The rules for deciding whether a gift given in the course of business is deductible are complex. The rules for business gifts generally follow those for business entertaining expenditure. This means that HMRC take the view that in general business gifts are not an allowable deduction from profit for tax purposes.

However, there are exceptions to this rule. Where the following exceptions apply, the expenses incurred in providing the gift are deductible from trading profits. The exceptions are where:

• the gift is of an item which it is the trader’s trade to provide and it is given away in the ordinary course of the trade to advertise to the public
• the gift incorporates a conspicuous advertisement for the trader, although there are exclusions relating to the type of gift and the total amount per person
• the gift is provided to the employees of the trader so long as this is not incidental to gifts being provided to others
• the gift is given to charity or other specific bodies.

HMRC is clear that in some instances, something that appears to be a gift may actually be a part of a sale to a customer. HMRC’s manuals provide the example of a bunch of flowers presented to a customer who has just purchased a new car would effectively have been paid for by the customer – it is a part of the cost of the car. Similarly, gifts offered to customers who purchase a certain level of goods are really discounts on sale and not business gifts. Gifts of this nature are not disallowed by the legislation.

The 1,25% increase in NIC contributions from April 2022 will be mirrored by a similar increase in the tax charge on dividends. From April 2022, the dividend tax increases will apply as follows:

• Basic rate taxpayers will see an increase from the present 7.5% to 8.75%.
• Higher rate taxpayers will see an increase from 32.5% to 33.75%.
• Additional rate taxpayers will see an increase from 38.1% to 39.35%.

This change will apply UK-wide. It will be scored at the Budget and legislated for in the next Finance Bill.

Dividend tax is charged on taxable dividend income an individual receives that falls outside of the personal allowance (£12,570 in 2021-22) and the dividend allowance (£2,000 in 2021-22). Taxable dividend income excludes, for example, dividends on assets held in ISAs.

Affected basic rate taxpayers are expected to pay, on average, an additional £150 on their dividend income in 2022-2314 . Affected higher rate taxpayers are expected to pay, on average, an additional £403 on their dividend income in 2022-23. Additional and higher rate taxpayers are expected to contribute over 70 per cent of the revenue from this increase in 2022-23.

There are special rules for the taxation of post-cessation receipts and expenses after a trade has ceased. These provisions also apply to professions and vocations as they apply to trades.

Tax relief may be available for post-cessation expenses of a trade, although expenses still have to satisfy the wholly and exclusively test and be revenue in nature in order to qualify for relief. In order to be an allowable post-cessation expense, the trade must have ceased and the expense would have been deductible in calculating the trading profits. Post-cessation expenses must be set against post-cessation receipts arising in the same period as the expense before any other method of relief can be considered.

There are a number of different ways in which post-cessation expenses can be relieved These depend on the person incurring the expenditure and the type of expenditure incurred. An expense specifically relating to the cessation itself is not an allowable expense.

When deciding whether an expense is allowed or disallowed it is important to consider that the expenditure must be incurred wholly and exclusively for the purposes of your trade or employment. 

Under the legislation any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation should be disallowed. HMRC takes a slightly more relaxed view that a strict reading of the legislation would suggest. 

One of the main points HMRC examines when considering the application of the ‘wholly and exclusively’ test relates to apportionment and duality.

In this regard, HMRC’s internal manuals state that:

When you consider the application of the ‘wholly and exclusively’ test, it is important that you distinguish between cases where:

1. a definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation. That part or proportion should not be disallowed on the ground that the entire expense is not laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation,
2. an expense has been incurred for a dual purpose. Such expenditure should be disallowed.

For example, when considering the running costs of a car used partly for the purposes of the trade and partly for other purposes, HMRC’s position is that the costs apportioned to the business use of the car would be deductible. 

The cash basis scheme helps sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. Landlords can use the cash basis when recording income and expenditure i.e., recording the flow of money from and to the business.

The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and you can stay in the scheme until your business turnover reaches £300,000.

Unlike other taxpayers that need to opt-in to use the scheme, the legislation assumes that landlords will use the cash basis as the default method of calculation. A landlord can still elect to opt out of the scheme in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. Landlords are also required to continue using GAAP if their rental receipts are more than the £300,000 scheme threshold.

HMRC’s property income manual lists the following criteria of when the cash basis is not available to a property business. 

