point to employment or self-employment. HMRC would like everyone to be employed so that they can collect tax through PAYE and no expenses would be allowable!
However, there are a few things you can put in place to help yourself:
A contract for services which states that the subcontractor is responsible for their own tax and National Insurance;
Do not pay holiday, sick pay or bonuses;
Do not pay the same amount regularly; pay by job done; or each report written:
State that you are not in a master-servant relationship.
Ensure they use their own equipment and their own time
If you are found to be an employer, then HMRC expect you to pay over the tax and National
Insurance due. To calculate this they will gross up the amount you have paid for both tax and National Insurance, plus they will add on employer’s National Insurance and charge interest and penalties.
They will also seek to go back for as long as this relationship has been in existence. This could prove very expensive indeed. So protect yourself as far as possible.
Entertainment is never an allowable expense for tax purposes. If you are having a meeting which includes refreshments, then ensure that you have an agenda or maybe have a quid pro quo arrangement where you pay one time and they pay the next.
Also, be reasonable – if you meet on a Sunday lunchtime and are accompanied by your spouses and children (happy meals are a give-away), then this is unlikely to be classed as a meeting.
If, on the other hand, it is a drink after work or a lunch mid-week for a few of you in the department to discuss setting up a limited liability partnership, then there is no reason why this will not be allowable.
Clothes or uniform?
There is a tax case (Mallieux v Drummond) which governs the deductibility of clothing and tests the wholly & exclusively rule. Basically, clothing is never allowable as a deduction for tax, as it is to keep you warm and decent. The only time when it is possible is if it could be described as a uniform.
Hence, if you are going to buy an Armani suit, you may want to ensure that it has a label with the name of your private practice emblazoned on it somewhere.
On the other hand, dry cleaning due to the type of work you do may well be allowable as a tax deduction, so if you do not like ironing shirts, a laundry service for work clothes may be a possibility as it is arguable that you do not have to be clean and fresh in society. If you wear them for your NHS consultant post make sure you adjust the claim for private use to avoid duality of purpose.
The Upper Tier Tribunal ruling on the Samadian case outlines some basic agreed rules for motoring expenses. The Tribunal agreed with HMRC’s very strict view disallowing any claims for consultants’ travel between home office base and other business bases where attendance was regular and predictable. This would include the following:
Travel from home office to private hospital
Travel from NHS employment to private hospital
Travel from private hospital to home office
This is because the taxpayer is not expected to fund lifestyle choices such as the fact that you may wish to live in Scotland but work in London. The journeys above have a dual purpose – to allow you to live away from work.
HMRC and the courts believe that whilst your home office does count as a work space and hence attracts a deduction for apportioned home costs; there can be no deduction for the travel to and from this business base if it is habitual. You can however claim for the following:
travel between private hospitals
emergencies (as not habitual)
visits to patient at home
courses & conferences
When keeping records (which you are required to do) be mindful of the case of Dr Jolaoso v HMRC where the motoring expenses were restricted on the grounds that Dr Jolaoso had not provided any evidence to support his claim. I therefore urge you to keep a mileage log in your car demonstrating the following:
Date of journey
Start and destination points
Mileage log (and if having to take an unusual route a note why (eg M25 shut!) as HMRC use Google to substantiate mileage claims.
Brief reason for journey
Odometer reading at the start of each financial year
To calculate the costs you can then deduct the business proportion of the total costs of the car including:
Repairs & servicing
Road fund licence
Capital allowances on the capital cost;
Or just apply 45p per mile to the business journeys and deduct this instead.
Also if your spouse is working for you, do not claim a proportion of their motor vehicle, pay them 45p per mile for its use otherwise you could find that you are charged for a benefit in kind on the provision of a car for an employee!
Unfortunately as an employee the rules for deductions against employment income are generally much stricter as there is a requirement to be wholly, exclusively and necessarily incurred in the performance of the duties of that employment.
Company cars have long been a target of the Government, and every year we have seen tax consequences for any vehicles other than electric, becoming increasingly punitive. The issue is the ‘green-friendliness’ of the vehicle and the necessity for having the car, which is viewed as a perk and taxed as a benefit in kind.
