fpdteam, Author at Bennetts Accountancy

Using the Annual Investment Allowance

4th August 2022 by fpdteam

The Annual Investment Allowance (AIA) is a generous tax relief that was first introduced in 2008. The AIA allows for the total amount of qualifying expenditure on plant and machinery to be deducted from profits before 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. Only 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. Following the pandemic, this limit has been temporarily increased to £1 million until 31 March 2023.

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.

A claim for AIA must be made in the period the item was bought. This date is defined as the date when a contract was signed – if payment is due within 4 months of the contract being signed – or the actual payment date if it’s due more than 4 months later.

Companies also have the option to claim the super-deduction for purchases of qualifying equipment up to 31 March 2023. As this relief effectively provides a 130% deduction, this would be a better choice under most circumstances. Unfortunately, this super-deduction is only available to companies. The best choice for the self-employed is the AIA.

Source:HM Revenue & Customs| 01-08-2022

Scope of Trade

4th August 2022 by fpdteam

There is no statutory definition of ‘trade’. The only statutory reference to the term is that ‘trade’ includes a ‘venture in the nature of trade’. This absence of a formal definition decides if an activity is a trade more difficult. However, over time the courts have set some established guidance.

It is clear from the significant amount of case law on this subject that a decision on whether there is a trade is a grey area. However, even having established that a trade, or a venture in the nature of trade, exists, the next question to consider is the scope of that trade.

HMRC’s internal guidance on this matter states as follows:

In many cases the nature and extent of a particular trade is never explicitly considered. This is particularly the case where there is no dispute about the nature of the trade, whose scope is implicitly understood and accepted.

However, the scope of a particular trade is fundamental when questions arise concerning:

whether particular receipts are income of the trade,
whether expenditure is incurred wholly and exclusively for the purposes of the trade, or
whether expenditure is capital or revenue for tax purposes.

One trader’s sale, or purchase, of a fixed capital asset may be another trader’s sale, or purchase, of trading stock.

Source:HM Revenue & Customs| 01-08-2022

Using Advisory Fuel rates

4th August 2022 by fpdteam

The easiest way to ensure that no car-fuel benefit charge (for private journeys in a company car) is payable, is to use the advisory fuel rates published by HMRC to repay any private fuel costs to your employer. The advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly.

However, the car-fuel benefit charge will still be payable if it cannot be demonstrated to HMRC that the driver of the car has paid for all fuel used for private journeys, this includes commuting to and from work. To ensure that this does not occur, employees will need to keep a log of private mileage.

The latest advisory fuel rates became effective on 1 June 2022 and the next set will take effect on 1 September 2022. Fuel rates are reviewed four times a year with changes taking effect on 1 March, 1 June, 1 September and 1 December. You can use the previous rates for up to 1 month from the date the new rates apply.

If you have a company car and your employer pays for all your petrol you will need to work out your actual private mileage for 2022-23, multiply this by the appropriate advisory fuel rate, and pay this amount to your employer.

This will avoid being charged the expensive car-fuel benefit – in many cases the tax saved will be more than the amount of your repayment to the employer.

Source:HM Revenue & Customs| 01-08-2022

Tax-free trivial benefits

4th August 2022 by fpdteam

There is a benefit in kind (BiK) trivial exemption that applies to small non-cash benefits like a bottle of wine, or a bouquet of flowers given occasionally to employees or any other BiK classed as 'trivial' that falls within the exemption. By taking advantage of the exemption employers can simplify the treatment of BiKs whilst at the same time offering a tax efficient way to give small gifts to employees.

The trivial benefit rules provide a great opportunity to give small rewards and incentives to employees. The main caveat being that the gifts are not provided as a reward for services performed or as part of the employees’ duties. However, gifts to employees on milestone events such as the birth of a child or a marriage or other gestures of goodwill would usually qualify.

The employer also benefits as the trivial benefits do not have to be included on PAYE settlement agreements or disclosed on P11D forms. There is also a matching exemption from Class 1A National Insurance contributions.

