HMRC have published guidance for employers on the tax treatment of various expenses and benefits provided to employees during the coronavirus pandemic in which they specifically address the extent to which a company car remains available for an employee’s private use. We explain what it means in practice in today’s blog.

Company car ‘availability’ during the Covid-19 pandemic

For many, their working patterns changed as a result of the Covid-19 pandemic. Some employees were required to work from home, some were furloughed, while those with certain health conditions were required to shield.

If the employee has a company car, is a deduction available for periods during the pandemic when it was not used?

Legislative test

Under the legislation, a benefit-in-kind tax charge arises where the car is available for the employee’s private use. The legislation deems a car to be available for private use, unless that use is specifically prohibited and there is in fact no actual use.

Deduction for periods of unavailability

When calculating the amount charged to tax in respect of the private use of a company car, a deduction is given:

  • where the car is made available during the tax year, the period from the start of the tax year to the date on which the car was first made available to the employee;
  • where the car ceases to be available to the employee throughout the whole tax year, from the date that the car ceases to be available to the end of the tax year; and
  • periods of 30 days or more throughout which the car was not available to the employee.

Unavailability during Covid-19: HMRC’s stance

HMRC have published guidance for employers on the tax treatment of various expenses and benefits provided to employees during the coronavirus pandemic in which they specifically address the extent to which a company car remains available for an employee’s private use.

In the guidance, HMRC state that where an employee has been furloughed or is working from home because of Coronavirus and the employee has been provided with a company car that they still have, the car should be “treated as being ‘available’” for private use during this period even if the employee is:

  • instructed to not use the car
  • asked to take and keep a photographic image of the mileage both before and after a period of furlough
  • unable to physically return the car or the car cannot be collected from the employee

Where restrictions on the freedom of movement prevent a car from being handed back or collected, HMRC accept that the car is unavailable where the contract has terminated from the date that the keys, including the fobs, are returned to the employer or to a relevant third party. Where the contract has not terminated, HMRC only regard the car as being unavailable from the date 30 days after the keys are returned.

Worth a challenge

The unavailability tests set by HMRC are stricter than those posed by the legislation, which require only that private use is prohibited and not take place; there is no requirement in the legislation that they keys are returned. Where and employee is instructed not to use the car and evidence can be provided that it was not indeed used, there a goods grounds for a deduction where the period of unavailability exceeds 30 days, even if the keys are not returned.

Partner note: ITEPA 2003, s. 114, 118, 143; www.gov.uk/guidance/how-to-treat-certain-expenses-and-benefits-provided-to-employees-during-coronavirus-covid-19

 

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If you have forgotten to file your tax return or have made a mistake leading to a penalty and you or a family member were ill with coronavirus, this might be allowed as a ‘reasonable excuse’. In today’s blog we explain what reasonable excuses are and how coronavirus might fall into this category.

Twitter: Reasonable excuse – does coronavirus count?

HMRC may allow an appeal against a penalty if the taxpayer has a ‘reasonable excuse’ for why, say, they filed a return late or paid their tax late.

A ‘reasonable excuse’ is something that prevented a taxpayer from meeting a tax obligation despite the fact that they took reasonable care. HMRC take a hard line as regards what they constitute as a ‘reasonable excuse’; providing the following examples of ‘acceptable’ reasonable excuses:

  • the taxpayer’s partner or another close relative died shortly before the tax return or payment deadline;
  • an unexpected stay in hospital that prevented the taxpayer from dealing with their tax affairs;
  • a life threatening illness;
  • the failure of a computer or software just before or while the taxpayer was preparing their tax return;
  • service issues with HMRC;
  • a fire, flood or theft which prevented the completion of a tax return;
  • postal delays which could not have been predicted; or
  • delays relating to a disability.

By contrast, HMRC cite the following example of excuses that they will not accept as a valid reason for failing to meet a tax obligation:

  • relying on someone else to send the return and they failed to send it;
  • a cheque or payment bounced due to insufficient funds;
  • the taxpayer found HMRC’s online system too complicated;
  • the taxpayer did not receive a reminder from HMRC; or
  • the taxpayer made a mistake on their return.