A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).

B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.

C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.

D: Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.

E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

When deciding whether an expense is allowed or disallowed for tax purposes it is important to bear in mind that the expenditure must be incurred wholly and exclusively for the purposes of your trade or employment.

Under the legislation any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation should be disallowed. Interestingly, HMRC takes a slightly more relaxed view than a strict reading of the legislation would suggest.

HMRC’s own internal manuals offers advice to HMRC inspectors to exercise care when applying the ‘wholly and exclusively’ test. The advice states that where there is an incidental benefit that does not, of itself, mean that the expenditure is disallowed.

The following example helps clarify this point.  A self-employed consulting engineer may travel to exotic locations to advise on projects. The travel and the exotic locations may be benefits but where there was no private purpose they are incidental to the carrying on of the profession and the cost is allowable.

It is also possible to apportion part of an expense where necessary. For example, when considering the running costs of a car used partly for the purposes of the trade and partly for other purposes.  HMRC’s position is that the costs associated with the business use of the car would be deductible.

Directors that have drawn remuneration from their companies as a mix of low salary and higher dividends would seem to be overlooked by the schemes announced in the past two weeks to support the employed and the self-employed.

In the first news story published by government announcing the Self-Employed Income Support arrangements (26 March 2020), the following paragraph was inserted:

“Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes”. 

On this basis, the only financial support that directors could claim is the Job Retention Scheme. This will be based on their salary – not salary plus dividends – and only if they furlough themselves (play no active role in their businesses). It is likely that a director's statutory responsibilities will not count as work if a claim under the Coronavirus Job Protection Scheme is made.

HMRC’s guidance lists the following useful examples about a change of accounting date:

If your accounting date in 2016 to 2017 is more than 12 months after the end of the basis period for 2015 to 2016, your basis period is the period between the end of the basis period for 2015 to 2016 and the new accounting date.

For example, your basis period for 2015 to 2016 ended on 31 May 2015, and the new accounting date is 31 August 2016, your basis period is the 15-month period 1 June 2015 to 31 August 2016.

If your accounting date in 2016 to 2017 is less than 12 months after the end of the basis period for 2015 to 2016, your basis period is the 12 months ending on the new accounting date.

For example, your basis period for 2015 to 2016 ended on 31 December 2015 and the new accounting date is 31 July 2016, your basis period is the 12-month period 1 August 2015 to 31 July 2016, see ‘Overlap profits’, below.

If your new accounting date is 31 March or 1, 2, 3 or 4 April, see Accounting dates in the period 31 March to 4 April below.

In the first example, above an overlap occurs because of the change in accounting date. A portion of profits is effectively taxed twice, this is known as overlap profit. Overlap profits relief can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period changes but the ideal scenario would usually be not to create the overlap in the first place.

The Annual Investment Allowance (AIA) allows business owners to claim the total amount of qualifying expenditure on plant and machinery, up to certain limits. This deduction reduces profits subject to tax.

The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let business. Please note, that partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.

The AIA was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. However, this limit was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020. This increased limit is a generous allowance and should cover the annual spend of most small and medium sized businesses. 

The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

There is now just three months left until the end of the tax year. If you are thinking of incurring large items of capital expenditure for your business, now is a good time to consider your investment options.

It is important to be aware of the main basic business structures available if you are considering starting a new business. There are three commonly used forms of business structure.

• A sole trader – this is the simplest way of starting and running a business. However, you are personally responsible for your business’s debts. You also have accounting responsibilities.
• A limited company – the business is quite separate to you as a person, but there are more reporting and management responsibilities. In most cases you will not be personally liable for business debts, but it also means that you cannot draw money from the business whenever you feel like it without generating tax issues.
• Partnership – There are two main types of partnership, a conventional version where you work with one or more partners in the business. This is the simplest way to run a business for 2 or more people. There is also a limited liability partnership or LLP, This more complex structure provides you and your partners with the protection of limited liability, much like a limited company.

Which business structure is best suited to your new business will depend on a number of factors. For example, cash flow, your longer-term plans for the business, whether or not you need the protection of limited liability, your willingness to comply with legal and administrative obligations of companies and LLPs and the nature of any investment you are seeking to capitalise the business.

Planning before you make a start is essential. Please call if you would like to discuss your options. Getting it wrong can be a painful and costly experience.