How do CGT Transfers between separating spouses work?

The government recently announced plans to give separating couples a longer period in which to consider and transfer their assets and avoid Capital Gains Tax, as currently, depending when the planned separation takes place, time may be very limited and impractical. This is known as ‘no gain or no loss’ transfers.

How does spouse CGT transfers workFrom April 6th 2023, separating spouses or civil partners, will be allowed up to three years to make any agreed split in assets transferred between each other, after they have split up.

NOTE: These plans are currently only draft legislation, so given how fluid government seems these days, this may or may not happen.

Separating from a spouse or civil partner is one of those events where those involved often fail to consider the immediate tax implications of the event. The overarching financial implication for those involved, i.e. who gets what and in what proportions, can be all consuming. If they are fortunate, their lawyers may suggest that they obtain independent financial advice and tax guidance, which may help them realise that simply dividing assets may not be that simple.

The current CGT position for separating couples

A normal part of being married or in a civil partnership is that you are allowed to transfer assets to one another without consequences and without incurring Capital Gains Tax. This can be cash, investments or any other asset, such as the family home or even rental property. The main consequence is that the transferee becomes responsible for any tax liabilities upon disposal of the asset. For example, if a rental property owned by one partner is transferred legally to the other and they decide to sell at some point in the future, the receiving partner will be required to make the declaration to HMRC.

The cost basis for the transfer while married or in a civil partnership is that of the original purchase, including fees. So if a home was purchased for £200,000 20 years ago and is now worth £500,000, it makes no difference, the transfer is based on the original £200,000. However, if the recipient of the transfer then decides to sell at some point in the future, the actual capital gain is realised (£300,000) and CGT becomes due.

How does the sale of the matrimonial home impacted by CGT?

Sometimes in divorce or separation cases, the family home may remain jointly owned, while the other partner moves out. This might be the case where children are involved and rather than upset their lives further, one parent stays in the family home.

If the family home is sold at a later date, the partner who remained in the home and treated it as their main residence will not be liable for CGT. However, if the sale was made more than nine months after they moved out, the partner who did leave will likely face a CGT bill for the proceeds of the sale of their portion of the home. If it was before the nine months, they will be exempt.

There is still relief available to the leaving spouse after nine months though. This is when the spouse transfers their share of the jointly owned property to the other, prior to the property being sold. However, there are conditions, these are:

The property continues to be the other spouse's main residence.
A Consent Order governs the transfer and a claim is made within two years to HMRC.
The spouse who left does not yet have a new principle residence.

Meeting these conditions will allow the leaving spouse to enjoy relief from CGT for the period of moving out to the point of the asset transfer.

Be mindful of the tax year end date - April 5th

Under current legislation, it’s very important to keep in mind the end of the tax year, i.e. April 5th. Separating couples can continue to transfer assets under a ‘no gain no loss’ basis up to the end of the tax year of separation. After that, the transfer is considered in the same way as if it were a straight property sale and capital gains tax is payable if it is applicable.

Not all separations are straight forward. It may take many months to negotiate and finalise details of an assets new ownership, and for the transfers to actually take place. As April 5th approaches, an unreasonable level of pressure may come to bear on the parties to resolve the issue quickly, possibly in a manner detrimental to one or both parties.

It is for this reason and others that the government has proposed the introduction of the new scheme; essentially to allow a reasonable period of time in which to settle the affairs for the separation and reduce the stress involved.

What are the new rules being proposed for April 6th 2023?

This is what the government have said:

  • Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
  • No gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement
  • A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold
  • Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner

What does this mean in practice?

Year end deadline is no longer a problem. There’s no pressure to complete transfers for separations in a tax year by the end of that tax year.

This applies equally to separating or divorcing for earlier years, so in this case 2019/20 and 202/21. Furthermore, if asset transfers are part of a formal divorce or court separation agreement, it may be possible for the ‘no gain no loss’ treatment to be applied for even earlier years.

Tax implications can be quite complex and require expert guidance

Many divorces or separations are relatively simple because not many assets are involved and may have a simple remedy and tax treatment. However, some divorcing or separating couples have quite complex assets involving not just a family home, but often rental properties, company ownership, income from stocks and shares, pensions, to name a few. In these circumstances, you’re best to proceed under the guidance of a professional tax advisor familiar with such circumstances.

At TaxAgility, we’ve assisted numerous individuals navigate the potential mine field divorce, separation and tax represents. Why not give us a call on 020 8108 0090 and find out how we can assist you.


DIY Self Assessment Tax Return - a good idea?

As we approach the end of the year there’s the inevitable scramble, for those that have to complete an SA100 Self Assessment Tax Return, to either beat the October 31st deadline for paper SA100 returns or the January 31st deadline for electronically submitted returns. The question we ask is: “Should you let an accountant complete the self assessment tax return for you?”. We’ll explore that question in this article.

diy tax returnsCompleting a tax return is something that can be planned for, especially if you are required to do so, such as those with supplementary income, sole traders, directors, etc. However, as an accounting firm, our busiest time always seems to be in the last few weeks before the January 31st deadline.

For some, completing an SA100 is a new experience, and often over trivialised, as reporting additional income from a second job or interest from investments appears straightforward. However, one quickly realises that SA100 actually comprises 18 supplementary pages, around 10 of which may apply to many people.

Tempus fugit - time flies, especially when tax deadlines are concerned

Faced with filling out a supplementary page and pressed for time due to the looming deadline, a degree of panic often sets in. The one thing many of these supplementary pages have in common is lots of boxes to tick, amounts to fill out and somewhat confusing descriptions, although HMRC does provide guidance notes as to how to fill this in. Still, it’s a lot to take on board.

The outcome is fairly typical in these circumstances; mistakes are made, sometimes costly ones.

What are the common SA100 supplementary pages you are likely to encounter?

Here, we will quickly list some of the typical supplementary pages you may come across given your personal circumstances.

SA101 Supplementary Income.

This is used to report less common sources of income, although these days they appear more often than in the past. Examples include:

  • Interest from different types of securities
  • Gains from life insurance policies, annuity contracts, etc
  • Stock dividends, securities issued as bonuses and redeemable shares.
  • Business receipts as income from previous years
  • A range of other tax reliefs, such as venture Capital Trusts shares, EIS share subscriptions, maintenance payments and many others.
  • Married couple’s allowance
  • Income tax losses
  • Pension savings tax charges

SA102 Employment

You’ll want to complete this form to list each of your jobs, including your main job. You'll also report what benefits you have received and the expenses you have incurred as part of the job.

SA103 Self Employment

There are two forms here, ‘short’ and ‘full’, and you’ll need to decide which one applies to you. Essentially, it depends on whether you received £85, 000 or more in income.

The short form asks for basic details as to your income source, the business details, expenses, profits etc. It helps you calculate your profits and tax payable.

The long form version is similar in many ways to that experienced if you ran a private limited company and had an accountant prepare your full company accounts. It’s a complex form.

SA104 Business Partnerships

Again, there are short and long form versions of this. Which one you use will depend upon the Partnership Statement your tax advisor gave you.

SA105 UK Property Income.

In recent years, with the popularity of buy-to-let ownership and more people becoming landlords, this form has become more prevalent.

You’ll need to provide full details about the property, whether it’s furnished or not, the types of income - i.e. income from services provided vs actual rental income. Your expenses and you’ll calculate your taxable profit or loss.

SA106 Foreign income or gains

With an increasingly globally mobile population and more foreign or naturalised residents required to complete a self assessment, many people have investments and income bearing assets overseas that must be reported as part of their ‘world-wide income’.

