TIPS & ADVICE Tax
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PENALTIES
New late payment fines
HMRC has finished consulting on draft regulations for changes to its new system for late payment penalties. Why is the change needed and who will it affect?
Penalty system reform. Several years have passed since the previous government announced a reform of tax penalties. While some changes have been implemented, it took until May 2024 for HMRC to address one or two key practical issues where a second penalty is chargeable.
Which taxes? The new penalty system affects income tax, capital gains tax and VAT. It has applied to VAT payments since January 2023 but, with one exception, is yet to affect the other taxes. The new regulation, when it becomes law, will therefore immediately affect VAT payments.
When will they apply? For most taxpayers the new rules aren’t scheduled to apply until April 2026. However, HMRC brought forward the regulations so that it can apply them to those who sign up for the Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) voluntary trial before April 2026 (see The next step).
First penalty. Under the new system a penalty (the “first penalty”) is triggered if you don’t pay all the tax you owe within 15 days of when it’s due. For self-assessment (including those using MTD ITSA) the due dates are 31 January and 31 July. The first penalty is 2% of the tax outstanding after day 15. If any of this tax is still unpaid after day 30, another first penalty of 2% applies. After that a second penalty accrues at 4% per annum on tax still owing (see The next step).
Second penalty. The second penalty is at the centre of the new regulations. These say that HMRC must charge the second penalty within two years of the tax due date. However, the wording of the regulation created a loophole which meant that anyone who hadn’t paid their tax by the time the two-year limit was reached would escape the second penalty altogether. The new regulations close this loophole.
The next step
For a link to information on the MTD ITSA trial and for more information on how the penalties will work, visit https://www.tips-and-advice.co.uk, code TATX25DB01.
› The new regulation closes a loophole that meant someone could escape a penalty by delaying payment of tax beyond two years. The new regulations apply immediately to VAT and anyone using MTD for Income Tax Self-Assessment.
Directors’ remuneration - avoiding HMRC penalties
The timing of HMRC payroll reporting for employees is straightforward. However, for directors’ salaries etc. special rules can mean you need to send a report to HMRC sooner than you might think. What are the trigger points for reporting?
Employees’ pay
As an employer you must send a report with details of pay, tax and NI to HMRC whenever you pay one or more employees cash earnings, e.g. salary or bonus. If you don’t send your payroll report on time more than once in a tax year HMRC will fine you. For employees a report is required when you actually pay them or, if earlier, when they are entitled to a payment. Things are less straightforward for directors’ pay.
Directors’ pay
An anti-avoidance rule applies to prevent companies from delaying PAYE and obtaining a corporation tax deduction for directors’ earnings. The rule says that a director is treated as having been paid on the earliest of:
1. The date when earnings are “credited” in the company’s accounts or records whether or not there is any restriction placed on the director from drawing the money, or
2. If the amount of pay is determined before the end of the company’s accounting period to which they relate, the date that period ends, but 3. If the amount of the earnings is decided after the end of the company’s accounting period to which they relate, when the amount is determined.
Example - credited in the company’s records. Acom Ltd’s financial year ends on 31 December. Without any formal resolution to set the director’s rate of pay it pays each director £6,000 per month. This is noted in the company’s accounting records on the last working day of each month. In this instance the remuneration is treated as paid and
received on that day.
Example - decided during the financial period. In a board meeting on 31 October 2024 Acom’s directors pass a resolution to pay themselves a bonus for the year ended 31 December 2024 to be payrolled on 31 January 2025. The payroll manager credits the director’s loan account on 27 January 2025. Rule 1 above doesn’t apply but Rule 2 does as the bonus was approved in the financial period to which it relates. It therefore counts as paid on 31 December 2024. A PAYE report should be sent to HMRC that day. Tip. Contrary to what you might have heard, the passing of the resolution isn’t caught by Rule 1. The passing of a resolution or any other form of approval of a director’s pay doesn’t count as being “credited” in the company’s records (see The next step).
Example - decided after the financial period. The facts are the same as for the previous example except that the directors only pass the resolution about the bonus on 21 May 2025 when they approve the company’s accounts for the year to 31 December 2024. The bonus counts as paid on 21 May 2025 and so the company’s payroll manager must send a corresponding payroll report to HMRC at that time. Tip. Even though the bonus was paid after the end of the accounting period, as long as the liability to pay it was accrued before that time, Acom can claim a corporation tax deduction for it in its accounts to 31 December 2024.
The next step
For a link to HMRC’s internal guidance on the timing of directors’ remuneration, visit https://www.tipsand-advice.co.uk, code TATX25DB01.