The only type of car which has any tax efficiency now is an electric vehicle and many doctors are investing in such cars. The government announced in Budget 2017 that CO2 emissions for cars registered from April 2020 will be based on the Worldwide Harmonised Light Vehicles Test Procedure (WLTP). Draft legislation has been issued to amend the previously planned benefit percentages for 2021 through to 2023:
All zero emission cars will attract a reduced percentage of 0% in 2021 and 1% in 2022, before returning to the planned 2% rate in 2023.
For cars registered before 6 April 2020, the current test procedure will continue to apply and there are no further changes to percentages previously set for 2021. These rates will be frozen at the 2021 level for 2022 and 2023.
For cars first registered from 6 April 2020 most rates will reduce by 2% in 2021 before returning to planned rates over the following two years, increasing by 1% in 2022 and 1% in 2023
This might be a good idea if you have teenagers driving. It is unlikely you could transfer the benefit to them as employees however as their salary package including the car, would need to be commercially justifiable for what they did for the business.
If you use your own car, then you can claim up to 45p per mile from the company for the first 10,000 business miles travelled and 25p per mile thereafter. If you travel 10,000 miles, this could be £4,500 in your pocket with a corporation tax deduction for the company, to boot!
Don’t forget this applies to all employees, not just to your own business travel. Hence, all those trips to the bank and to ferry paperwork around can be claimed by your employed spouse, for example.
All that is required is an expenses claim (mileage log) for a company and a mileage log of business miles and a note of total mileage to calculate a business proportion.
Tax-free employee benefits
If you are a sole trader then a reasonable proportion of the costs of any communication tool is an allowable deduction. HMRC expect you to be able to identify business calls from private but this may not be possible over a whole year so it may be worth looking at one month and doing an example split – pick a busy one!
A mobile phone provided to an employee is still a tax-free benefit – although you can now only have one per employee (and the value of the salary package still has to be justified so watch for those teenage data surfers!). The following rules apply:
1. A policy must be in place stating that the employee’s personal use of the phone will be limited and incidental;
2. The contract must be in the name of the company – although the name of this could be as part of the address line, as having a business contract could be cost-prohibitive for smaller companies;
3. The company cannot foot the bill of personal mobiles without there being a tax and NI cost and a benefit form to fill in at the end of the tax year, so beware!
4. Free calls on a contract phone will be assumed to be the line rental and so cannot be claimed back if value not exceeded.
Ordinary telephones can also be provided, but similar rules apply. For instance, they must be:
Limited personal use;
In the name of the company, not the individual;
If in the name of the individual; only the cost of business calls can be reclaimed;
The cost of any line rental is the liability of the individual, as the ‘wholly and exclusively and necessarily’ rule for employees does not allow apportionment.
This also applies to use of the internet.
Subsistence and incidentals
As a sole trader, you cannot really claim for subsistence as the expense cannot be deemed to be for the trade but for your comfort and sustenance. However HMRC are more relaxed about this and will allow a reasonable amount of drinks or food if you are away from your normal routine or having a meeting or have gone on a course.
When employees work away from their normal base, a subsistence amount can be paid. For example, when on a course at home or abroad or if required to work a particularly long day (not including NHS work however).
The company needs to look at how much is reasonable to pay by collecting actual receipts for reasonable period of time and then agreeing with HM Revenue and Customs (HMRC) how much can be paid. Round-sum amounts always have to be agreed with HMRC in the first instance, otherwise they will be taxed as if employment income.
Some off-shore companies set up umbrella companies allowing large deductions to be made from contractual fees particularly in the locum market. Do not be fooled, this does not cover you if you are claiming outside of the letter of the law and if HMRC decide to investigate you will be found wanting. Seek on-shore professional advice from a qualified accountant carrying professional indemnity insurance!
The basic rule is that an employer can now provide trivial benefits such as a bunch of flowers, a box of chocolates, a meal out, without having to disclose the amounts via a form P11D and which do not attract tax or national insurance for either employer or employee. The employer will also be entitled to claim income tax or corporation tax relief on the cost.
These are the key conditions:
The cost is £50 or less to provide;
it is not cash or a cash voucher (so gift cards from John Lewis would work);
it is not a reward for their work or performance;
it is not part of the terms of their contract.
The legislation imposes no limit on the number of trivial benefits an employer may provide except of course for directors or office-holders of ‘close’ companies. They are restricted to trivial benefits worth no more than £300 in total in a tax year. A close company is a limited company with five or fewer shareholders. This limit also applies to benefits to associates of those directors. As ever HMRC provide many examples for such a trivial benefit and I have included this one below as it shows the complexities of trying to avoid tax on even £50.