The tax exemption applies to trivial BiKs where the BiK:

is not cash or a cash-voucher; and
costs £50 or less; and
is not provided as part of a salary sacrifice or other contractual arrangement; and
is not provided in recognition of services performed by the employee as part of their employment, or in anticipation of such services.

The rules also allow directors or other office-holders of close companies and their families to benefit from an annual cap of £300. The £50 limit remains for each gift but could allow for up to £300 of non-cash benefits to be withdrawn per person per year. The £300 cap does not apply to employees. If the £50 limit is exceeded for any gift, the value of the benefit will be taxable.

Source:HM Revenue & Customs| 01-08-2022

Duty free limits if you are travelling abroad

4th August 2022 by fpdteam

Here is a reminder of any duty payable and tax-free allowances if travelling abroad this summer.

If you are travelling from outside the UK and arriving home in Great Britain (England, Wales and Scotland), you are allowed to bring the following back to for your own use without any UK tax or duty liabilities.

200 cigarettes or 100 cigarillos or 50 cigars or 250g of tobacco or 200 sticks of tobacco for electronic heated tobacco devices. This allowance can be split, so you could bring in 100 cigarettes and 25 cigars (both half of your allowance).
18 litres of still table wine.
42 litres of beer.
4 litres of spirits or strong liqueurs over 22% volume or 9 litres of fortified wine (such as port or sherry), sparkling wine or other alcoholic beverages of less than 22% volume. This allowance can be split, for example you could bring 4.5 litres of fortified wine and 2 litres of spirits (both half of your allowance).
£390 limit for of all other goods including perfume and souvenirs. If you are lucky enough to be arriving by private plane or boat for pleasure purposes, you can bring in goods up to the value of £270 tax free.

Northern Ireland

There are no limits on tobacco or alcohol brought into Northern Ireland from another EU country. This means that no duties or tax will be payable as long as you can demonstrate that the goods are for your own use and that you paid the relevant taxes and duties on the purchase.

However, HMRC provide the following guidelines as to an acceptable maximum for personal use. If you exceed these limits, you are more likely to be subject to further questioning.

800 cigarettes
200 cigars
400 cigarillos
1kg of tobacco
110 litres of beer
90 litres of wine
10 litres of spirits
20 litres of fortified wine (for example port or sherry).

Source:HM Revenue & Customs| 01-08-2022

Emergency tax codes

28th July 2022 by fpdteam

The letters in an employee’s tax code signify their entitlement (or not) to the annual tax-free personal allowance. The tax codes are updated annually and help employer’s work out how much tax to deduct from an employee’s pay packet.

The basic personal allowance for the tax year starting 6 April 2022 is £12,570 and the tax code for an employee entitled to the standard tax-free Personal Allowance 1257L. This is the most common tax code and is used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

Emergency tax codes can be used if HMRC does not get a taxpayer’s income details in time after a change in circumstances such as:

a new job
working for an employer after being self-employed
getting company benefits or the State Pension

Employees on an emergency tax code will see one of the following codes on their payslip:

1257 W1
1257 M1
1257 X

These codes mean that an employee’s tax calculation is based only on what they are paid in the current pay period. The emergency tax codes are temporary and will usually be updated once the necessary details about previous income or pension payments are sent to HMRC.

Source:HM Revenue & Customs| 24-07-2022

Settlement legislation – non-trust settlements

28th July 2022 by fpdteam

The settlement legislation seeks to ensure that where a settlor has retained an interest in property that the income arising is treated as the settlor’s income for all tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner. In general, the settlements legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved.

However, in most everyday situations involving gifts, dividends, shares, partnerships, etc. the settlements legislation will not apply. For example, if there is no “bounty” or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income.

HMRC’s manuals provide the following two indicative examples of how the legislation applies to non-trust settlements.

Direct gift of shares to minor children

Mr and Mrs X each own 50 of the 100 issued ordinary shares in X Ltd. They each decide to give 10 shares to each of their children aged 12 and 15. The children each then hold 20 shares, 10 from each parent. We would treat the dividends paid to the children as the income of their parents.