Use SA106 to report income from:

  • Interest from overseas saving
  • Dividends from foreign companieS
  • Remitted foreign savings income
  • Remitted foreign dividend income
  • Income from overseas pensions
  • Income from land and property abroad
  • Foreign tax paid on employment, self-employment and other income

SA108 Capital gains summary

If you own a second home, whether in the UK or overseas, and decide to sell, you’ll incur capital gains on the profits of the sale. If the property is overseas, then you may have to declare the sale in that country too. SA108 is used to report capital gains on property. Also, if you’ve made gains or losses on shares and securities (listed or unlisted), report them here.

There’s a section for ‘non-residents’ to report capital gains on UK property too.

SA108 Residence, remittance basis etc

Residence and domicile are two fairly complex subjects and you should fully understand your obligations to HMRC in this regard. Your UK tax liability depends on where you’re ‘resident’ and ‘domiciled’ in a tax year. The notes to SA108 help you understand your requirements here.

It applies to UK nationals too, particularly if they are working overseas for extended periods.

Should you complete your own self assessment tax return or let an accountant do it for you?

As we have seen, completing an SA100 is not necessarily a walk in the park. It’s definitely not a task to leave to the last minute, especially if you may have more complex income sources.

More often or not, when clients come to TaxAgility seeking us to complete their returns for them, we hear the words “I wish I hadn’t left this so late”, and “I didn’t realise it was that complicated” or “I underestimated the effort involved”.

From our perspective, having seen and assisted countless clients with last minute returns, the cost of having a professional assess and complete your SA100 Self Assessment Tax Return, is by far outweighed by the potential to make mistakes and be penalised by HMRC for under reporting or miss out on things you could have claimed for. Then of course, there’s the reduction in stress knowing it is being handled by a professional.

What happens if I do make a mistake?

Here’s a list of the most common mistakes we see clients that eventually come to us make.

  • Reporting the wrong NI or UTI number
  • Failing to report all your income
  • Not claiming all your expenses
  • Claiming the wrong expenses
  • Over-claiming expenses
  • Failing to use the appropriate supplementary pages
  • Poorly understanding their tax status and liabilities
  • Not fully grasping the implications of residency and domicile
  • Ticking the wrong boxes
  • Missing the deadlines
  • Poor record keeping
  • Miscalculated or incomplete information

If you’ve made simple honest mistakes, HMRC may just correct them for you and update your return accordingly, and not penalise you.

However, if the mistakes are not so simple and those which may lead HMRC to suspect some form of avoidance or deliberate under reporting, you could find yourself the subject of a tax investigation and stiff penalties.

You can make corrections if you discover honest mistakes after you have filed your return. There is a three days window after the deadline in which to do this. The process to do this depends on how your SA100 was submitted. If you submitted online, you can sign in to your government Gateway and correct it through your online account. If it was a paper return, send the corrected pages to HMRC, but make sure you clearly note on each page that this is an ‘amended page’.

In summary, we do believe it is worth the extra cost to have a professional quickly review your personal tax circumstances and prepare your SA100 Self Assessment Tax Return (and supplementary pages) for you. While you might expect us to say that, we just know from the experience of others how beneficial this is, as you may have underestimated your tax liability or worse still, missed out on an opportunity.

Call TaxAgility today on 020 8108 0090 and tell us about your circumstances and we’ll see how we can assist. The earlier you do this, the less stress there will be for you.


Do I need to complete a tax return this year?

Many workers go through their working life never having encountered HMRC’s form SA100 - Tax Return for Self Assessment. With economic pressures such as growing inflation and the significant impact of the rise in cost of living, more people turn to a second job or turn to other sources to help supplement their income and pay the bills.

In such circumstances, you may well need to file form SA100. Also, many underestimate the complexities of income sources and types that can also affect whether you need to file or not. Here’s why and how to check to see if you do.

The SA100 Self Assessment tax return form

Do i need to complete a tax return this year?Mention form SA100 to an average person in employment and they may have never heard of it. This is because employees are on what’s known as PAYE - Pay As You Earn. Simply put, the taxes and national insurance you owe as a result of being employed are paid automatically to HMRC through your wages. They appear on your wage slip as things like Tax, NI, pension payments and adjustments for personal allowance and benefits in kind.

Those who do need to annually complete an SA100 include:

  • Those who are self employed
  • A company director with income not taxed through PAYE
  • A partner in a partnership business
  • A minister of religion
  • A trustee or the executor of an estate

For the most part, the only encounter the average employee will have with HMRC is through the Notice of Coding you may receive when your circumstances change - such as changing jobs or receiving benefits in kind. However, there are circumstances where you will most likely need to complete and return an SA100 Self Assessment tax return. Here are most of those instances.

Regardless of whether any of the situations below apply to you, HMRC may still ask you to complete a Self Assessment tax return.

If you believe any of the factors below relate to you, the government has an online tool to further help you assess your tax position and the need to fill out an SA100, here.

Circumstances that may require you to complete and return an SA100 Self Assessment tax return

A company director

If you are a company director and receive an income that is not taxed at source, you’ll need to complete an SA100. This typically includes basic salary and any dividends and any benefits in kind.

Sources of untaxed income

This may be from interest on bank accounts, shares, or rental income, for example. If this is below £2500 per year, even though you may not need to complete an SA100, you must still notify HMRC of the income. You can do that here.

Also, if you receive any other untaxed income which cannot be collected through your PAYE tax code, you will have to file an SA100.

Trust or settlement income

Regular annual income from a trust set up for you or from a divorce settlement will need to be reported through an SA100. Also, if you receive income from the estate of a deceased person, that tax has not been paid on.

Foreign sourced income

There are many potential sources of foreign income, including:

  • If you worked abroad and received wages
  • Investment income from overseas share dividends or foreign bank account interest. However, foreign dividends will be covered under your UK dividend allowance.
  • Income from overseas pensions
  • Overseas rental income

Find out more at the government’s site here.

Non-resident and receiving income

You are a non-resident, but that doesn’t necessarily exclude you from paying taxes in the UK. This would include non-resident landlords.

You can find out more here.

Income from savings and investments

If income from these sources exceeds £10,000 before tax, you’ll need to report it.

Annual income exceeds threshold

Report through the SA100 if your annual income exceeds £100,000 before tax.

Child benefit and adjusted net income

You or your partner receive child benefits. The higher income child benefit charge will apply if your adjusted net income is over £50,000.

Other tax charge liabilities

An excess in Gift Aid contributions or pension contributions.

State Pension lump sums

If you deferred a state pension lump sum from April 6 2016, you’re liable to tax on this payment.

Coronavirus payments

If claimed a coronavirus support payment incorrectly and have not already paid this back, you’ll need to report this.

Expense claims

You have claimed £2,500 or more in expenses for the tax year, this needs to be reported.

Capital gains

You’ll need to check whether any of the following is true. However, capital gains calculations can be a little tricky. You can find out more here or call TaxAgility and we may be able to assist.

  • Assets sold or bestowed worth £49,200 or more for the tax period 2022/23
  • Where you have capital losses, but gains net of losses exceeds the 2022/23 £12,300 annual exemption.
  • Gains greater than the annual exemption of £12,300 in 2022/23.

In the case of capital gains arising through a residential property sale, you need to complete a separate return within 60 days of the property’s sale.

How TaxAgility can help

Every year around December and January, we receive many requests for assistance with personal tax returns and filling out the SA100. This is because, every year, people underestimate the implications of their tax situation. Unfortunately many leave it to the last minute to fill out the form believing there’s to be a simple case and realise otherwise.

You can avoid this stress and hassle if you review your sources of income and the factors listed above. Upon doing so, if there are any issues you feel are not so simple, simply call us and ask us to assist with your SA100 Self Assessment tax return. This will help you avoid the potential for penalties for late returns and inaccurate declarations.

