Tips & Advice Tax - Issue 17

TIPS & ADVICE Tax

Your fortnightly guide to practical tax savings

INVESTMENTS

Warning for cryptoasset investors

Changes to the self-assessment tax return signal HMRC’s intention to go after those buying and selling cryptoassets. What’s the full story?

Tax return changes. HMRC has already set out its design for selfassessment tax returns for 2024/25. The return will include dedicated questions in the capital gains pages (Form SA108) for purchases and sales of cryptoassets such as Bitcoin and Ethereum.

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Special attention. It’s apparent HMRC considers that many taxpayers are not reporting or incorrectly reporting gains or losses they’ve made from investing in cryptoassets. YouGov statistics show that in January 2024 10% of the adult population has bought or own them. This has been the position since mid-2022. Of course, this doesn’t mean they’ve all made gains that ought to have been declared to HMRC, but it believes that there’s a lack of awareness of when a declaration is required.

Tip. HMRC has published specific guidance on cryptoasset tax issues (see The next step).

Exemption reduction. Another factor makes undeclaration increasingly likely. In the space of a year the annual exempt amount for capital gains has been reduced from £12,300 (as it stood on 5 April 2023) to where it stands now at just £3,000. This means that if the aggregate of all your capital gains, net of any capital losses, made in 2024/25 exceeds £3,000, you will have to pay capital gains tax (CGT) on the excess at 10% if you’re a basic rate taxpayer, or 20% if you pay at the higher or additional rate.

Tip. As well as understanding what and how to report, it’s essential that you keep a record of each cryptoasset transaction, i.e. the date, its value in UK sterling and any dealing or brokers’ costs (these are CGT deductible). Keeping good contemporaneous records will make your life much easier in deciding if you need to include a declaration to HMRC and whether you have CGT to pay.

The next step

For a link to HMRC‘s guidance on cryptoassets, visit https://www.tips-andadvice.co.uk, Download Zone, year 24 issue 17.

› Tax returns for 2024/25 will contain special questions relating to capital gains or losses resulting from transactions in cryptoassets, e.g. Bitcoin. Therefore, you should keep up-to-date records of any such transactions; date, value in sterling and dealing costs.

Are you ready for the next payroll deadline?

With the PAYE end of year procedure safely negotiated your next payroll task is preparation of the various employee-related reports required by 6 July. What steps must you take to avoid trouble with HMRC?

Deadline heads-up

As an employer 6 July should be marked as a key date in your calendar. It’s the deadline for reporting benefits in kind on P11Ds, P11D(b), employmentrelated shares provided to employees or directors and employee termination packages which include non-cash benefits.

P11Ds and P11D(b)

Taxable benefits provided to employees and directors, which are not covered by a PAYE settlement agreement or formally payrolled, must be declared on a Form P11D Tip. Directors and employees can avoid a taxable benefit if they make good non-payrolled benefits, i.e. they pay the employer for the taxable value of the benefit. Trap.  Paper forms are no longer allowed. For 2023/24 P11Ds must be submitted digitally to HMRC by 6 July 2024.

Don’t forget the P11D(b)!

The job of reporting benefits is not done until you submit the Form P11D(b) which states the Class 1A NI payable on all taxable benefits including any which have been payrolled. If you’re late you’ll be fined £100 for each month (or part month) for every 50 employees you have. Like P11Ds, the P11D(b) must be submitted online. Tip. If you didn’t provide benefits in 2023/24 but HMRC sends you a Form P11D(b) or P11D(b) reminder, you must submit a nil P11D(b) return.

The future of P11Ds

Early in 2024 HMRC announced that in 2026

employers will be required to payroll benefits in kind, i.e. tax them through PAYE. The good news is that P11Ds will become a thing of the past. The bad news is that you’ll need to get to grips with a new system (unless you already use payrolling) and make sure that your payroll software can cope.

Employee share schemes

If in 2023/24 one or more of your employees (including directors), or someone connected to them, has acquired or been given an option to acquire shares in your company at a reduced price because of their employment with you, you must report this by 6 July 2024. A report is also required to certify that any new tax-advantaged share plans meet conditions (see The next step).

Trap. Before you can make a report you must be registered with HMRC. This can take a couple of weeks so allow enough time to ensure you don’t miss the deadline.

