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When the cash basis is not available to a property business

The cash basis scheme helps landlords, sole traders and other unincorporated businesses to benefit from a simpler way of managing their financial affairs. The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and qualifying businesses can stay in the scheme until their business turnover reaches £300,000. 

Since the 2017-18 tax year, it has been the default basis for most property businesses that are run by individuals or partnerships with income for the tax year of £150,000 or less. A landlord can 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. 

HMRC’s property income manual lists the following list of circumstances 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.
Source: HM Revenue & Customs Wed, 23 Sep 2020 00:00:00 +0100

Property income split for couples

As a general rule, the fall-back position for couples who live together with their spouse or civil partners is that property income – where the property is owned in joint names – is divided 50:50. This is regardless of the actual ownership structure. However, where there is unequal ownership and the couple want the income taxed on that basis a notification must be sent to HMRC together with proof that the beneficial interests in the property are unequal. This is done using Form 17 published by HMRC.

A Form 17 declaration can only be made by spouses or civil partners that are living together and own property in unequal shares with income being allocated in proportion to those shares. Couples that are separated or in some other type of union cannot make a Form 17 declaration. The declaration is only valid if both partners agree. If one spouse / partner does not agree then the income will continue to be treated on a 50:50 basis even if the ownership structure is different.

A Form 17 declaration stays in place until there is either a change in the status of the couple i.e. separation or divorce or a change in the ownership structure. If either of these occur the 50:50 income split will reapply.

There are a number of scenarios where a form 17 cannot be used, such as where a husband and wife or civil partners own property as beneficial joint tenants, for commercial letting of furnished holiday accommodation and for partnership income.

Where property is held in an unequal split, making a form 17 declaration can have a tax advantage where, for example, the majority owner of the property pays tax at a lower marginal rate than their partner.

Source: HM Revenue & Customs Wed, 02 Sep 2020 05:00:00 +0100

Settlement legislation

The settlement rules are intended to prevent an individual from gaining a tax advantage by entering into arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable to Income Tax.

Where a settlor has retained an interest in a property, 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 anti-avoidance settlements legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved.

These arrangements must be:

  • bounteous, or
  • not commercial, or
  • not at arm’s length, or
  • in the case of a gift between spouses or civil partners, wholly or substantially a right to income.

However, there are a number of everyday scenarios where the settlements legislation does not apply. In fact, after much case law in this area, HMRC has confirmed that 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, then the legislation will not apply.

Source: HM Revenue & Customs Wed, 26 Aug 2020 05:00:00 +0100

Tax consequences if income exceeds £100,000

If your income is expected to exceed £100,000 for the first time, we would like to remind you of the effect this can have on your personal allowance and marginal tax rate.

If you earn over £100,000 in any tax year your personal allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age. This means that any taxable receipt that takes your income over £100,000 will result in a reduction in personal tax allowance. Your adjusted net income is your total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

For the current 2020-21 tax year if your adjusted net income is likely to fall between £100,000 and £125,000 you would pay an effective marginal rate of tax of 60%. This 60% rate arises as your £12,500 tax-free personal allowance is gradually reduced. If your income sits within this band you should consider what financial planning opportunities are available to avoid this personal allowance trap by trying to reduce your income below to £100,000. This can include giving gifts to charity, increasing pension contributions and participating in certain investment schemes.

There is also an option for higher rate or additional rate taxpayers, who wanted to reduce their tax bill, to make a gift to charity in the current tax year and then elect to carry back the contribution to 2019-20. A request to carry back the donation must be made before or at the same time as the 2019-20 Self-Assessment return is completed i.e. by 31 January 2021.

Source: HM Revenue & Customs Tue, 11 Aug 2020 05:00:00 +0100

Calculating Adjusted Net Income

Calculating the adjusted net income amount is necessary if any of the following apply:

  • A taxpayer is liable to an income-related reduction to the personal allowance when their adjusted net income is over £100,000 (regardless of their date of birth);
  • A taxpayer that is liable to the high income child benefit charge where they have an adjusted net income above £50,000.

In order to work out adjusted net income, you need to look at a taxpayer’s total taxable income before personal allowances and then deduct any trading losses, gift aid donations, gross pension contributions and pension contributions where the pension provider has already provided tax relief at the basic rate. To complete the calculation for adjusted net income, tax relief of up to £100 is available for payments to trade unions or police organisations and can be added back.

Taxpayers should be aware that there is no automatic entitlement to the Income Tax personal allowance.

Source: HM Revenue & Customs Tue, 11 Aug 2020 05:00:00 +0100

Are you due a tax refund?

HMRC’s annual reconciliation of PAYE for the tax year 2019-20 is well under way. HMRC uses salary and pension information to calculate if you have paid the correct amount of tax. The calculation is usually generated automatically by HMRC’s computer systems on what is known as a P800 form. P800 forms are sent out from the end of the tax year with HMRC expecting all forms to be sent by the end of November. The P800 form is also used if you have not paid enough tax so be sure to read the document carefully.

If you are due a refund, the P800 form will usually tell you that you can claim a refund online. Once you complete the claim online, the refund will be paid within 5 working days and will be in your UK account once your bank has processed the payment. If you do not claim the refund online within 45 days, HMRC will send you a cheque payment. 