Example given by HMRC
Company O gives bottles of wine each costing £30 to a director, to his wife who is a former director, and to their daughter on their birthdays. The daughter is not an employee or office holder of Company O, so the cost of her bottle of wine is apportioned between her father (a current director) and her mother (a former director). In respect of the daughter’s gift, £15 (£30/2) is allocated against the father’s annual exempt amount. The balance is allocated against the mother’s annual exempt amount under the amended employer-financed retirement benefits (EFRBS) regulations 2011.
Suppose during my weekly shop every so often I buy five £30 bottles of champagne to give to each of my employees. If I take them into the office and say “Good morning chaps, we are doing really well this month by hitting all our targets so here’s a bottle of champagne to say thank you”. That would be a reward for services and so would attract tax and NIC. But if I were to say “The sun is out, the sky is blue – I’m in a super mood and this is for you!” – then the champagne would be a trivial benefit.
Staff parties (which may include partners or friends and family) and events for all employees are tax deductible and exempt from tax and National Insurance Contributions and reporting only if the following conditions are met:
an annual event, such as a summer BBQ or an end-of-year party
the event is open to all employees
the cost per head of those attending the event is no more than £150.
You can also spread the cost across more than events but if the total cost exceeds the threshold all of the cost will have to be taxed as this is not an allowance.
Use of home
As a sole trader working from a home office there are only two ways to claim a deduction:
Using simplified expenses by the hours worked between £10 and £26 per month; or
A proportion of your costs of providing that home (calculated in the same way as below), but with an adjustment for personal use to avoid Capital Gains Tax (CGT) issues on eventual sale.
Employees required to work from home can claim a home-working allowance of £6 per week with effect from 6 April 2020. This may be a little extra you can give to a secretary in your employ if she/he has to work from home. You do need to have something in their contract to say this is the case, however.
As a director/owner, the company can rent a space off you. This can be done by using a simple licence granted to the company to allow them to operate within your home, making use of various facilities such as kettles and toilets; but not leasing a specified area – which would create CGT issues. A licence gives use of a space not an interest in it.
The householders then charge a rent for this licence – usually the husband and wife or civil partner. This income is then put onto their individual tax returns as rental income with deductions for the costs (see below “Home sweet home”)
For this, the company receives a deduction against corporation tax and you get to fund that part of your home you are providing as an office.
An employee is allowed to borrow up to £10,000 from their employer without incurring a benefit in kind. The loan must eventually be repaid or written off. At the point of write-off, there would be a taxable benefit.
If you are a director/shareholder, you may still borrow the funds, but you must ensure that your loan account with the company never exceeds the £10,000 or the deemed interest will be a benefit.
Also, the loan must be repaid by nine months after the company year-end to avoid tax at 32.5% being payable thereon for the duration of the loan even if it is repaid and reissued within a certain time limit. This is known as s455 tax (CTA 2010).
Non-domiciled individuals (NDI)
From the fiscal year 2018, any NDI resident for 15 years out of the last 20 will be deemed domiciled for all UK taxes.
Once deemed domiciled, an individual will need to leave the UK for at least five consecutive tax years including UK residents who wish to alter their status. This applies after 6 April 2017. If you have returned to the UK and your original status was as UK domiciled you will re-acquire that status as soon as you acquire a UK residence, regardless of your intention to remain.
Those whom own property also come in for a battering:
Home sweet home
Advice on how to avoid paying out even more on your property.
Everyone is aware that your home, otherwise known as your principal private residence (PPR), is free from capital gains tax (CGT). Individuals can only have one PPR for which they can claim exemptions at any one time and married couples or those in civil partnerships can only have one between them.
You may think this odd after the debacle over the MPs changing their minds constantly over where they live; but this is allowed. If you have more than one property, then you can elect for one of them to be your PPR. You can then re-elect if circumstances change.
9 months free!
You may wish to make the elections because there is a ‘free’ period when a property has been your PPR for any time during your ownership. This free period is the last 9 months of ownership, slashed from 18 months with effect from 6 April 2020 (there are no changes to the 36 months that are available to disabled persons or those in a care home).
You buy a property to live in and stay there for two years. You then have to move but cannot sell the first property. You decide to let this out. You then elect to have your PPR at your new home and this must be done within a specified time period. You can now sell the rented property within 9 months and pay no CGT at all.