Termination packages

For employee termination settlements in excess of £30,000, unless made wholly in cash, i.e. they include non-cash benefits such as a transfer of an asset, you must send a report to HMRC (and give a copy to the former employee). There’s no set format for the report but it must include certain information (see The next step).

The next step

For links to HMRC notes on how to report employee shares schemes etc. and non-cash termination awards, visit https://www.tips-and-advice.co.uk, Download Zone, year 24 issue 17.

› By no later than 6 July 2024 you must submit Forms P11D and P11D(b) employee benefits returns for 2023/24. This must be done electronically. In addition, you must register (if you haven’t already) and report employment-related shares transactions. A report is also required if you made a non-cash termination award to an employee in 2023/24.

Loan write-off vs repayment

You’re the sole shareholder of a company. A few years ago you borrowed money from it which resulted in a tax bill for the company. You now want to clear the debt. Is it more tax efficient for you to repay it or for your company to write it off?

Overdrawn loan accounts

Where you owe your company money two tax charges can apply: one for you and one for your company. In this article we consider only the latter. This tax, usually referred to as a s.455 charge applies when a participator, typically a shareholder, in a close company (broadly, one controlled by five or fewer persons) borrows money from it and the debt remains outstanding more than nine months after the end of the financial period in which the money was borrowed.

Tip. A s.455 charge is a temporary tax. HMRC will refund it nine months after the end of the financial period in which the debt to your company is cleared.

No s.455 charge

The usual way to clear the debt and generate the s.455 charge refund is by repaying it. The trouble comes where the money to do this originates from your company in the form of salary or dividends. You’ll have to pay tax and, in the case of salary, NI, before you can use the net amount to repay the debt. For example, assuming you’re already a higher rate taxpayer (40%) on your salary and you owe your company £10,000, you’ll need an extra £17,241 gross pay to leave enough to repay what you owe.

Tip. One other method for triggering the refund of the s.455 charge is for your company to write off your debt. This counts as taxable income for you but is more tax efficient than extra salary.

Taxable write-offs

If your company writes off your debt, as a

shareholder and director, you’ll pay tax at a lower rate on a loan write-off compared with salary. As a higher rate taxpayer you’ll pay 33.75% on a loan write-off (compared with 40% payable on salary) making it a still more tax-efficient option. There’s also a small cash-flow advantage.

Example. Rajeev owes his company Acom Ltd £30,000 at the end of its financial year which ended on 3 March 2024. To avoid the s.455 charge he draws extra salary in June 2024 and repays the debt. The PAYE tax and NI on this is payable by Acom in mid-July 2024. If instead Acom writes off the debt the resulting tax bill for Rajeev won’t be payable until 31 January 2025.

Trap. NI liability can be a major drawback to writing off a debt. HMRC’s view is that a loan writeoff usually counts as earnings for NI purposes. If this is factored in, writing off a debt will be less tax efficient than salary. HMRC’s view is correct for directors who aren’t shareholders, but can be challenged if they are. Its argument relies on a write-off being “remuneration or profit derived from an employment”. Therefore, if you can show that it was instead because of your position as a shareholder then NI won’t apply. However, this argument can be difficult to win and there’s a better option as long as your company has accumulated profits (reserves) that exceed the debt you owe to it.

Tip. A simpler and guaranteed way to achieve the same tax efficiency and cash-flow advantage as a write-off on which NI isn’t payable, is for your company to declare a dividend sufficient to cover the debt. Instead of paying it to you it’s credited against your debt to clear it.

› It can be more tax efficient for your company to write off your debt than pay you additional salary to cover it. However, depending on the circumstances NI might be payable on a write-off. This will make it less efficient. To avoid the NI issue, and achieve the greatest tax efficiency, your company can clear the debt by crediting you with a divided.

Is there a tax cost to buying holiday entitlement?

To encourage productivity and attract new talent, you’re thinking of introducing a holiday purchase scheme where employees can give up some of their salary for extra leave. What’s the tax position?

Work-life balance

With heightened awareness of mental and physical health, combined with juggling unprecedented care needs, many employees would like the option of requesting extra holiday.

Tip. Having a formal holiday purchase scheme may reduce sick leave and so help you to plan for absences.

Tip. Trading holiday for cash can work both ways. You could allow employees to swap unwanted holiday in return for extra pay. However, make sure they do get their statutory minimum of 28 days per year (for full-time employees).