Indirect gift of shares from parent

Mr J owns 60 of the 100 issued £1 shares in J Limited. Mr J is the sole company director and is the person responsible for making all the company’s profits because of his knowledge, expertise and hard work. On starting up the company, Mr J allowed his mother to subscribe £40 for 40% of the shares but shortly afterwards she gifted them to her grandchildren. The circumstances are such that the decision to issue 40 shares at par is a bounteous arrangement (as were the shares in Jones v Garnett). The true settlor here is Mr J rather than the children’s grandmother. ITTOIA/S629 therefore applies and attributes the dividends received by the children to Mr J for tax purposes.

Source:HM Revenue & Customs| 24-07-2022

Construction services taxed at VAT zero or 5% rate

28th July 2022 by fpdteam

Whilst most businesses in the UK charge VAT at the standard rate of 20%, there are a number of different VAT rates and exemptions that businesses should be aware of. In the UK, there are three separate VAT rates, the standard rate @ 20%, reduced rate @ 5% and the zero rate @ 0%.

HMRC has published an updated version of their guidance titled VAT rates on different goods and services. The guidance provides a list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT.

The guidance lists the following construction services which can be taxed at the zero or 5% rate.

Taxed at the zero rate:

Substantial reconstructions to protected buildings that are buildings used as a dwelling, for a relevant residential purpose or for a relevant charitable purpose
The installation of a bathroom or lavatory, constructing ramps and widening doorways or passageways for disabled people in their own home
Construction and first freehold or long leasehold sale of a new building for a relevant charitable purpose
Construction and first freehold or long leasehold sale of a new building for relevant residential purposes
Construction and first freehold or long leasehold sale of new domestic buildings
First freehold or long leasehold sale of a commercial building converted into a dwelling or dwellings
First freehold or long leasehold sale of buildings converted for relevant residential purposes
First freehold or long leasehold sale of buildings converted for relevant charitable purposes

Taxed at the reduced rate of 5%:

Converting existing premises by increasing the number of dwellings within the building
Renovating a dwelling that has been empty for at least 2 years

Source:HM Revenue & Customs| 24-07-2022

Business records if self-employed

28th July 2022 by fpdteam

If you are self-employed as a sole trader or as a partner in a business partnership, then you must keep suitable business records as well as separate personal records of your income.

For tax purposes, the business records must be held for at least 5 years from the 31 January submission deadline for the relevant tax year. For example, for the 2020-21 tax year where online filing was due by 31 January 2022 you must keep your records until at least the end of January 2027. In certain situations, such as when a return is submitted late, the records must be held for longer.

If you are self-employed, you should also keep a record of:

all sales and income
all business expenses
VAT records if you’re registered for VAT
PAYE records if you employ people
records about your personal income
grant details if you claimed through the Self-Employment Income Support Scheme because of coronavirus

You don't need to keep the vast majority of your records in their original form. If you prefer, you can keep a copy of most of them in an alternative format, as long as they can be recovered in a readable and uncorrupted format. For example, a scanned PDF document.

If your records are no longer available for any reason, you must try and recreate them letting HMRC know if the figures are estimated or provisional. There are penalties for failing to keep proper records or for keeping inaccurate records.

Source:HM Revenue & Customs| 24-07-2022

Tax relief on replacement of domestic items

28th July 2022 by fpdteam

The replacement of domestic items relief has been in place since April 2016. The relief allows landlords the ability to claim tax relief when they replace movable furniture, furnishings, household appliances and kitchenware in a rental property. The allowance is available for the cost of domestic items such as free- standing wardrobes, curtains, carpets, televisions, fridges and crockery.

The amount of the deduction is based on:

the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent), plus
the incidental costs of disposing of the old item or acquiring the replacement,
less any amounts received on disposal of the old item.

There is an important distinction to note if deciding if a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s internal guidance provides an example highlighting the fact that a brand new budget washing machine costing circa £200 is not an improvement over a 5 year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation).

Also, if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.

Source:HM Revenue & Customs| 24-07-2022