Mortgage interest on rented property

Posted on 5th May 2022 by Solutions Accountancy

Under new rules that came into effect from April 2017 the tax relief on mortgage costs for residential landlords was restricted to the basic rate of tax. The finance costs restriction was phased in over a number of years and is now fully in place since 6 April 2020. This means that all finance costs, such as mortgage interest on rented properties, are disallowed as expenses and any tax relief is restricted to the basic rate of tax (20%) tax reduction.

The definition of finance costs include interest on mortgages, loans – including loans to buy furnishings and overdrafts as well as alternative finance returns, mortgage fees and other costs and discounts, premiums and disguised interest. No relief is available for capital repayments of a mortgage or loan.

These changes have affected many higher rate and additional rate taxpayers and particularly those with highly leveraged properties, i.e., loans form a significant part of property values. The rules also mean that relevant taxpayers are pushed into paying higher tax rates than previously was the case. This could mean losing some or all of their personal allowances as well as restricting the amount of tax relief on money invested in their pension.

The finance cost restrictions apply if you are a UK resident individual that lets residential properties in the UK or overseas, a non-UK resident individual that lets residential properties in the UK or if you are involved with a partnership that lets properties or are a trustee or beneficiary of a trust liable for Income Tax on the property profits.

Interestingly, landlords of furnished holiday lettings are not affected by the restriction on finance costs.

Builders – when you may not have to charge VAT

Posted on 5th May 2022 by Solutions Accountancy

VAT for most work on houses and flats by builders and similar trades, like plumbers, plasterers and carpenters, is charged at the standard rate of 20%. However, there are a number of exceptions where special VAT rules apply and a reduced or zero rate of VAT may apply.

A builder may not have to charge VAT (zero rate) on some types of work if it meets certain conditions, including:

building a new house or flat
work for disabled people in their home

A builder may be able to charge the reduced rate of 5% for some types of work if it meets certain conditions, including:

installing energy saving products and certain work for people over 60
converting a building into a house or flats or from one residential use to another
renovating an empty house or flat
home improvements to a domestic property on the Isle of Man

There are also special VAT rules for work on certain types of buildings that are not houses or flats, including approved alterations and substantial reconstructions to protected buildings and converting a non-residential building into a house or communal residential building for a housing association.

In addition, there are certain other types of communal residential building that builders do not have to charge VAT. These include children’s homes, residential care homes, hospices and student accommodation.

In all cases, it is the supplier’s responsibility to charge VAT correctly and to ensure they hold proper evidence to support the fact that a customer is eligible for a supply at the reduced or zero VAT rate.

Tax benefits of switching to electric cars

Posted on 5th May 2022 by Solutions Accountancy

There are many benefits to encourage the use of electric cars including lower running costs, the environmental advantages and reduced noise pollution. There are also tax benefits to encourage the purchase of electric cars.

We have listed some of these benefits below.

The benefit-in-kind (BIK) due on company cars can be significantly reduced. For example, most electric cars will incur a BIK rate of only 2% in 2022-23. Compare this with the benefit charge for a gas-guzzler pumping out 160 g/km or more of CO2 which would be based on 37% of the list price when new. This means that company car drivers who switch to an electric car should see their tax bill significantly reduced. This also benefits employers who may see a significant decrease in Class 1A National Insurance charges.

Businesses purchasing electric cars can expect to recover more of their investment in direct tax relief. For example, businesses can write-off 100% of the cost of an electric vehicle against the profits of the year of purchase and there are no restrictions on the value of the vehicle. The car must be new and unused to qualify for the 100% relief.

Companies can also benefit from the super-deduction, which offers 130% first-year allowance on qualifying electric charging points for cars and vans. To qualify for the relief the company must use the charging point in their own business. This relief is available until 31 March 2023.

The road tax, or Vehicle Excise Duty (VED) rates for all fully electric vehicles have been reduced to £0 until at least 2025. There are reduced VED rates for plug-in hybrid electric vehicles (PHEVs).

There is no benefit-in-kind charge for the private use of a company van if the private mileage is insignificant. If the van is an electric vehicle, there is no benefit-in-kind charge even if the private mileage is significant.

There are also other benefits including an EV charge-point grant that provides funding of up to 75% towards the cost of installing electric vehicle smart charge-points, up to a maximum of £350 (including VAT) per household/eligible vehicle. Electric cars are also exempt from the London congestion charge when applying for a Cleaner Vehicle Discount.

Writing off a director’s loan

Posted on 5th May 2022 by Solutions Accountancy

An overdrawn director's loan account is created when a director (or other close family member) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay for personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the director’s loan account (DLA).

The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create some unwelcome consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 as interest must be charged and be reported on the directors’ personal Self-Assessment tax return.

There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company. If this happens, the company must deduct Class 1 National Insurance through the company’s payroll. The director will be required to pay Income Tax on the loan through their Self-Assessment tax return.

Exchange of joint interests

Posted on 5th May 2022 by Solutions Accountancy

HMRC’s internal manuals consider the reliefs available where there is an exchange of joint interests in land.