Lettings relief has been reformed so that it only applies in those circumstances where the owner of the property is in shared occupancy with a tenant hence all of those who have lived in their rental properties may wish to reconsider plans for sale and build in the need for calculations of capital gains tax.
Payments on account and 30 day returns
Legislation has been enacted to change reporting obligations for residential property gains chargeable on UK resident individuals, trustees and personal representatives. Also introduced is a requirement to make a payment on account of the associated CGT liability. For disposals made on or after 6 April 2020:
a tax return is required if there is a disposal of UK land on which a residential property gain Accrues;
CGT is required to be computed on the reported gain in the tax return.
The return needs to be filed and the CGT paid within 30 days of the completion date of the property disposal. The new requirements do not apply if a chargeable gain does not arise, for example where the gain is covered by PPR relief.
Higher rates of 18% and 28% apply for chargeable gains on residential properties with the exception of any element that qualifies for Private Residence Relief.
CGT annual exemption
The CGT annual exemption rises from £12,000 for 2020 to £12,300 for 2021.
Rent a room
Anyone can rent a furnished room in their own home while they live there for residential purposes – so not your office. Provided you receive less than £7,500 in rent, no tax is payable. You do have to put up with a tenant, however. The relief is shared by the number of people whose home is being shared.
Using your home as your office
This is an extremely valuable relief to be allowed and applies whether you operate as a sole trader or through a limited company.
Although the way you let it is different, the expenses you are allowed to claim are the same:
Mortgage interest or rent;
Insurance (but tell the insurer that you work from home);
Repairs and redecoration.
But not gardening, unless you have clients wandering the lawns, in which case you need separate insurances, as clients are visiting your premises!
You add up all of these expenses and then look at what proportion you use for business. For example, if you have an eight-roomed house and you use one as an office, then the percentage of costs would be 12.5%.
However, it is essential that you do not use it exclusively for business. This is where the private use adjustment comes in. Put the cat or the kid’s musical instruments in and make a small add back for that. This avoids potential conflicts with CGT.
Mortgage interest is to be restricted: currently mortgage interest is deducted as an expense before the rental profits are charged to tax. Thus tax relief is given the marginal rate of tax. So for higher rate taxpayers this is at 40%. The Chancellor proposes to restrict mortgage interest relief to the basic rate, and given as a tax.
The change was introduced from April 2017 by 25% of finance costs available as a basic rate deduction over the following 4 years.
For those of you heaving a sigh of relief or suppressing a sob as you wave off your university-headed offspring, the loans available are based on the household income and are to be repaid as the student reaches earnings of
If you have a Plan 1 student loan
Income exceeds £364 a week or £1,577 a month (before tax and other deductions).
If you have a Plan 2 student loan
Income exceeds £494 a week or £2,143 a month (before tax and other deductions).
Considering the average earnings of graduates tabled in the Sunday Times University Guide, this should be immediately, so you may wish to consider alternative funding via employment or shareholding ownership (see above).
Taken on trust
If you have adult children whom you want to assist with buying a property or giving them somewhere to live while at university or starting a new job, then look at the use of a trust.
Simply speaking, you can put down a deposit into a trust, the trust then takes out a mortgage – usually with you acting as a guarantor – and names your offspring as the beneficiaries. Your son or daughter could then live in the property as their PPR and, when it is time to sell, the trust can claim the PPR exemption.
The trust can also let out any spare rooms in the property; but it would have to return the income (less allowable expenses such as the mortgage interest) and pay tax on it.
Alternatively, your son or daughter could rent out a room and not pay tax if the rent was less than £7,500. However, asking a young adult to play landlord may be an issue, as the legal requirements can be onerous.
You can also own the property as tenants in common with your child allowing some of any capital gains to be mitigated, but transferring the whole of the property into their sole ownership can have consequences if they are made insolvent or marry and divorce.
But those who want to leave their homes…
Principle Private Residence (PPR)
There is to be an additional nil-rate band (NRB) for those leaving an interest in residential property, which was their PPR, to direct descendants. There will also be some flexibility built in where people have chosen to downsize their property before their demise, but this is subject to consultation.
The amount of the additional NRB will be the lower of:
The value of the interest in the property (after mortgage charges etc.), and
The ‘maximum amount’ of the band.