› Payroll reporting of directors’ pay is required on the earlier of when the pay is recorded in the company’s records, e.g. credited to the director’s loan account, the end of the accounting period to which the pay relates and the date when the directors determine the amount of pay. Failure to report on time more than once in a tax year will trigger a financial penalty.
Make your mortgage interest tax deductible
A friend has told you that his accountant was able to get him tax relief for his home mortgage interest. As relief for this type of interest ended decades ago, how was it possible and might you be able to do the same?
Home loans
It’s been around 30 years since tax relief was allowed for interest on loans used to buy or improve your home. This tax break would come in handy right now with mortgage rates still running high. The good news is that it might be possible if, e.g. you own shares in a private company.
Tips & Advice Tax Memo
For detailed commentary on qualifying loans, visit https://www.tips-and-advice.co.uk, code TATX25DB01.
Company owners
Tax relief is allowed for interest paid on a loan to buy shares in or provide working capital for a close company (broadly, one that’s controlled by five or fewer individuals). The main condition for relief is that the company doesn’t exist to mainly hold investments. You must also work full time or own at least 5% of its ordinary share capital. Tip. If you and your spouse or civil partner together own 5% of a company’s ordinary share capital, the condition is met.
Refinance
Where all the loan conditions are met you’ll need to rearrange your finances so that you reduce the amount of borrowing relating to your home purchase and correspondingly increase that relating to funding ownership of some or all of your company shares or your company’s working capital. Example. Jack owns 15% of the ordinary shares in Acom Ltd worth around £350,000. He is a full time director of Acom. Jack’s spouse Gill also owns 15% of Acom’s ordinary shares. Their home is worth £500,000, on which they owe £140,000 on a
joint mortgage loan. At the current rate the interest payable on the loan is approximately £7,000 per year. Jack and Gill take the following steps:
• they take a second mortgage on their home for £140,000
• Jack uses the money to buy some of Gill’s shares in Acom to the value of £140,000. He pays the interest on the whole loan. Note that there’s no capital gains tax for Gill to worry about because of the special rules which apply to transfers of assets between spouses and civil partners
• Gill uses the £140,000 received from Jack to repay their original mortgage.
No tax relief to full tax relief
Before the refinancing Jack and Gill owed £140,000 on a home loan. After the refinancing they still owe £140,000 on a mortgage but the purpose of the loan is now to purchase shares in Acom. As a result, Jack is entitled to claim tax relief on the interest he pays. If the interest in the twelve months following the refinancing is, say, £7,000, the tax saving (assuming Jack is a higher rate taxpayer) is £2,800 (£7,000 x 40%). And if the interest over the remaining mortgage term is £50,000, the total tax saving will be £20,000.
In practice
To put the plan into action Jack and Gill might need to obtain valuations of Acom’s shares and their home. Plus they’ll have to pay legal fees for the remortgage and stamp duty at 0.5% on the purchase of shares by Jack from Gill, i.e. £700. However, the tax saving more than makes up for the extra admin and relatively small costs.
› Tax relief is possible if you and your spouse or civil partner own shares in a private trading company. Take a second mortgage on your home and use the money to buy shares from your spouse/civil partner. The interest payable on the loan can qualify for tax relief. Your spouse/civil partner can reduce the original mortgage with the money received from you.
Creating a home office tax efficiently
You want to erect a cabin in your garden to use as a home office. You and your family will also use it for private purposes. Will it be more tax efficient for you or your company to pay for it?
No tax exemption
If your company provides you with as asset, e.g. a computer, solely for the purpose of work to use when you’re away from your normal workplace it isn’t a taxable benefit in kind. This exemption applies even if there’s private use as long as it’s not significant. Consequently, if the private use is significant there is a taxable benefit in kind.
How much tax?
The taxable amount depends on two factors: the cost of providing the asset and any additional expenses, e.g. for maintenance of the asset.
Example. Carol is an owner manager of Acom Ltd. She wants to spend less time commuting and so arranges for Acom to pay for a fancy garden office so she can work at home. It pays £25,000 for the installation. The taxable benefit is 20% of this, i.e. £5,000 each year. Assuming the structure is used for 15 years Carol will be taxed on a whopping £75,000. In addition, Acom pays Class 1A NI on the same amount. If Carol is a higher rate taxpayer throughout the 15 years, and assuming the tax and NI rates stay as they are, the tax and NI cost would be £40,350 ((£75,000 x 40%) + (£75,000 x 13.8%)).