If your P800 tells you that you will be repaid by cheque, then you do not need to take any further action and you should receive a cheque within 14 days of the date on the P800 Tax Calculation.

If you have not received a P800 form but think that you have overpaid tax then you can contact HMRC to inform them. If HMRC agrees that you are due a tax refund they will send you a P800 form.

You may be able to claim a refund if, for example, you:

  • are employed and had too much tax taken from your pay;
  • have stopped work;
  • sent a tax return and paid too much tax;
  • have paid too much tax on pension payments;
  • bought a life annuity.

We would be happy to assist you in ensuring that you claim back all the money you are owed from HMRC.

Source: HM Revenue & Customs Tue, 28 Jul 2020 05:00:00 +0100

HMRC reminder that you can defer tax

HMRC has issued a press release to remind Self-Assessment taxpayers of the opportunity to defer Income Tax payments due on 31 July 2020. This opportunity is available to taxpayers due to make their second payment on account for the 2019-20 tax year that is ordinarily due at the end of this month. Taxpayers who take up this offer will see the payment due date deferred until 31 January 2021.

This is an automatic offer with no applications required. You can opt into the deferral offer by simply not paying your tax bill due by the 31 July 2020 due date. HMRC will then (we are told) automatically update their systems to show payment has been deferred and no interest or penalties will be incurred providing it is paid in full by 31 January 2021. You should also remember to cancel your direct debit if you have one setup to ensure that HMRC do not take the payment.

Remember, this is only a deferral and any tax owing will be due on 31 January 2021. This will be in addition to the usual final payment deadline for any remaining tax due for the 2019-20 tax year. In addition, the 31 January 2021 is also the payment date for any Capital Gains Tax due in relation to the 2019-20 tax year and the due date for the first payment on account for 2020-21.

If you do not wish to take advantage of this deferral you can continue to pay your tax bill as normal.

Source: HM Revenue & Customs Wed, 22 Jul 2020 05:00:00 +0100

Students working summer jobs

We would like to remind students that work part time, for example in a summer job, that they are entitled to claim back any tax overpaid. Students (and other temporary workers) are not required to pay any Income Tax if their earnings are below the tax-free personal allowance, currently £12,500.

However, employers are required to calculate the amount of tax you need to pay on the basis that you would be working for the rest of the tax year. This means that an over-payment of Income Tax can often occur where a student or temporary worker earns more than their monthly allowance of £1,042 (£12,500 / 12), but over the course of the tax year earn less than their annual allowance. For example, a student only working over the summer and earning more than £1,042 a month is unlikely to have exceeded the current £12,500 tax free personal allowance.

Students that expect to earn less than £12,500 in the current tax year (i.e. to 5 April 2021) can complete a HMRC P50 form entitled Claim for repayment of tax when they have stopped working. A refund of overpaid tax can be requested using an online version of the P50 form. The P50 form can only be used if you are not going to work for at least the next 4 weeks and are not claiming certain state benefits.

Any students that are continuing to work for the rest of the tax year in part-time jobs should consider waiting until the end of the tax year in order to make a claim.

Source: HM Revenue & Customs Wed, 22 Jul 2020 05:00:00 +0100

Want to trial the MTD for Income Tax process?

Making Tax Digital (MTD) will fundamentally change the way businesses, the self-employed and landlords interact with HMRC. The regime will require businesses and individuals to register, file, pay and update their information using an online tax account.

The regime started in April 2019 for VAT purposes only when businesses with a turnover above the VAT threshold were mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software. The next stage in the introduction of MTD will be the launch of MTD for Income Tax.

A relatively small number of businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the MTD service for Income Tax. Under the pilot, qualifying landlords and sole traders (or their agents) can use software to keep digital records and send Income Tax updates instead of filing a Self-Assessment tax return.

Every 3 months, users will electronically send a summary of their business income and expenses to HMRC. At the end of their accounting period, users will need to finalise their business income and expenses. They will also be able to submit any personal income and claim reliefs.

Source: HM Revenue & Customs Wed, 15 Jul 2020 05:00:00 +0100

Basis periods if accounting date is changed

The assessment of self-employed or partnerships profits is usually relatively straight-forward if the accounting date, to which annual accounts are prepared, falls between 31 March and 5 April. However, overlap profits can arise where a business year end date is not coterminous with the end of the tax year.

Overlap profits can happen in the first 3 years of the business or in any year in which there is a change of basis period (due to a change of accounting date).

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

If your accounting date in 2018 to 2019 is more than 12 months after the end of the basis period for 2017 to 2018, your basis period is the period between the end of the basis period for 2017 to 2018 and the new accounting date.

For example, your basis period for 2017 to 2018 ended on 31 May 2017 and the new accounting date is 31 August 2018 – your basis period is the 15-month period 1 June 2017 to 31 August 2018.

If your accounting date in 2018 to 2019 is less than 12 months after the end of the basis period for 2017 to 2018, your basis period is the 12 months ending on the new accounting date.

For example, your basis period for 2017 to 2018 ended on 31 December 2017 and the new accounting date is 31 July 2018 – your basis period is the 12-month period 1 August 2017 to 31 July 2018.

Source: HM Revenue & Customs Wed, 24 Jun 2020 05:00:00 +0100

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