Call TaxAgility today on 020 8108 0090 and speak to one of our knowledgeable team members about how we can help you with your SA100 Self Assessment Tax Return.

 

 


Everything you ever needed to know about your Tax Code

A tax code is a little set of numbers and a letter assigned to you by HMRC that appears on your PAYE payslip, which can have a profound impact on your earnings. Its important then, to understand why this is so and how to ensure it is correct. This is what this article aims to achieve, so read on, you may even find out that HMRC owes you money!

First of all, where can you find your Tax Code?

HMRC notice of tax codeThere are usually five sources that provide your tax code. The most obvious one is on your payslip. It will resemble something like “1257L”. Obviously, the code will be representative of your personal tax circumstances.

The second place you’ll find it is in the letter of coding that HMRC issues you by post when your tax code changes.

Third, via your HMRC personal tax account, found at the following link if you wish to register:
https://www.gov.uk/personal-tax-account

Forth, on your end of tax year P60. And Fifth, on your P45 if you change your job.

What is a tax code? Really.

There are two parts to the tax code: the numbers and the letter.

The numbers are there to tell your employer how much tax allowance you are entitled to. This is the amount you can earn before tax is applied at the various tax bands published. Simply multiply the number in the code by 10. So, if your tax code is 1257L, this tells your employer that the first £12,570 of your salary is tax exempt. So, if you earn £30,000 per year, your taxable income is £30,000 - £12,570 = £17,430.

There are various reasons why this number may vary in your particular circumstances and this will be covered later. But for most people with simple tax affairs, “1257L” will be a common tax code through the tax year 2022/2023 as this is the threshold set by the government for the personal tax free allowance.

The letter in the code refers to your personal circumstances and how they affect your personal allowances. For instance:

L - Means an employee entitled to the standard tax-free personal allowance.

0T - Where no personal allowance is available. Perhaps the employee hasn’t submitted a P45 and so there’s no information to calculate a tax code.

BR - For income at the basic rate but used for a second job or pension.

NT - No tax is deducted. Used for occupations that are exempt from PAYE, such as musicians.

W1 or M1 - These are emergency tax codes. They are used to calculate your tax only on what you have paid in the current pay period, not the whole year.

K - If you have this letter in your code, it means you are due deductions maybe because of company benefits, state pension or tax you
owe from previous years and these are greater than your personal allowance. So, for example if your tax code is “K525'' and your income is £30,000, you have a taxable income of £30,000 + £5.250 = £35,250.

There is a much larger list of tax coding letter explanations available on the government’s site here. These detail specific codes for Wales and Scotland too.

If the government sets my tax code, why would I need to check it?

Quite simply, mistakes are made. You may make a mistake in reporting aspects of your salary, pension, expenses, benefits, etc. Only by thoroughly working through your personal tax circumstances, ideally with your employer if you are a PAYE employee, can you be sure your tax code is correct.

The situation can get more complex if you have a second job, as the tax code for that will be different to your main job where your personal tax allowances are usually applied. This is why under some circumstances, it’s a good idea for a tax expert such as TaxAgility to check through your income, expenses and coding to make sure you are paying the correct amount, and if you are due any refunds.

I just received a PAYE coding notice in the post, what does that mean?

Typically, you will receive a notice of tax coding in January or February, to allow time for your employer to update your PAYE ready for the new tax year in April. Saying this, if there are no changes to your code and there is only the uplift to consider for the New Year, HMRC will not send you anything. You could receive a notice of coding at any time if your personal circumstances or the tax rules change, or if HMRC feel there are issues with your tax payments.

This is why it’s really important to check the new coding you receive against what you might expect. If you don’t, you may find yourself having to challenge HMRC and either claim back overpayments or find yourself owing tax. Neither situation is particularly fun.

Note: HMRC will not send you a code via post every year if there are no changes or just the uplift to consider.

Why might my tax code change?

As we mentioned earlier, there are numerous reasons why your tax code may change, these may include:

  • Your tax code has been updated, perhaps because of information you or your employer provided, or the tax rules have changed, as they can do each tax year.
  • You’ve started a new job, but your employer hasn’t received P45 information. This means they cannot calculate your tax payments. HMRC will impose an emergency tax code until this is resolved. If subsequently you find that this means overpayment, you’ll have to claim that back, most likely through your coding, which means your coding may change again until you have reached your regular tax payment band.
  • You receive income from a second job or pension. Where your main job uses up your personal tax allowance, the tax code on your second job will be different.
  • When your income changes, earning more or less can affect the tax you are liable for.
  • Benefits within your job impact coding, so this may change when you begin to receive them or stop receiving them. Benefits include such things as company cars, certain types of expenses, phones, etc.
  • You may be eligible to certain types of state benefits, such as the state pension, widow’s pension, widowed parent’s allowance, bereavement allowance, incapacity benefit, employment and support allowance and carer’s allowance. When these start or stop, your coding will most likely change.

What happens if you’ve paid too much tax?

This can happen, especially if you are moving between jobs, have more than one job, or receive or stop receiving any kind of benefits, state or otherwise.

If you think you may have paid too little tax, you need to let HMRC know as soon as possible. The difference will likely be claimed through your tax coding. However, this is only done for sums up to £3000. More than that and you’ll need to pay them directly. In any case, any tax due will need to be paid fully by 31 January following the end of the tax year in which the income was earned - e.g. if you owe HMRC tax for the 2021/2022 tax year, it needs to be paid in full by January 31st 2023.

If you’ve paid too much tax there is an online tax refund service that can be found here. https://www.gov.uk/claim-tax-refund.

The reasons HMRC cite as possible cause of overpayment are:

  • Pay from a job
  • Job expenses such as working from home, fuel, work clothing or tools
  • A pension
  • A Self-Assessment tax return
  • A redundancy payment
  • UK income if you live abroad
  • Interest from savings or payment protection insurance (PPI)
  • Income from a life or pension annuity
  • Foreign income

Essentially, once complete, they will use the information you provide to perform their own calculations and arrive at a figure, hopefully the same as yours. If they agree, they may issue a cheque or make a payment into your bank account.

I have two jobs and two tax codes, now what?

This also applies if you are receiving a pension as well as working. HMRC will determine which of the two jobs is your main job and use this to apply any personal tax allowances. If you don’t agree with this, you’ll need to contact HMRC and request that your allowances are moved to the other job or the pension if that’s more important to you.

If your primary job uses up all of your tax allowances then your second income employer will most likely be instructed to tax your income at the basic rate or higher rates of tax accordingly. This means that all of this second income will be taxed. This is usually done through the tax codes “BR” and “D0”.

How do expenses from my job affect my tax code?

It’s certainly not uncommon, as an employee, to find yourself having to pay out for things you need in your job. Most of the time, your employer will reimburse you for legitimate expenses and it won’t affect your tax coding.

If you do incur expenses that are not reimbursed by your employer and they are essential to your job, HMRC may include these in your allowance calculation. This might include such expenses as:

  • Traveling costs - those needed to do your job, including food and accommodation. However, traveling to and from work - i.e. the normal cost of computing is considered a private expense and not considered.
  • Professional subscriptions, such as those associated with a professional industry body and that allow you to do your job - e.g. as a lawyer, accountant, surveyor, etc.
  • Clothing, such as safety clothing.
  • You cannot claim for things that your employer may have provided an alternative for and for things that you do not use in your private life.

Claims can be made up to four years of the end of the tax year in which you spent the money. Bear in mind that you will have to keep good records and receipts, as HMRC may challenge the validity of your claim.

If your claim is up to £2,500, you can use form P87. PAYE employees don’t usually have to complete an SA100 Self Assessment Tax Return. However, where you are owed tax through expense claims, you can also choose to submit an SA100 detailing your income and expenses. It’s likely that the amount owed will be paid back through your tax code, either in the current tax year or the next one.