OpRA rules

Since April 2017 salary sacrifice schemes, where an employee can choose a benefit in kind in lieu of pay, have been subject to anti-avoidance measures known as the optional remuneration arrangement (OpRA) rules. Simply put, they cancel out any tax advantage that would have resulted.

Example. Bill, who’s a higher rate taxpayer, is offered a suite of flexible benefits including a mobile phone package in lieu of pay, worth £1,080 per year. A single mobile phone is usually a tax-free benefit. However, due to the OpRA rules, Bill has to pay £432 tax on it (£1,080 x 40%). Plus, Bill’s employer must pay Class 1A NI at 13.8% of £149.

Cash equivalent

The taxable amount of a benefit for OpRA purposes is its cash equivalent. This is the greater of the cost to the employer of providing the benefit and

the taxable amount where special rules apply for calculating it, e.g. company cars.

No monetary value = no benefit

For tax purposes unpaid leave has no monetary value despite any costs that might result for an employer, e.g. lost sales or agency staff to cover absence. HMRC has therefore stated that where an employee becomes entitled to additional unpaid leave they are simply reducing their working hours and having their pay adjusted. Trap. Make sure none of your employees are in danger of falling below the national minimum wage rates - it might be necessary to cap their unpaid leave purchases.

Calculating the reduction

The employee receives a reduced salary based on the number of extra days’ leave taken.

Example. Boudica is paid £35,000 p.a. and works full-time office hours over 260 working days in a year. Every day of extra leave is therefore equivalent to £135 (35,000/260 days). If Boudica chooses to buy five extra days of leave, the reduction of £675 spread over the year results in a monthly salary reduction of £56 (135 x 5)/12.

Tip. Spreading the deductions throughout the tax year maintains a regular salary amount while saving NI costs for the employer. We’ve created a calculator that works out the salary deduction for extra holiday, plus any NI and employer pension contributions saved (see The next step).

The next step

For our holiday pay calculator, visit https://www.tipsand-advice.co.uk, Download Zone, year 24 issue 17.

› A holiday purchase scheme can be a win-win for you and your employees, helping to avoid burnout, retain employees and boost morale. The special anti-avoidance tax rules don’t apply to extra holiday as it’s not treated as a benefit in kind. The reduction in salary can be spread over the tax year to save employers’ NI.

Company income sharing for couples

You’re getting married soon and to save tax you want your partner to receive a share of the dividends from your company. Should you transfer some of your shares or should your company issue your partner with new shares?

Tax saving

After losing a long battle through the courts in 2007 HMRC was forced to accept that a couple can share dividends from a company, even if one of them does not generate income for it and the purpose is solely to reduce income tax. The simple example below shows how worthwhile this arrangement can be and why HMRC fought to block it.

Example. Sam and Lisa are married. Sam is an IT systems designer who, with his employees, provides his services through a company. The company’s after-tax profits in its last financial year were £120,000. Currently Lisa doesn’t work. If Sam owned all the shares in the company and took all its profits as dividends, he would pay income tax of £39,432. However, if Sam and Lisa owned 50% of the shares each and took all the profits via dividends, their joint tax bill would be £22,864 - a saving of £16,568.

Tip. The allocation of shares doesn’t have to be 50/50 as in our example. You can divide the shares how you like to achieve maximum tax efficiency.

Transfer shares or issue new ones?

For tax planning purposes it makes no difference whether you transfer shares or issue new ones. In our example, where Sam is the sole shareholder in his company, he could give Lisa half of his shares (or whatever proportion he wants) or arrange for his company to issue new shares. The outcome will be the same.

Tip. Where, as in our example, the company has been trading for some time it’s simpler for Sam to gift some of his shares to his partner. He should

wait until they are married to do this so that the special rules for gifts between married couples apply to prevent the shares being liable for capital gains tax.

Tips & Advice Tax Memo

For detailed commentary on transfers of assets between spouses and civil partners, visit https:// www.tips-and-advice.co.uk, Download Zone, year 24 issue 17.

Increasing tax efficiency

Sam and Lisa’s individual financial positions might change year to year making a 50/50 split of dividend income less efficient than if they owned the company’s shares in different proportions. It would be impractical for them to transfer shares back and forth frequently between each other to improve tax efficiency.