Alternative tax charges
If in our example Acom rented or leased the structure, the taxable benefit in kind for any year will not be 20% of its cost but the amount of rent etc. paid by Acom. Carol pays for lighting and heating the office personally. If Acom paid these costs it would increase the taxable benefit. Despite this it could be more tax and NI efficient for Acom to pay them. We’ll look at this in another article.
Reduction for unused periods?
Some days Carol won’t use the garden office at all. The bad news is that this doesn’t reduce the taxable benefit. The benefit applies to any day where the office is “available” for private use, even if it’s not used. Unless Acom is able to prevent its use, the garden office will always be available.
Reduction for business use?
The tax rules for employment income include various exemptions and deductions relating to benefits in kind where there is business use associated with the benefit. We’ve already mentioned one which applies where private use of a benefit is insignificant. However, in our example, the private use is significant so the exemption cannot apply. Also, while a reduction in the taxable amount is allowed where there’s business use of some types of benefit, this rule doesn’t apply to use of an employer-owned asset.
More tax-efficient alternative
The long-term use of employer-owned assets can result in a disproportionate tax and NI bill.
Tip. Rather than making an asset available to a director or employee for long-term use, the NI cost can be reduced if a dividend is paid. In our example, the tax cost to Carol would be just under £15,300 with no NI for Acom to pay. Even though Acom will lose corporation tax relief on the cost of the asset (up to £7,500), the overall tax bill is far less. When providing use of an asset always consider the tax and NI cost over the expected period for which it will be used.
› If private use of the home office is significant, an annual taxable benefit will apply equal to 20% of the cost of the office. Over many years the resulting tax and NI can easily exceed the original cost of the asset. It would be more tax and NI-efficient for your company to pay you a dividend to enable you to purchase it.
Why your tax code is now more important than ever
The amount of tax you pay on your salary depends on your tax code. If it’s wrong you’ll pay too much or too little. For many this can be a temporary issue, for others it can be permanent. What’s the problem and what can you do about it?
PAYE
The PAYE system celebrates its 80th birthday this year. Depending on your point of view that may or may not be a cause for celebration. Either way, the PAYE basics are the same today as they were when it was introduced. For example, your tax code tells your employer how much of your salary is tax free and the tables show the rates of tax that apply. The tax code is where trouble can start.
Codes and the end of year review
A key feature of the PAYE system is the end-ofyear review carried out by HMRC. These days it’s done automatically by its National Insurance and PAYE Service (NPS) computer. It compares the tax you paid through PAYE with what it expects to see based on the tax code HMRC thinks should have been used. If there’s a discrepancy it marks your record for manual review. Conversely, if the code matches and the PAYE tax paid corresponds with it, the NPS calls it good and moves on even if your tax code was wrongly calculated.
NPS assumptions
The NPS assumes that HMRC officers have calculated your tax code correctly despite there being countless reasons why this might not be so. To be fair, incorrect codes are often not the fault of HMRC as it calculates your code from information about your income and tax-allowable outgoings provided by you and your employer. However, it’s not uncommon for HMRC officers to interpret information incorrectly or simply make a mistake that results in the wrong tax code. The frequency of errors has increased significantly in recent years.
Trap. If the information HMRC has about your
income and tax reliefs, e.g. job expenses, pension contributions, savings interest etc., is out of date your tax code is likely to be wrong. However, the NPS will not (cannot) identify this. It’s therefore up to you take the lead and notify HMRC of changes needed to your code (see The next step).
Tip. If you’re in self-assessment you needn’t worry too much about tax code errors. These are superseded by your self-assessment tax calculation which will pick up any over or underpayments of PAYE tax. However, it’s sensible to notify HMRC of any significant errors in your code.
HMRC delays
Sadly, over the years HMRC has reduced its number of properly trained officers. The effect is that even if you notify HMRC that you are owed tax or that you owe it, you’ll be told that there is no need for a manual review of your tax and it will be done automatically by the NPS later in the year. This usually takes place in August and September. Frankly, this isn’t acceptable. If you’ve overpaid tax why should you wait months to obtain a refund? What’s more, as we’ve already mentioned, the NPS can’t definitively check if your code is right, consequently it will not pick up over or underpayments caused by coding errors.
Take action. The lesson here is that unless you complete a self-assessment tax return you need to pay special attention to checking your tax code and notify HMRC of any changes needed. If you don’t you might miss out on a tax refund or find yourself landed with an unexpected tax bill.