The band is to rise at a rate of £25,000 per annum between 2018 (£100,000) to 2021 (£175,000) and thereafter linked to CPI. The existing NRB of £325,000 will remain frozen until 2021.
Of course there is a restriction for those with more valuable estates. The new allowance will be removed at the rate of £1 for every £2 of the total net estate before allowances and exemptions (e.g. Business Property Relief) exceeds £2million. There are also to be anti-avoidance measures in place primarily around non-domiciled individuals using other vehicles to own their properties.
Business CGT relief
There are two specific types of disposal which potentially qualify for a 10% rate up to a lifetime limit for each individual:
• Entrepreneurs’ Relief (ER)
This is targeted at directors and employees of companies who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met, and the owners of unincorporated businesses (including partnership disposals).
The lifetime limit is reduced from £10 million to £1 million for ER qualifying disposals made on or after 11 March 2020. There are special provisions for disposals entered into before 11 March 2020 that were not completed by that date.
• Investors’ Relief
The main beneficiaries of this relief are external investors in unquoted trading companies who have newly-subscribed shares. Investors’ Relief has a lifetime limit of £10 million, however the lifetime limit position for ER has been changed in the Budget
Death us do part
There are a few simple planning steps you can take involving small amounts of money, but as we know, every little helps:
Each individual can gift up to £3,000 per annum which is ignored when valuing an estate for inheritance tax (IHT). If grandparents can give this away, then the parents’ tax trap does not come into play. You cannot collude, however, and as a parent give it back to the grandparents.
You could also use this exemption to set up a bare trust to hold small amounts of assets such as a few shares each year which could be built up over time (ready for university fees).
As a parent, you can gift up to £5,000 each as a wedding gift without it forming part of your estate for IHT. Grandparents’ gift limits are halved at £2,500 and anyone else can give £1,000. These gifts are in addition to the £3,000 exemption mentioned above.
Expenditure out of income
If you have a large enough annual income, then you are, of course, allowed to spend it as you wish. This means that you can give money away which will not form part of your estate if:
It does not affect your standard of living;
It does not deplete your capital resources;
It is a regular feature of your expenditure – for example, a commitment by grandparents to pay school fees.
Potentially exempt transfers (PET)
You can always give away anything you like and if you live seven years, then the value of the gift will fall out of your estate entirely.
The rule is, however, that you must actually give the asset away. You cannot keep using it, otherwise there will be a tax charge known as a pre-owned asset tax (POAT).
IHT nil rate band
Make sure you use this wisely. The amount usually increases each year and people often use this nil rate band in association with trusts for their descendants. Husbands and wives now have transferable nil rate bands if one death does not use it all. This is worth around £700,000 in total.
Deeds of variation
It is estimated that around 70% of the public do not hold a will. To date even if you get it all wrong or, like Roy Jenkins, you think 'Inheritance Tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue’, your beneficiaries can still agree to alter your will if they apply for a deed of variation within two years of the date of death. However there is to be a review into these deeds of variation (a legal document allowing a change to a will after death to redistribute assets) to reduce the avoidance of inheritance tax. Vanessa Sanders is a chartered accountant with Stanbridge Associates (01522 546606)
DO NOT TRY ANY OF THIS WTHOUT TAKING PROFESSIONAL ADVICE.
All of the above are simplified explanations of some complex matters. If you get it wrong then you will be subject to penalties on the adjustments to your figures and interest on the tax lost to HMRC. These can add in excess of 100% to the overall figure in severe cases and enquiries can stretch back over many years. On a more positive note…
Clearly this remains a tough time for wealthy professionals being squeezed at both ends but the good news is that cider duty has been reduced by 2p per pint which is probably all we will be able to afford to drink!
This guide is produced for general guidance only. As each individual’s circumstances may vary considerably, professional advice should always be sought before taking any action. No responsibility is accepted by the author or the publisher of these guidance notes for actions taken or refrained from being taken as a result of reading this guide.
Tax legislation and interpretation change continuously and hence any guidance is only accurate at the time of going to press.
No investment advice, either financial or legal is given with this guidance. Should you require such advice, please contact a suitably qualified professional adviser.
We do, of course, care about you and the success of your business, hence these disclaimers are there for your protection. The guide is therefore without express or implied warranty and both the author and the publisher cannot accept responsibility for any direct, indirect, special or consequential or other losses or damages of whatsoever kind as a result of using this guide. Back page, as before but adapt last wording and fan of four fronts