If the amount to be claimed is over £2500, then you will have to use a self-assessment tax return. For those who have not done this before, you’ll first need to register with HMRC.

A full list of allowable expenses can be found on the government site on allowable expense claims here.

Why not let TaxAgility ensure your personal taxation is correct

Most of the time regular employees can most likely work out their tax coding issues through their employer. However, for more complex cases with additional sources of income beyond your day job are concerned or where you may be self-employed. It’s a good idea to let a professional tax advisor assist you.

Mistakes can be costly, as they may represent situations where income from other sources have not been fully taken into account, rendering you liable not just to unpaid taxes, but also penalties too; and these can be substantial.

If in doubt, ask an expert to help. So give us a call today on 020 8108 0090, and find out how we can help.


September mini-budget

September's Mini-Budget

The budget delivered a package of more than 30 measures intended to tackle high energy bills, drive down inflation, and cut taxes to drive growth. However, the abolishment of the 45% tax bracket took many by surprise.

Here's a summary of the main elements of the budget.

Income Tax changes

An 'additional' tax rate of 50% was introduced in April 2010, reduced to 45% three years later but from 6 April 2023 will be no more. The 40% band will now be the highest tax rate such that the 13.7% previously 'additional' rate taxpayers will not only pay less tax but now everyone will benefit from the £500 personal savings allowance. The level of personal allowances remains (for the moment), meaning taxpayers earning more than £125,140 will still have no personal allowances.

The increase in dividend rates will also be reversed from 6 April 2023 such that the tax rates of income tax in England and Northern Ireland will be:

Earnings band (after allowances) On earnings and profits On dividends
Basic rate (0 to £37,700) 19% 7.5%
Higher rate (above £37,701) 40% 32.5%
Additional rate Abolished Abolished

 

This reduction/cancellation in tax rates is pleasing for the individual taxpayer but tax relief given at source (currently at 20%) on pension contributions and Gift Aid donations will be affected. The government has confirmed that there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027 and a one-year transitional period for 'Relief at Source' pension schemes.

NIC changes

The rates of class 1 NIC are reversed back to the levels in place on 5 April 2022 but the rates imposed from 6 July 2022 to 6 November 2022 remain. Therefore for all employees (except directors paying NIC cumulatively) the tax year will effectively be split into two - the first period for the first seven months of the tax year (6 April to 5 November 2022) and a second for the remaining five months (6 November 2022 to 5 April 2023). The calculation means that over the year the main Primary rate payable by the employee will be 12.73% (i.e. seven months at 13.25% and five months at 12%) and the main Secondary rate payable by the employer will be 14.53% (15.05% and 13.8%). Corresponding rates of Class 4 NIC for the full tax year 2022/23 will be 9.73% and 2.73% (a reduction from 10.25% and 3.25% to 9% and 2% respectively).

The figures are as follows:

  • Employees' class 1 NIC
  • 12% on earnings in the band: £1,048 to £4,189 per month (£12,570 to £50,270 per year)
  • 2% on earnings above £4,189 per month (£50,270 per year)
  • Employers' class 1 NIC
  • 13.8% on earning above £758 per month (£9,100 per year)
  • The employment allowance remains at £5,000.

Care will be needed if payroll is run around the changeover date. If the software has not been updated in time payments may have to be made using pre- 6 November percentages and any underpayment sorted out in the following payroll run.

Other key tax announcements

The statement included the reversal of a string of planned tax rises including the intended increase to 25% in the corporation tax rate originally set for 6 April 2023 -- this remains at 19%. Planned beer, wine, cider, and spirits duty rate increases have also been canceled and overseas shoppers can now shop sales- tax free in the UK.

The Annual Investment Allowance is a valuable tax break providing a 100% tax deduction for up to £1m of plant and machinery purchased in a year. This cap was due to be reduced to £200,000 on 1 April 2023 but will now be kept at £1m indefinitely.

Queries remain over the application of the 'super relief'. Under this relief qualifying expenditure on new plants and machinery incurred from 1 April 2021 to 31 March 2023 receives 130% tax relief effectively allowing 24.70% tax relief on expenditure (130% x 19%). Now that the corporation tax rate is being retained at 19% from 1 April 2023, we await further announcements as to whether this relief will remain.

The Enterprise Investment Scheme, providing tax incentives for individuals to subscribe for shares in unquoted trading companies, was due to end in 2025 but has now been extended for an undefined period. The similar Seed Enterprise Investment Scheme providing tax relief for investment in small trading companies also remains in place with increases in the annual investment caps of £100,000 per investor, £150,000 per company.

IR35 reversal

IR35 never really went away - the rules just changed. Now from 6 April 2023, another change means we are back to the original 2017 rules. The off-payroll working variants for the public sector (from 6 April 2017) and for large private sector organisations (from 6 April 2021) are to be scrapped. It will now be up to the directors of intermediary companies to decide whether there would be an employment relationship between the worker and the engager, if all intermediaries in the chain are ignored.

Stamp Duty Land Tax

As from 23 September 2022, the threshold from which SDLT must be paid on the purchase of residential property had doubled from £125,000 to £250,000. This means that the 2% tax rate has been abolished, saving purchasers a potential £2,500.

 


New Trust Registration Service Requirements

Trust Registration Service - Rules extension and deadline

Changes in trust registration requirements - act now!

Did you know that you have until September 1st 2022 to register a trust with the Government’s Trust registration Service (TRS), even if you previously didn’t have to?

Until recently, only thrusts that had a UK tax liability, had to register. This included off-shore trusts, but where they still had a UK tax liability. Now, all Express Trusts need to be registered.

Recent changes in Trust Registration Requirements

The new requirements to register a trust were introduced in 2020. Those trusts created on or before October 6 2020, have until September 1 2022 to register or be faced with a fixed penalty fine of £100 or up to 5% of any tax due (or £300, whichever is greater).

Trusts created after this date must be registered within 90 days of creation.

It is estimated that because of this change, there may be around one million trusts in the UK that are still to be registered before the September 1st deadline.

What trusts now need to be registered?

The Government instructs that the the following types of trust now need to register:

  • All UK express trusts — unless they are specifically excluded
  • Non-UK express trusts, like trusts that:
    • acquire land or property in the UK
    • have at least one trustee resident in the UK and enter into a ‘business relationship’ within the UK

By way of example, trusts that now require registration include those where:

1. A trust holds an offshore or onshore investment that was set up by a financial advisor. Most commonly these include:

  • discounted gift trusts
  • loan trusts
  • gift and loan trusts

2. Property is held and a beneficiary exists but where there was no taxable income or capital gains and therefore no need, up to now, to register with HMRC.

3. Trusts that hold shares in a private company. This includes:

  • a trading company,
  • a family investment company (FIC)
  • a personal investment company (PIC)

4. Any other trusts that hold other assets where a tax liability has not arisen.

Trusts that do not have to be registered.

While the extension of the TRS requirements covers many trusts that previously didn’t have to register, there are a number that remain exempt. A full list of exemptions can be found on the Government’s ‘register a trust page’ here.  Remember, that this only applies if the trust is not liable to UK taxes.

How Tax Agility can help

While you can do this yourself through your own Government Gateway account, it’s really important that you get it right the first time. Mistakes in any reporting to HMRC can be very costly. This is why Tax Agility offers a simple service to ensure your Trust is reported correctly. First, we will make sure your trust isn’t exempt. Then we will ensure the correct information is reported through the TPS service and that it is up to date - another requirement, even if you have previously registered your trust.

Contact Tax Agility today on 020 8108 0090 and enlist our assistance in registering your Trust - time is running out.


paying tax on cryptocurrency profits

Cryptoassets - what are they and what are the tax implications?