Tip. Once Sam and Lisa own the ordinary shares in the company, preferably 50/50, it can issue further shares to each of them so the company can pay different amounts of dividends to each of them depending on their respective financial positions and to maximise tax efficiency.

Alphabet shares

The shares should be additional ordinary shares with identical rights to income and capital but of different classes. For example, Ordinary A shares for Sam and Ordinary B shares for Lisa. For obvious reasons these are often referred to as alphabet shares. Sam and Lisa could do this themselves but as neither is proficient in tax or the company law requirement for issuing shares it would be wise for them to ask an accountant to handle it.

› While either method of giving shares to your partner works for tax-saving purposes, it’s generally simpler to gift shares between married partners rather than have the company issue new ones. Once each partner has shares the company can issue each with further ordinary shares of different classes to make income and tax planning more effective.

A SUBSCRIBER’S QUERY

Was CGT declaration required?

Our subscriber recently sold a property making a large gain. For some of the time he had occupied it as his home and at other times he shared its occupation. Was he required to declare anything to HMRC?

Tax simplification

If you make a gain from the sale of a property which was at some point your home, full or partial private residence relief (PRR) will reduce the amount of gain chargeable to capital gains tax (CGT). The bad news is that the once simple PRR rules have become tricky, especially if a property has been let as well as occupied as your home. This was our subscriber’s situation.

Trap. If you make a gain from the sale of a residential property (a dwelling-house) and the gain is sufficient that CGT is payable, you have 60 days from the date of completion in which to declare it and pay any tax due.

Tip. So-called letting relief (LR) can apply to a capital gain relating to a period when a property was let. For gains made on or after 6 April 2020, LR only applies if part of a property was let and the owner occupied the other part at the same time.

Mixed occupation

Our subscriber bought the house on 1 May 2001three bedrooms plus a two-room annexe accessed through the main home. He lived in it alone as his only home until July 2008. It was then vacant (while he worked abroad) until March 2010 when he returned and lived in it until July 2015. He then moved into his partner’s home and let the property from September 2015 until April 2020. He again occupied the property, this time with his partner, until April 2024 when it was sold. His partner paid towards the mortgage and running costs.

Also, between June 2020 and when it was sold his partner’s son occupied and paid rent to live in the annexe.

PRR and letting relief

The table below summarises the PRR and LR position.

The key points to note are:

• full PRR is allowed for absence while abroad and for when our subscriber lived in the property alone

• no PRR or LR allowed while the whole property was let

• partial PRR plus LR when the annexe was let

• sharing the property with a lodger does not affect entitlement to PRR (see The next step).

Calculating partial PRR and LR. To calculate the partial PRR and LR the property must be notionally separated between the part lived in (78% by floor area) and the let annexe (22%). The 78% part qualifies for PRR and the 22% for LR (but subject to restrictions). A further factor is that an extension of PRR (which overrides the LR) applies to the gain attributable to whole property for the final nine months of ownership. It’s no wonder our subscriber struggled to decide if he needed to declare anything to HMRC. However, we provided him with our CGT calculator which quickly determined his entitlement to PRR and LR and crunched the numbers (see The next step), allowing him to submit his declaration within the 60 days allowed and so avoid a penalty.

The next step

For details of the PRR rules and for our CGT calculator, visit https://www.tips-and-advice.co.uk, Download Zone, year 24 issue 17.

› You must make a declaration to HMRC within 60 days of the sale or transfer of a residential property if you make a gain which is sufficient to be liable to capital gains tax. Where the property has been occupied as your home but also empty or let, use our calculator to work out the taxable gain to decide if a declaration is required.

VAT and personalised number plates

You’ve purchased a pricey personalised number plate which included VAT. A business associate has told you that because the registration number has a connection with the business you can reclaim the VAT. Is he correct or will HMRC block it?

VAT claim allowed

Unlike VAT paid on the purchase of cars, there’s no block on reclaiming VAT for personal registration numbers. However, to do so, it must be incurred on a cost which is used for business purposes and linked to making VATable sales.

Trap. HMRC takes the view that private motive and enjoyment prohibits any VAT reclaim, particularly for luxury or superfluous items.

A business purpose?