The manuals state that:

The exchange of interests in land which are jointly owned by two or more persons constitutes a disposal by each owner for Capital Gains Tax purposes. In some cases, the exchange is made simply to rationalise the ownership of the land and to make it easier to deal with. The exchange may give rise to a charge to Capital Gains Tax or Corporation Tax on Chargeable Gains, and this is the case even where no money changes hands.

An Extra-Statutory Concession (ESC) – ESC/D26, published in 1984 provided relief in relation to these types of disposals but was withdrawn in April 2010. The ESC was replaced by a modified relief for exchanges on or after 6 April 2010. This relief is provided by way of TCGA1992/S248A-E in the form of roll-over relief in certain circumstances to facilitate rearrangements of holdings of land.

There are five separate conditions that must be met to claim roll-over relief under the applicable legislation. Where the relevant conditions are met then a landowner can make a claim for roll-over relief.

IHT business asset relief

Posted on 5th May 2022 by Solutions Accountancy

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who had died. One of these reliefs is known as Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
50% Business Relief can be claimed on:
– shares controlling more than 50% of the voting rights in a listed company
– land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
– land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

Reclaiming VAT

Posted on 28th April 2022 by Solutions Accountancy

For most fully taxable businesses, VAT can be reclaimed on goods and services used in the course and furtherance of their business activities. This means that businesses must consider where there is personal or private use of goods or services bought for the business and can usually only reclaim the business proportion of any VAT charged.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use.

You cannot reclaim VAT for:

anything that is only for private use;
goods and services your business uses to make VAT-exempt supplies;
business entertainment costs;
goods sold to you under one of the VAT second-hand margin schemes;
business assets that are transferred to you as a going concern.

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their activities using a 'partial exemption method' in order to calculate how much input tax is recoverable.

Tell HMRC if your company is dormant

Posted on 28th April 2022 by Solutions Accountancy

If a company has stopped trading and has no other income, then the company is usually classed as dormant for Corporation Tax purposes.
A company is usually dormant for Corporation Tax if it:

has stopped trading and has no other income, for example investments
is a new limited company that hasn’t started trading
is an unincorporated association or club owing less than £100 Corporation Tax
is a flat management company.

There is a special online form that can be used to advise HMRC if a company is dormant. The form can be found at www.gov.uk/tell-hmrc-your-company-is-dormant-for-corporation-tax. In order to complete the form, you will need the company’s name, 10-digit Unique Taxpayer Reference (UTR) and the date the company ceased trading.

HMRC can also send a notification if they think a company is dormant. This notice will state that a company or association is dormant and is not required to pay Corporation Tax or file Company Tax Returns.

Limited companies are still required to file annual accounts and a confirmation statement even if the company is dormant for Corporation Tax and dormant according to Companies House. A company defined as 'small' by Companies House can instead file 'dormant accounts' and does not have to include an auditor’s report.

A company can stay dormant indefinitely, however there are costs associated with this option. This might usually be done if for example a company is restructuring its operations or wants to retain use of a company name, brand or trademark.

Check which EORI number is required

Posted on 28th April 2022 by Solutions Accountancy

The Economic Operators' Registration and Identification System (EORI) was setup as a European Union (EU) wide initiative that helps businesses communicate with customs officials when they are importing and exporting goods. The EORI allows businesses to provide pre-arrival/pre-departure information for goods.

Following the end of the Brexit transition period, businesses in the UK are still required to hold an EORI number for the movement of goods in the following scenarios:

between Great Britain (England, Scotland and Wales) or the Isle of Man and any other country (including the EU)
between Great Britain and Northern Ireland
between Great Britain and the Channel Islands
between Northern Ireland and countries outside the EU

Which type of EORI number you need and where you get it from depends on where you’re moving goods to and from. You may need more than one. If you move goods to or from Great Britain, you must get an EORI number that starts with GB. Most are then followed by a 12-digit number based on the businesses VAT number.

You may also need an EORI number starting with XI if you move goods to or from Northern Ireland. If a business will be making declarations or getting a customs decision in the EU, then they may need an EU EORI number from an EU country.

PAYE settlement agreements

Posted on 28th April 2022 by Solutions Accountancy

A PAYE Settlement Agreement (PSA) allows employers to make one annual payment to cover all the tax and National Insurance due on small or irregular taxable expenses or benefits for their employees.

The expenses or benefits included in a PSA must belong to one of the following categories;

minor – e.g., a small birthday present
irregular – e.g., one-off relocation expenses over £8,000 (these are tax-free below £8,000)
impracticable (difficult to work out the value of or divide up between individual employees) – e.g., shared cars or taxi journeys.

Employers that are required to notify HMRC of the value of items included in a PAYE settlement agreement (PSA) must do so using form PSA1. The deadline for applying for a PSA for 2021-22 is 5 July 2022.

A PSA agreement will continue until either the employer or HMRC cancels the agreement or if changes are required. Employers do not need to renew the PSA each tax year.

The deadline for an electronic payment for a PSA for the year ended 5 April 2022 – to clear into HMRC’s bank account – is 22 October 2022. Employers that pay by cheque must ensure that the payment reaches HMRC’s Accounts Office by 19 October 2022. There may be interest and / or a late payment penalty due where the payment is made late.