The next step
For our guide to tax code adjustments and how to get them, visit https://www.tips-and-advice.co.uk, code TATX25DB01.
› HMRC officers frequently make mistakes when calculating tax codes. HMRC’s automated annual review system can’t detect these without information provided by you. Always check your code for out of date or unwarranted adjustments and notify HMRC as soon as possible. Use our tax code guide to help identify errors.
Benchmark subsistence rates - are they worth it?
As an employer you don’t want to waste valuable time on avoidable admin tasks such as processing scores of expenses claims for employees’ subsistence claims. Might benchmark rates be a viable alternative?
Subsistence
As an alternative to reimbursing your employees’ subsistence costs, which might run into a long catalogue of snacks, caffeine, congestion charges etc., you can instead pay them tax and NI-free amounts at HMRC’s benchmark rates of up to £25 per day. This avoids the need to obtain receipts for tiny amounts of expenditure and can even be a useful tax-free perk to offer employees. Tip. You don’t have to use benchmark rates for every employee or for each business trip and the payments don’t have to be declared on Form P11D Trap. Benchmark payments can’t be used with a salary sacrifice arrangement, i.e. paying employees the tax and NI-free benchmark payments in lieu of salary.
Conditions
The benchmark rates can be paid in respect of an allowable business journey during the day only, when the following qualifying conditions are met:
• the travel is in the performance of an employee’s duties or to a temporary place of work
• the employee is absent from the normal place of work or home for a continuous period of at least five hours; and
• the employee incurs the cost of a meal (meaning food and drink) after starting the journey.
Tip. There is no minimum spend for the meal and the employer doesn’t have to verify how the whole subsistence payment is spent. Trap. The benchmark rates don’t cover meals consumed at home, ingredients purchased to make a meal, or meals provided on a training course or at a conference. The benchmark rates are:
• £5 where the business trip lasts at least five hours in a day
• £10 if it lasts at least ten hours
• £25 if it lasts at least 15 hours and ends after
8.00pm
• £10 supplementary rate where either the £5 or £10 rate is paid and the trip ends later than 8.00pm.
Valid expense?
Rather than having to check all the details, you are only required to ensure that qualifying travel is undertaken and be certain that no one could have reasonably suspected otherwise, i.e. there is an implicit level of trust involved. Typical supporting evidence that a meal expense has actually been incurred might include a diary of establishments visited or a credit card statement.
Example. Ken is meeting a client over 100 miles away at 6.00pm, so he leaves the office at 3.30pm. He arrives home, direct from the meeting, at 10.00pm. You can pay him £15 tax and NI free, as the trip exceeds five hours and ends after 8.00pm.
Tip. An employer may choose to pay blanket higher rates, but the excess will be liable to tax and NI unless covered by a bespoke arrangement with HMRC or an industry-wide working agreement (see The next step).
Is it enough?
As these rates haven’t been increased since their introduction years ago, they don’t cover very much given the recent inflationary pressures. Employees can make a specific claim to HMRC for any shortfall where they keep receipts (see The next step), although they will be better off if you make full reimbursement, which of course is deductible against profits.
The next step
For links to HMRC’s information on working agreements and claiming relief for expenses, visit https://www.tips-and-advice.co.uk, code TATX25DB01.
› There’s no need to ask for HMRC’s permission before paying the benchmark rates. However, as they’re not exactly generous, it might be fairer to reimburse your employees’ actual costs where the rates are inadequate as long as the necessary evidence is retained.
Selling a holiday home - what about the VAT?
Our subscriber owns a cottage which he lets as holiday accommodation. He plans to redecorate, make minor improvements and then sell the property. Can he reclaim the VAT on these costs and, if so, how will it affect the VAT position when he sells?
What is a holiday let?
Before we dive into our subscriber’s question it’s worth understanding the general position regarding VAT and holiday lets. Like direct taxes, VAT has special rules relating to the letting of holiday accommodation. However, unlike direct tax, what counts as holiday accommodation doesn’t rely on the number of days a property is let or is available for letting. Instead, letting is holiday accommodation if you advertise or promote it as such. This means you must charge VAT if appropriate.
Tips & Advice Tax Memo
For detailed commentary on VAT on holiday accommodation, visit https://www.tips-and-advice. co.uk, code TATX25DB01.
Charging VAT
Like any other VATable supply you only need to charge your customers VAT if you’re registered. If holiday letting is your only VATable activity then you only need to register if the value of your supplies exceeds the registration threshold (£90,000 since 1 April 2024) in the previous twelve months, or in the next 30 days alone. Currently, our subscriber isn’t required to be registered.