Many ordinary people and businesses, and by that we mean people who don’t usually engage in financial trading, have tried their hand at investing in crypto currencies. Some have fared well, but many over the past year have suffered significant losses, due to recent crashes in this space. As with any traded asset one may make a financial gain or a loss, but the question arises as to how one reports such gains or losses to HMRC. This is especially poignant if as an individual you’re not usually reporting via an SA100, as maybe the case with employees on PAYE, or perhaps exploring their use in your business.

This article explores the world of cryptocurrencies (and NFTs) and explains how HMRC treats them, how to report them to HMRC and what taxes you’ll be expected to pay.

Cryptocurrencies in the news

paying tax on cryptocurrency profitsOver the past few years cryptocurrencies have made the headlines, sometimes because of meteoric price rises and at other times catastrophic crashes. Some have been caught out in what appeared as the new ‘gold rush’ - investing heavily and initially seeing significant gains, but then very quickly watching the currency crash, wiping out almost everything. In short, if you invest in cryptocurrencies you need a strong stomach as you’re in for a wild ride.

That doesn’t deter everyone though, to the point where significant numbers of people not accustomed to financial trading have put their toe in the crypto ocean - and it’s a very large ocean indeed. By March 2022 there were over 18,000 different cryptocurrencies in existence.

What is a cryptocurrency?

The definition given by Wikipedia is this: “A cryptocurrency, crypto-currency, crypto, or coin is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.”

But why is there such an interest in cryptocurrencies? Here is a summary of the main reasons:

  1. It is not a ‘fiat’ currency. This means that it is not a currency controlled by a government - i.e. legal tender, like the Dollar, Pound or Euro. This of course means that because it isn’t backed by a government institution like the Bank of England, its value can vary wildly, as indeed it has recently, just like stock prices. This is why it is considered a more risky form of investment, and some would say a form of gambling. So, in short - it’s owned by everyone and no one: it is decentralised. HMRC refers to cryptocurrency as “DeFi” - Decentralised Finance.
  2. It is almost impossible to manipulate or forge. Unlike centralised ‘fiat’ currencies, which can be forged and manipulated because of a ‘centralised ledger’, crypo’s decentralised basis means there is no central ledger, as it is ‘distributed’, in fact, it’s part of each transaction.
  3. The power of the Blockchain. It’s worth spending a little time understanding the blockchain if you’re considering investing in crypto currencies. A good summary can be found here.

 In short though, the blockchain is a powerful piece of mathematics that encrypts and keeps track of each transaction. Every transaction has a unique code called a ‘hash’ and forms a ‘block’ of information. The block is added to the chain, which is the public database where all blocks are stored. Blocks are added to the chain chronologically and distributed worldwide among millions of computers.

This is why it is almost impossible to forge or manipulate, because someone would have to control a majority of those computers in order to change the blockchain. This would also take an enormous amount of computer resources. The bigger the block chain becomes over time, the harder it is to crack.
  4. Privacy. While cryptocurrencies use mathematics to track transactions between parties, powerful encryption keeps personal information private, in this case the identities of the parties crypto ‘wallets’. This is one reason why cryptocurrencies have drawn bad press because it is the favoured currency of criminal gangs, money launderers and extortionists.
  5. Reduced reliance on the banking network. We’ve all experienced at one time or another, the problems traditional financial institutions have. This ranges from account access issues to network outages, hacked accounts and of course, bank failures, although thankfully less common. Basically, banks are a single point of failure in a system millions of people rely on daily. Cryptocurrencies were intended as a way to move away from this centralisation, making the transaction between two parties, just between the two parties - no middle men. This is another reason why governments and banks are concerned about the rise of crypto.
  6. Money transfer. Sending money to somebody internationally can be a real pain. Even though it is an electronic exchange processed in milliseconds, the institutions still want to charge an ‘arm and a leg’ for the service. Once you understand the process, crypto transfers are very smooth, and you don’t have anyone looking over your shoulder at the amounts or where they came from - no freeze on funds while the bank checks authenticity or reports high value fund moments to the government.

This all makes cryptocurrencies look like fantastic monetary vehicles, and they are, but they’re not without downsides. The main ones are these:

  1. It’s still early days and governments still have the ability to impose regulations over their use.
  2. If you lose your virtual wallet or accidentally delete your currency, game over. For instance the story in the press about a man whose hard drive with £210 million worth of cryptocurrency ended up in the local landfill.
  3. Volatility. The value of a crypto currency can change dramatically quickly.
  4. There’s no regulation in the crypto market, e.g. the FCA and therefore no comeback if a currency disappears or is withdrawn. Your investments are like stocks, can go up or down and are not insured like money in the bank.
  5. The crypto exchanges - the places where currencies are bought and sold, are not immune from hackers. Wallets stored online (hot wallets) can be lost. This is why many investors prefer ‘cold wallets’ - those stored offline - like the man in the press.
  6. Crypto currencies are often the target of scams on social media, with fraudsters trying to trick people into investments using crypto - precisely because they can be traced.

What are NFT’s and are these the same as crypto currency?

We won’t go into detail here as NFT’s are another deep subject to explore, but here’s a quick answer to this question.

NFTs or ‘non-fungible’ tokens are digital assets. This asset represents a real-world object, such as an image, a video, a music file. The digital files that carry the ‘work of art’ are encoded using the very same technology as crypto currencies, but that’s where the similarity ends - they are not currencies. NFTs use crypto currencies to facilitate the sale and purchases of the assets.

Fungible vs non-fungible

Simply put, fungible assets are divisible and non-unique. Cryptocurrencies like BitCoin are fungible as they can be sold in increments. Non-fungible assets are unique items and can’t be divided, like image or video or digital artwork.

NFT’s can be bought and sold just like any other form of investment asset and through exchanges just like crypto currency. Buying and selling NFT’s will however be treated the same way for tax purposes as cryptocurrency.

Should you invest in crypto currencies?

Firstly, Tax Agility is not an investment advisor and so no guidance should be inferred here, what follows is just for interest. 

The relative newness of crypto makes some nervous about significant investments. That said, some of those who dipped their toes in early in this market made absolute fortunes. There are still a lot of opportunities to potentially experience significant gains (and losses), sometimes in the 000’s of percent.

However, like any investment strategy, one should maintain a healthy spread of investments to help offset losses in any one asset. Crypto could be a part of a broader investment strategy, perhaps your more risky investments with potential for high upsides and losses. In short, make sure your eyes are wide open when considering this investment.

The other key point to make here and the original reason for this post, are the tax implications of cryptocurrencies. If there’s a sudden rise or fall in a crypto asset and you decide to exit, you’ll be liable for any gains made. Depending on the value of the crypto asset, this could seriously impact your personal tax circumstances. While this is also true of assets in the form of stocks and shares, the extreme volatility experienced in crypto markets is less frequent in regular investments and so allows for at least some planning or recovery time, and generally allows you to plan a more regimented exit with tax planning considerations. Dumping a large crypto asset in panic, simply because there’s little history in this market, is potentially a different proposition for some.

How are cryptocurrencies and crypto based assets taxed in the UK?

The government’s Cryptoassets Manual provides very clear guidance as to how taxes will apply depending on the circumstances and whether it’s a business or individuals involved.

At the core of this is whether or not a ‘trade’ is being carried on. Profits arising from cryptocurrency asset transactions will be considered as either income or capital gains or for a business, a chargeable gain.

HMRC’s Cryptoassets manual can be found here.

Cryptoasset taxation for individuals

Income from cryptocurrency trading

HMRC makes it clear that only in exceptional circumstances would individuals buying and selling cryptocurrency tokens (such as BitCoin) be considered trading. This would mean that an individual would need to be trading at considerable frequency and be using a degree of sophistication in the tools they use. This is more akin to a financial trading company than an individual, although some day traders may fall into this bracket.