Impact of coronavirus

HMRC have confirmed that they will consider coronavirus as a reasonable excuse. Where claiming this, the taxpayer should explain in their appeal how they were affected by coronavirus. As a rule of thumb, HMRC are more likely to accept it as a reasonable excuse where the virus led to one of the circumstances listed above as ‘acceptable reasonable excuses’. Thus the contention that the taxpayer had a reasonable excuse for failing to meet a tax obligation would be strong if a partner or close relative (such as a parent) died of Coronavirus around the tax deadline, the taxpayer was seriously ill with the virus or was in hospital unexpectedly.

Where the taxpayer appeals on the grounds that they had a reasonable excuse for failing to file a return or pay a tax bill, they should file the return or pay the bill as soon as they are able after the reason for the reasonable excuse has been resolved.

Partner Note: www.gov.uk/tax-appeals/reasonable-excuses.

 

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Have you reduced your rent or let family and friends stay in one of your properties during the pandemic? Unfortunately, HMRC’s view of this is not so generous as you’re unlikely to be able to deduct expenses during that period.

Tax implications of uncommercial lets

There are various circumstances in which a landlord may let a property at rate which is below the current market rate or, indeed, allow the property to be used rent-free. For example, during the Covid-19 pandemic, landlords may have agreed a reduced rent with tenants who are struggling financially and are unable to meet the normal rental payments in a bid to help them out and on the basis that some rent is better than none. Where a landlord has properties that would otherwise be empty, these may have been occupied by family and friends either at a low rent or rent-free.

When reaching the decision to allow the property to be occupied rent-free or at a rate below the market rate, the impact on the deductibility of expenses was probably overlooked.

Restriction on relief

While the landlords motives might have been philanthropic, unfortunately this approach is not shared by HMRC when it comes to allowing a deduction for expenses incurred in a period when the property when not let at a commercial rent.

For expenses to be deductible in computing the profits of the property rental business, those expenses must have been incurred wholly and exclusively for the purposes of the property rental business. HMRC take the view that if the landlord does not charge the full market rent or impose normal market lease conditions, it is unlikely that this test is met. A strict interpretation would mean that expenses could not be deducted.

Deductions capped at level of rental income

Where a property is let for a rent which is less than the market rent that the landlord could obtain, HMRC permit expenses to be deducted up to the level of the rental income received. It is therefore not possible to create a loss in relation to an uncommercial let. Where the expenses exceed the rental income, no relief is given for the excess expenses – they cannot be carried forward to the following year, even if the property is let at a commercial rate in that year. No deduction is permitted for expenses relating to a period when the property is occupied either by the landlord or by family or friends rent-free.

Where the period for which the property is let at an uncommercial rate is temporary, if possible, delay significant expenditure to a future period when the property is let commercially so that full relief for the expenditure can be obtained.

House sitting

In the situation where a friend or relative house sits while a property is empty, expenses incurred in that period can be deducted if the property genuinely remains available for commercial letting and the landlord is actively seeking a tenant. HMRC guidelines suggest relief will not be lost if a relative house sits for one month over a three-year period.

However, no deduction is available for expenses incurred while a property is occupied rent-free by a friend or relative who is essentially using the property to take a holiday. Where a holiday home is let commercially for some of the time and used rent-free by the landlord or by his or her friends or relatives some of the time, the expenses should be apportioned between the commercial and uncommercial use. Expenses related to the commercial use can be deducted in excess of the rent for commercial lets; however, expenses apportioned to uncommercial use can only be deducted up to the level of the rent received, if any.

Partner note: HMRC’s Property Income Manual at PIM2130

 

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If you run a property business which has had empty properties during the coronavirus pandemic you might be wondering if your business is classed as ‘paused’ or ‘ceased’. We explain how to determine which applies to you.

Empty properties – does this mean the end of the property rental business?

During the Covid-19 pandemic, landlords may have periods when their properties have been empty. Landlords letting furnished holiday lettings were particularly badly affected due the restrictions imposed during the lockdown period, as letting of holiday homes was prohibited between 23 March 2020 and 3 July 2020. Home moves were also put on hold at the start of the lockdown.