Trap. The registration threshold applies to the aggregate of all your VATable supplies. For example, if you own a business which had a turnover of £85,000 in the last twelve months and your holiday letting income was £12,000 for the same period, you should have applied for registration no later than 30 days from the end of the month in which the threshold was reached.
Tip. Where the value of your VATable supplies is less than the threshold, you can register for VAT voluntarily. This allows you to recover VAT paid on expenses subject, of course, to the normal rules.
Reclaiming VAT
Our subscriber’s only other income, apart from some savings interest, is his salary from employment, but because he lets his holiday home he’s entitled to register voluntarily.
Tip. As a bonus he can recover VAT paid on any expenses incurred in the letting business prior to registering for VAT. Naturally, there are conditions:
• for services, e.g. advertising, letting agency fees, cleaning costs, only VAT incurred in the six months prior to registration can be reclaimed
• for goods, VAT can be reclaimed on all purchases that were on hand at the date of registration. For example, furniture and soft furnishings, as long as they were acquired for the business. VAT paid on items purchased for private purposes cannot be reclaimed even if the items were in use at the date of VAT registration.
Selling the property
Assuming our subscriber goes ahead with registration there’s more good news if and when he decides to sell the property. The VAT rules specifically exempt the sale even where it’s been used to make supplies of VATable holiday accommodation. What’s more, there’s no adjustment required to pay back any of the VAT reclaimed on the costs of refurbishment. Registering for VAT is a win-win in this case.
› Letting holiday accommodation is a VATable supply. Although our subscriber’s turnover is below the VAT registration threshold, he can apply for voluntary registration. He’ll have to add VAT to the rent he charges once registered but is entitled to reclaim the VAT paid on repairs and improvements. However, VAT isn’t chargeable when he sells the property.
Important change to PAYE repayment procedure
New HMRC tax letters. Every year HMRC reviews the income and tax paid by everyone who’s an employee or has pension income and who it hasn’t asked to complete a self-assessment tax return. Where it appears that the taxpayer has over or underpaid tax, HMRC will send a tax calculation letter (Form P800) or a simple tax assessment. Until recently if these showed overpaid tax HMRC would automatically make a refund.
Claim required. HMRC now requires you to make a formal claim to get back any tax you’ve overpaid according to a Form P800. If you don’t make a claim the government will hang on to your money indefinitely. You can make a claim for a refund online or by post (see The next step).
Tip. HMRC’s window for reviewing tax records for 2023/24 runs until 30 November 2024. If you think you have overpaid tax but don’t receive a P800 you can make an alternative claim (see The next step).
The next step
For links to HMRC’s repayment claim services, visit https://www.tips-and-advice.co.uk, code TATX25DB01.
› If you’re not required to complete a self-assessment form for 2023/24 HMRC will review your tax position by 30 November 2024. It will send you a Form P800 if it believes you have overpaid tax. Unlike previous years, you’ll need to make a formal claim to get your money back.
SELF-ASSESSMENT
HMRC’s student loan tax trap
Self-assessment bug. In 2023 HMRC acknowledged an error in its selfassessment tax system which can result in inflated tax bills. The error is yet to be fixed and so HMRC has provided a workaround (see The next step). To avoid overpaying tax you need to follow HMRC’s workaround when completing your 2023/24 self-assessment return.
Who’s affected? Your tax is affected if all the following apply for the 2023/24 tax year:
• you were an employee
• you made student loan repayments
• you received taxable benefits in kind not liable to Class 1 NI (most aren’t), e.g. company car, private health insurance and so on
• one or more of the benefits was taxed through your salary (these are known as “payrolled” benefits).
The next step
For details of HMRC’s workaround, visit https://www.tips-and-advice.co.uk, code TATX25DB01.
› Due to a bug in the self-assessment system, if in 2023/24 you received benefits in kind from your employer and made student loan repayments you’re at risk of HMRC demanding too much tax. A workaround prevents this, so make sure you use it when completing your self-assessment return.
Editor-in-Chief: Tony Court
Contributing Editors:
Andrew Rainford - BA(Hons) ACA CTA
Sarah Bradford - BA(Hons) ACA CTA
Roger Lawes - Tax Advisor
Graham Palmer - Inst. of Cert. Bookeepers
Nick Avis - FCA
Simon Louis Cooper - Senior Tax Manager
Neil Warren - CTA (Fellow) ATT
Pete Miller - CTA (Fellow)
Steve Kesby - FCA, CTA
Publishing Director: Duncan Callow
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