HMRC’s Business Income Manual outlines how it determines if a trade is being carried on or not - referred to as ‘Badges of Trade’.

If the individual can prove that they are indeed trading, then the profits arising from the activity would be considered ‘trading profits’ and be considered as regular income, and therefore subject to income tax.

Most scenarios involving crypto currency trading are likely to be treated similarly to a trade in shares (investments) and therefore profits arising would be treated as capital gains and incurring capital gains tax.

In what other situations would crypto assets be considered as personal income?

Cryptoassets earned through employment

If an employee receives crypto assets as employment income, HMRC considers this as “money’s worth”. As such, this income is subject to both income Tax and National Insurance Contributions based on the value of the assets.

What happens if the employee then sells the asset acquired as employment income?

Profit arriving from the disposal of a cryptoasset token is treated as a capital gain(or loss) and subject to Capital Gains Tax.

Tokens earned through mining activities

Yes, you read that correctly - ’mining’. BitCoin, for instance, has to be ‘dug up’ or mined. This is way beyond the scope of this article, but in simple terms: each ‘coin’ is based on a unique identifier ID derived from a complex mathematical calculation. It’s rather like looking for prime numbers, the bigger they are the harder they are to find and the more computing power it takes to find them. Crypto miners invest significant sums of money in mining equipment - basically very fast, powerful computers used to crunch the numbers. These are not only expensive, but power hungry too and so the rarer a coin - such as BitCoin which has a finite number of 21 million coins (not reached yet), the greater the potential value.

However, many private individuals have tried their hand at crypto mining and need to understand how profits from this activity may be taxed.
As stated earlier, even if you consider your mining activities as ‘carrying on a trade’ and expecting profits to be treated as income rather than capital gains, HMRC will look closely determine this based upon a range of factors, including:

  • Degree of activity
  • Organisation
  • Risk
  • Commerciality

In reality, to show that a trade is being carried on, you’ll need to show significant investments in computing equipment and organisation around it, rather than the activity being based on your home computer being used in its spare time for mining activities.

If you can show a reasonable basis for trading, then any profits will be treated as regular income, otherwise CGT will be applied.

How do you report profits made from the sale of Cryptoassets?

For individuals, this will be reported through the SA100 Self Assessment tax return, specifically supplementary pages SA108 which is used to report capital gains.

Cryptoasset taxation for businesses

Even though cryptoassets may be referred to as ‘currencies’, HMRC does not regard them as such. Instead, HMRC treats cryptocurrency as a traditional asset for tax purposes.

Whether or not the sale of a crypto asset is deemed profit from a trading activity or simply a chargeable gain (or loss) from the sale of an asset, will depend on how HMRC views your firm’s activities. So, the same ‘badge of trade’ tests will be applied.

To trade or not to trade

HMRC’s Business Income Manual outlines how it determines if a trade is being carried on or not - referred to as ‘Badges of Trade’.

For most businesses, it’s likely that the sale of a cryptoasset will be treated as a chargeable gain (or loss), just like regular assets, rather than income from a trade. As such, any expenses associated with the asset may be set against the profit, or indeed any losses incurred in the sale.

More information can be found in the Government’s Cryptoassets Manual for businesses.

Reporting gains made from the sale of cryptoassets is exactly the same as that of the sale of a regular asset and would be shown in your year end company accounts as such.

Whether you’re an individual selling crypto assets or a business trading in business assets, Tax Agility can help

The tax regimes around cryptoassets are still in relative infancy. HMRC, as indeed are many tax authorities around the world, is continually reviewing the development of this new area of finance. If and when HMRC begins to treat cryptocurrency like other fiat currencies is anyone’s guess.

For many, how investments like crypto are taxed can be a little confusing, but rest assured that if you have made investments in crypto, either as an individual or a business, and have received profits or losses from trading them, Tax Agility can help you in reporting them in the correct manner. Just give us a call today on 020 8108 0090 to discuss how we may assist.


capital expenditure super deductions 2022

Super deductions - how to maximise your business’s tax efficiency

Most business owners understand that it is important to ‘capitalise’ certain company assets. These ‘fixed assets’ can be used to reduce your corporation tax bill. However in April 2021, the Government increased the usual 100% deduction to 130% until April 2023. Read on to find out how you could benefit from this increase.

What is a super deduction?

capital expenditure super deductions 2022Over the years, successive governments try to find ways to incentivise industry or stimulate areas of business. This is especially true during troubled times, such as the financial crisis of 2008 and more recently the problems brought on by the Covid pandemic.

Reducing broad ranging tax rates, such as reducing corporation tax, VAT, capital gains, etc, introduce problems of their own, most often political, as they can appear to favour selective groups in society, so governments look for more niche methods to achieve their aims. The ‘super deduction’ is one of them, as this applies purely to businesses that qualify for corporation tax. It’s also limited in its range, as it can only be applied to new plant and machinery that ordinarily qualify for the 18% main pool rate of writing down allowances.

How does this affect the Annual Investment Allowance?

Essentially, it compliments it. Since January 1 2019, companies have been able to annually invest up £1 million in qualifying assets, these already benefit from 100% relief. This is known as the ‘Annual Investment Allowance’. Prior to 2019, the AIA was set at £200,000.

The £1 million limit has been extended to March 31 2023.  The Introduction of an extra 30% deduction is, therefore,  a most attractive additional incentive for owners to invest in their businesses - or even start new ones.

What is the SR Allowance that was also announced?

Along with the Super Deduction, the Government also introduced the SR Allowance.

Not all purchases can qualify for the super deduction, such as those that qualify for the 6% write down allowance rate - typically long life assets such as those associated with buildings and property. To incentivise this industry, the Government has introduced a ‘special rate for first year allowance’ - the SR allowance. This affords new plant or machinery in this bracket with a 50% first year allowance.

What businesses qualify for Super Deduction?

This benefit is only available to those entities who qualify for corporation tax. In other words, it is not applicable to those in business as individuals, sole traders, or partnerships.

What purchases qualify for the Super Deduction?

There are a wide range of asset types that can take advantage of the SD beyond the most obvious forms of fixed assets, such as computers, IT systems, manufacturing equipment and the like. In short, most purchases that contribute to the operation and functioning of your business should be treated as an asset, rather than an expense, and capitalised accordingly.

However, there are other less obvious expenditures that can close be capitalised and gain SD relief. The most common of these include:

Development costs: Under FRS 102 costs associated with bringing a system into working condition, such as those attributed to the development, can be classified as tangible fixed assets. For example, developing a new website or piece of software, could be treated as such and gain the SD allowance benefit.

Borrowing costs: When developing a new product or building a new manufacturing plant or product line, a business may be required to finance the operation. The costs of borrowing may be capitalised.

Hire purchase: Assets on hire purchase or similar purchase contracts where possession rather than ownership passes to the business can also benefit from super deduction, but only at the point where the asset began use.

The most obvious test of applying the SD benefit is that the purchased plant or machinery needs to be new and not second hand. Also, you cannot decide to capitalise something bough in prior accounting periods just to take advantage of the SD.

What happens if I don’t make a profit, can I still apply the Super Deduction?

carry over super deduction allowanceYes. Not all businesses make a profit each year. Indeed, some businesses may choose to capitalise equipment porches in a  financial year specifically to reduce their tax bill to zero - typically smaller businesses. If you make a loss in a year where capital purchases were made, you may carry any unused deductions forward to use as losses.

Selling an asset that qualified for Super Deduction

It may enter the minds of some that as the government is giving away an extra 30% in the form of a tax deduction, which is true, if they quickly sold the purchase, they may benefit further. Also, there are legitimate reasons why a firm may have to sell assets that benefited from the SD. So what happens and how is this accounted for?