There’s no statutory definition of “business purpose” so the meaning must come from court decisions. These say that business purposes are something more than just being commercially beneficial. In fact, there must be a clear connection, i.e. a direct and immediate link between the trading supplies made (the core activity) and the expenditure. Tip.  Standard registration numbers give away the age of a vehicle. Using a personalised registration can to a degree disguise this and give the appearance that your business is doing well. This can be important for promoting your business.

Direct link to the business

The most effective argument to justify reclaiming VAT is where the registration number can be seen to advertise your business. The number must be readily identifiable to the man in the street as associated with your business’s trading name. Tip.  Keep a record of the reasons that support your decision to purchase the number. There are a few court rulings that can help you in deciding what reasons to cite if challenged by HMRC (see The next step).

Tip. To reclaim the VAT your business must own the rights to the registration. Therefore, it should appear in its accounts and other records as a business asset. If you paid for it personally, the business should reimburse you.

Helpful court rulings

In 1985, BJ Kershaw Transport Ltd, a company named after its director, lost its case as the number plate “BK4” was not sufficiently relatable to the name of the company. In 2005, Mr Hooper purchased the car registration “HO O2 PER” in order to publicise his eatery which was known locally as “Hooper’s” even though its real name was “The Windmill”. As the establishment was a couple of miles from any main road, this mobile form of advertising was deemed plausible by the Tribunal. In a 2022 case involving Ben Firth, who traded as Church Farm, the First-tier Tribunal decided that “BS70BEN”, while referencing his name, didn’t have any obvious link with the trading name.

VAT 4U

Determining the true purpose behind acquiring an item which could also have personal benefit comes down to a subjective interpretation of the facts. Remember that at a tribunal the taxpayer must show that HMRC acted unreasonably when denying the input tax deduction - a hard nut to crack. Tip. Be ready with your convincing arguments in the event of an HMRC enquiry.

The next step

For links to information about court and tribunal decisions involving VAT on personalised number plates, visit https://www.tips-and-advice.co.uk, Download Zone, year 24 issue 17.

› VAT paid on the purchase of a personalised vehicle registration can be reclaimed if it isn’t bought for reasons of private indulgence, and it clearly promotes the name of your business. HMRC considers each case on its merits, so keep a record of why you think a registration promotes your business in case of a challenge.

No brightline test for property businesses

FHL rules. The special rules for furnished holiday lets (FHLs) set out the criteria by which short-term property lets are treated as a trade for the purposes of some tax breaks. These rules will be abolished in April 2025.

Trading activity. When the rules are abolished landlords will still be entitled to assert that their letting activities amounted to a trading business and therefore qualify for the tax reliefs. The trouble is that because such claims are subjective they have been the cause of many long-winded and difficult to resolve disputes with HMRC.

Brightline test. To prevent disputes, in 2022 the Office of Tax Simplification proposed that if the FHL rules were abolished a so-called brightline test for trading status, based on the number of let properties, should be created to give certainty to landlords and HMRC. However, in April 2024 HMRC rejected this idea saying that trading status will continue to be determined using case law. This seems bound to result in more disputes.

Tip. Even after FHL rules are abolished you can still claim that your letting business is a trade. Generally, this depends on the amount of services, e.g. laundry, catering, etc., that you provide in addition to just letting the property.

› When the furnished holiday lettings rules are abolished in April 2025 you may still be entitled to trade-related tax reliefs, e.g. capital allowances, if you can convince HMRC that your letting activities amount to a trade, but be prepared for a fight.

CAPITAL ALLOWANCES

New enhanced guidance to prevent errors

More guidance. According to HMRC, businesses are making too many errors when claiming tax deductions (capital allowances) for the cost of equipment (plant and machinery). It’s therefore published new guidelines to its existing advice (see The next step).

Trouble spots. The guidelines centre on five main areas: the annual investment allowance, 100% first year allowances, the super-deduction, 50% special rate first year allowance and cars. We’ve trawled through the new guidelines and can’t see anything out of place. Therefore, if your claim is for one or more types mentioned, we recommend that you take a look at HMRC’s new publication before claiming capital allowances.

The next step

For a link to HMRC’s new guidelines, visit https://www.tips-and-advice.co.uk, Download Zone, year 24 issue 17.

› HMRC has published additional guidelines on how to work out capital allowances for certain types of equipment purchase. The guidance doesn’t supersede HMRC’s existing advice but it should help you to avoid common mistakes.

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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