Naturally, the Government is going to want their ‘pound of flesh’ in this instance. You will need to carefully track any asset that benefited from the SD, so when it comes to selling the correct treatment can be applied.

The first thing to note is that if the disposal of an SD qualifying asset is before April 1 2023, its disposal value is 1.3 times the actual disposal value. This income should then be treated as taxable profits and not allocated to ‘pools’.

Read more about the government's super deduction scheme here.

Is this a good time to start a business?

This may indeed be a good time to start a new business if that business is going to need significant investment in new capital equipment. Furthermore, if your established business is an entity in the form of a sole-proprietorship or partnership and you are looking to grow, this may be a good time to incorporate.

Talk to Tax Agility about how your business can take advantage of the super deduction scheme.

Tax Agility are chartered tax accountants operating in the Richmond, Putney and Wimbledon area. We specialise in assisting small and medium sized businesses navigate the complexities of company taxation. Our goal is to ensure your business is as tax efficient as possible and to effectively exploit incentives such as the super deduction scheme.

Why not call us today on 020 8108 0090and discuss how we can help take your business to the next level of tax efficiency.


declaring your overseas income

What are the differences for tax purposes between domiciled and non-domiciled status?

A few months ago we published a case study concerning HMRC enquiring about foreign income. This can happen if you are a foreign national and are now living and working in the UK. An area we didn’t touch on was associated with how HMRC views your domiciliary status. The recent news about Rishi Sunak’s wife has highlighted this is somewhat complex and often misunderstood area of tax law. In this short post we’d like to help explain what it means to be ‘domiciled’ or ‘non-domiciled’ where tax in the UK is concerned.

What does ‘domicile’ mean?

declaring your overseas incomeIn a nutshell, ‘domicile’ refers to that country a person treats as their main or permanent home. Also, it concerns where they actually live and maintain a ‘substantial’ connection with.

If you read our article on “Living Overseas - Do I Need Top Pay Tax if I Leave The UK?”, then you’ll be familiar with the tests that HMRC apply to decide how to treat your current tax residency status. As part of the Automatic UK Test, HMRC looks at your sufficient ties to the UK and whether they point to whether or not you’ve actually left the UK or still have reasons to come back, perhaps regularly. These tests help HMRC determine if you are legitimately living overseas for tax purposes or if perhaps you’re trying to avoid paying UK taxes by staying out of the country for 183 days a year.

Domicile of origin and domicile of choice.

Where UK tax law is concerned, there are three types of domicile - domicile of origin, domicile of choice and domicile of dependence. In the UK, you acquire domicile or origin at birth through your father, although this doesn’t mean the country the person was born in, but most often does. So, if your father is from India, India is your domicile, unless you choose otherwise.

Domicile is different to residency. In UK common law, every individual has one domicile, you can’t have two or have no domicile.

Your domicile of origin cannot be lost easily. Simply by moving overseas for an extended period, becoming a tax resident here or elsewhere, does not automatically remove for domicile status.

However, domicile of choice is a little harder to consider. Take for instance, a UK national. If they move abroad ‘permanently’ to settle in another country. Permanent means ‘indefinitely as it is really up to the person concerned, as is domicile of choice. It comes down to intention’s: if the new country will be their permanent residence, will they have family interests there, a business or other social interests. Do they own a property in that country? And, what about the existence of a Will and where that was created.

It’s quite a tricky area, as there are many variables and many ways to interpret somebody’s intentions. Hence, arguments with HMRC can arise and as always, you’ll need to prove your ‘innocence’ in the matter.

Domicile of dependence is for children under the age of 16 and their domicile will follow that of the person on whom they are legally dependent. However, it must be noted that if the domicile of the parent or legal guardian changes, the child will automatically acquire the same domicile and the child’s domicile of origin will be displaced.

[Read more about what happens if HMRC make enquires about you overseas income]

Important tax issues to consider

It is quite understandable why somebody would not wish to give up their domiciliary, as there may be intentions to return home, the UK being transitory, even though it may appear as somebody’s permanent home.

As tax specialists based in the London area, we are conveniently located to assist foreign nationals, non-domiciled in the London and the surrounding counties, with their unique tax issues and concerns. We've assisted many individuals navigate the complexity of foreign income taxation, whether you are domiciled in the UK or are considered non-domiciled.

Take for instance somebody from India who has been living and working in the UK for many years. Their family may still predominantly be in India. They may’ve family business interests there too, or even own property there. In short, there may still be clear intent to return one day.

This means that although a foreign national living and working in the UK maybe a ‘tax resident’ and pay taxes on the income generated through their work here, their ‘non-domicile’ status will mean that their worldwide income does not have to be reported in the UK, as that will no doubt be payable to the tax authorities in the domiciled country. This highlights two options for non-domicile tax residents - being taxed on an arising or remittance basis

Taxed on an ‘arising’ or ‘remittance’ basis

If you are ordinarily considered as UK domiciled and a tax resident, then you are charged on an arising basis. This means that you pay tax on your worldwide income and you’re allowed to use your personal tax allowances and any annual exemptions to offset that income.

However, things are little different and often highly beneficial if you are considered ‘non-domiciled’ while a tax resident in the UK. In this case, you can choose to be taxed on a remittance basis, if that treatment is more favourable than the arising basis. By choosing the remittance basis, you’ll only be taxed on UK sourced income, not worldwide income, unless you decide to ‘remit’ that income. For instance, if you’re a Singapore domiciled national living and working in the UK as a tax resident and a retirement or an assurance policy matures yielding a gain. If you leave the gain in Singapore, no tax is due. If you bring that money into the UK - remit it, then tax falls due.

It’s important to note though that if you choose the remittance basis, you’ll lose your tax allowances and exemptions.

Other factors to consider when using the remittance basis

Do I need to claim to use the remittance basis?

Not necessarily. If your ‘unremitted’ foreign income and gains for the tax year are less than £2000, the remittance basis applies automatically, so you don’t need to claim. Also, it should be noted that at this level, you won’t lose your personal allowance or capital gains annual exemption either. This also allies, even if you are considered ‘domiciled’ for UK tax purposes.

If I choose to remit my income, how will it be taxed?

If you decide to bring some of the income you have earned overseas into the UK, that income will be taxed at the standard (non-savings) tax rates - 20% for basic rate earners, 40% for higher rate payers and 45% for the top tier incomes over £150,000.

Note though that dividend income, where you’d normally see these taxed at 8.75%, 33.75% and 39.35%, will be taxed as ordinary income - which would not be the case if you’d decided to opt for the ‘arising’ basis as opposed to ‘remittance’ basis.

How does the remittance basis work if I am a long term resident?

As the saying goes - “there’s no such thing as a free lunch”. At some point, HMRC will see your long term residency in the UK as a way of reducing your tax exposure and will look to make you pay for that entitlement. So, two bands of charges apply:

Resident for 7 out of the previous 9 tax years. For the privilege of maintaining your remittance basis, you’ll need to pay £30,000 per year.

Resident for 12 out of the previous 14 tax years. For the privilege of maintaining your remittance basis, you’ll need to pay £60,000 per year.

This is HMRC’s way of encouraging people to convert to the ‘arising' basis.

When am I automatically considered domiciled in the UK?

If you have been resident in the UK for 15 out of the previous 20 years, you are deemed as domiciled for tax purposes.

Domiciliary status for tax purposes is a complicated area, seek help

We have presented in rather simple terms the most commonly encountered tax aspects of being domiciled or non-domiciled in the UK. This subject is very complicated as the range of income sources can be extensive as can your ties to the UK if you are non-domiciled. Inheritance tax is another area affected by domiciled status that we haven’t covered here. Rules covering IHT and domiciled status changed in 2017.

If you are encountering issues with taxation as applied to domicile status, it’s likely that you require specialist tax assistance. We're based in London and our offices are conveniently located in Richmond-Upon-Thames, Putney and Cavendish Square. Our tax advisers are on-hand to help you navigate these difficult waters and arrive at an outcome best suited to your personal circumstances. Call 020 8108 0090 or use connect using the form here.


claiming covid-19 related expenses for work

Working from home and claiming tax relief on expenses

As more of us are now working from home, more often, because of the recent impact has had on businesses and attitudes concerning the practice of working from home, how can employees be reimbursed for the extra expenses they incur working from home, and what exactly can they claim for?

It comes as no surprise to find that many of us have had to work from home over the past couple of years. While in most cases this was forced upon us, it has had a significant effect on the attitudes of employers towards this practice.

Many employees have found it beneficial, as indeed have some employers, and want to continue, at least for part of the working week. Working from home imposes a range of costs on both employer and employee that prior to the recent pandemic, haven’t drawn that much attention. So when employees spend a considerable part of their work time working from their own home, how much of the extra expense can they claim, and what exactly is claimable?claiming covid-19 related expenses for work

What types of working from home expenses are we talking about?

Enabling an employee to work effectively from home requires more than a little thought and planning, there are real costs and expenses to consider. These may include:

  • The cost of a laptop or other computer
  • An internet connection
  • A printer
  • Printer and general office consumables
  • A home office space and furniture
  • Heating
  • Lighting
  • Telephone / mobile phone

Most people typically discover that while working from home can be a great convenience, their household bills start to increase, especially if normally both adults are at work, working the typical 9 to 5 office shift.

Then there are other considerations that are often forgotten, issues such as insurance come to the fore, personal and for additional equipment. Also, can an employee now claim expenses for a trip to the employer’s office?

Reimbursement vs tax exemption

It is important to understand how expenses are treated for tax purposes.

Reimbursement

If, as an employee, your employer reimburses the expenses you incur as a part of your job, HMRC must be satisfied that:

  • No matter who did the job, the expense would have been incurred.
  • It was necessary to perform your job.
  • It was incurred in the performance of your duties.
  • It was incurred and paid back to you.
  • The expense was wholly and exclusively for your work.

If HMRC isn’t satisfied, you’ll run the risk of expense payment being treated as additional income and be taxed accordingly.

Tax exemption

If your employer doesn’t reimburse you for expenses incurred during the performance of your duties, you may be able to claim these against your income. That may be the case if for example your employer doesn’t reimburse you for the additional expenses of working from home. You must be able to prove, just like reimbursed expenses, that they were purchased wholly and exclusively for your job.

If this is the case then your expenses can be claimed against your income. For instance, if you earn £30,000 and you incur £5,000 of expenses, you will only pay income tax on £25,000.

Some common questions about claiming working from home expenses

Implications exist for both employers and employees where claiming expenses related to working from home are concerned. Let’s look at some of these.

Can employers reimburse homeworkers for their household expenses tax free?

The simple answer is ‘yes’ an employer can reimburse its employees when they work from home with your full agreement, provided they are ‘reasonable’ and provided that the employee working from home is a regular occurrence.

HMRC allows different levels of payment to be paid free of tax and national insurance without supporting evidence. For weekly paid employees, this is up to £6, and monthly paid employees can expect £26 a month.

Can an employee be reimbursed tax free for working expenses greater than these figures? Again, yes. However, you must be able to prove that the payments are wholly in relation to ‘reasonable additional household expenses’ and that you have supporting evidence to this effect.

When employees are given equipment for home use, is there an income tax charge?

Income tax charges for this type of expense usually arise because the equipment concerned is also being used for personal use. As such it’s considered a benefit and tax arises as a result. So, if the equipment is supplied and owned by the company and supplied for business use, not personal use, then a tax charge will not arise. The other condition is that this ‘benefit exemption’ is offered to all employees with similar employment terms. The equipment must also be returned when the home working ends or when an employee leaves, if not a chargeable benefit will arise.

[Learn more about how benefits in kind are treated by HMRC here]

If an employee purchases their own home-working equipment, can we reimburse them tax free?

As a consequence of Covid-19, there was a government scheme in place up to April 5th 2022 that allowed employees to be reimbursed tax free for home-office equipment purchases, provided the same benefit was available to other employees in a similar role. This has not been extended beyond April 6th 2022.

Can homeworkers claim tax relief on household expenses?

Yes, because not every employer will cover the cost of an employee working from home. However, there are limits. Firstly, just like an employer reimbursing employees for home use, it has to be fully justified as an expense incurred wholly, exclusively and necessarily in the performance of their duties. Usually this is difficult to achieve as the employee should not have had a choice to work from home - i.e. it was forced upon them by the employer. If they did have a choice in the matter, then this would not be allowed.

However, because of Covid-19, an employee can now claim the same weekly £6 or monthly £26 allowance through their Government Portal for tax years 2020/21 and 2021/22. This claim is possible even if the employee was asked to work from home on a single day in either tax year. For a person on the basic tax rate of 20%, they are able to claim £6 per week which equates to £1.20 per week, or £62.40 per year. 40% taxpayers can claim double this.

Again, it is possible to claim more, but as ever, complete records demonstrating the authenticity of the claim must be kept and be justifiable.

If an employee works from home can they claim tax relief on travel expenses for trips to the office?

This is a difficult and complex area. It requires the definition of what is an employee's permanent workplace and temporary workplace. It also depends on whether the employee is permanent or part-time.

HMRC considers a permanent place of employment that location where an employee attends in performance of their duties. Regular relates to the frequency of attendance or pattern of attendance. This means that going to the office everyday is a requirement, a visit once a week, fortnightly or monthly, may apply.

On the other hand, HMRC considers a temporary workplace a location an employee attends while fulfilling a temporary role or one of limited duration. If an employee spends more than 40% of their time at one location over a 24 month period, HMRC will consider this as a permanent workplace.

So, if an employee ordinarily works from home full-time and is required to travel to the office, the employee can claim unreimbursed expenses tax free - provided the travel is not made regularly, else it may be considered that the office is the permanent place of employment.

Accordingly, if an employee shares their time between two locations, such as a home-office and their real office, HMRC will consider this as ordinary commuting between two ‘permanent’ places of work.

Can you backdate working from home allowance?

Yes, HMRC will accept backdated claims for up to 4 years.

Am I eligible for working from home tax relief?

Yes, provided you had no choice in the matter and your employer asked you to. Then you can claim £6 per week / £26 per month (monthly workers).

Note that you cannot claim this allowance if your employer reimbursed your expenses for doing so or paid you an allowance.

How do you claim payment for working from home?

You can make a claim if you have a government portal account or through your regular SA100 tax return.

Record keeping

Making expense claims is one thing, making sure you have the evidence to support them is quite another. Most employees are used to claiming ad-hoc expenses from their employer, such as when they attend an off-site client meeting, attend a trade show, stay overnight somewhere or claim subsistence expenses. When it comes to claiming expenses that relate to the use of your home, HMRC quite naturally regards these claims with little more skepticism.

It’s essential that you keep accurate documents in relation to what you are claiming. If you are claiming for heating that you might ordinarily expect not to have to pay because ordinarily you work in an office from 9 to 5, then make sure you apportion a reasonable amount of the bill. Don't, for instance, claim for heating your entire house when in reality you’re using just one room.

When you’re unsure, talk to a tax expert like TaxAgility

Personal tax addition can be a complicated area and making claims for expenses if not properly validated and justified, can lead to serious consequences with HMRC. If you have any doubts or would like a tax expert to help you in making claims for tax relief, call TaxAgility today on: 020 8108 0090 and speak to one of our personal tax experts.