How long can a property remain empty before the property rental business is regarded as ceasing?

Temporary pause or permanent cessation

In the life of a property rental business, rental business activities may stop and, after an interval, start again. A prime example of this during the Covid-19 pandemic when some lets may be have empty for a period, before being let again as restrictions eased.

The question as to whether the business has been paused or has ceased depends on the facts. Even if lettings start again, it is not a given that this is a continuation of the previous business – it may instead by the start of a new property rental business.

To determine whether the existing property rental business is continuing or has ceased, it is necessary to look at the facts.

Considerations

In reaching a decision, consideration should be given to factors such as:

  • whether the same property is let before and after the break;
  • where the same property is re-let after a break, whether it been altered significantly during the empty period;
  • the length of the period between lets; and
  • the type of activities that constitute the property rental business before and after the pause.

For example, where the property rental business comprises a single property, the property rental business will not normally be regarded as ceasing where there is a break between lets while a new tenant is found.

HMRC’s rule of thumb

HMRC offer a rule of thumb as a guide to whether a property business has ceased. The old business is treated as stopping where there is an interval of more than three years and different properties are let in the old and new period of letting activity. A business may be regarded as continuing where the gap is more than three years, although evidence would need to be provided to show this is a case. This could be important where losses are involved, as losses from the old business cannot be set against profits of the old.

Cessation

Where a rental business comprises the letting of several properties, it will normally be regarded as having ceased when the last property has been sold or is used for another purpose, for example as a private residence. If there is only one property in the property rental business, the business would cease when the property was no longer available for letting. However, it would continue if the taxpayer bought a different property to let and lived in the original let property as his or her home.

Partner note: HMRC’s Property Income Manual at PIM2510.

 

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Most businesses have suffered due to the pandemic, but should you take the option to defer your payment on account to 31 January 2021? We weigh up the option in our latest blog.

Deferring self-assessment POA – Is it is good idea?

To help those suffering cashflow difficulties as a result of the Covid-19 pandemic, the Government have announced that self-assessment taxpayers can delay making their second payment on account for 2019/20. The payment would normally by due by 31 July 2020.

Under self-assessment, a taxpayer is required to make payments on account of their tax and Class 4 National Insurance liability where their bill for the previous tax year is £1,000 or more, unless at least 80% of their tax liability for the year is deducted at source, such as under PAYE. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. The payments are made on 31 January in the tax year and 31 July after the end of the tax year. If any further tax is due, this must be paid by 31 January after the end of the tax year. In the event that the payments on account are more than the final liability for the year, the excess is set against the tax due for the next tax year or refunded.

The normal payment dates for payments on account for the 2019/20 tax year are 31 January 2020 and 31 July 2020, with any balance due by 31 January 2021.

Delay not cancellation

The option on offer is a deferral option not a cancellation. Where this is taken up, the payment on account must be paid by 31 January 2021. As long as payment is made by this date, no interest or penalties will be charged.

Should I pay if I can?

The deferral option is clearly advantageous to those who have taken a financial hit during the Covid-19 pandemic, particularly those operating in sectors where working is not possible during the lockdown, such as hairdressers and beauticians and those operating in the hospitality, leisure and retail sectors.

For those who have not taken a financial hit or who are otherwise able to pay, from a cashflow perspective it may be attractive to defer the payment. However, this may simply be a case of delaying the pain; not only will the delayed payment on account be due on 31 January 2021 together with any Class 2 National Insurance liability, but also the first payment on account for 2020/21. This may amount to a sizeable bill.

The decision as to whether to pay or defer is a personal one; but the option to choose is a welcome one.

Partner note: www.gov.uk/pay-self-assessment-tax-bill

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Reporting employment income earned abroad on a self assessment tax return

Pro-taxman in Hounslow strongly advises that you initially need to determine your residency status for the tax year in question. This is decided using the ‘Statutory Residence test’. Assuming you were working abroad for 4 months, you would therefore have been resident in the UK for more than 183 days and as a result considered to be a UK resident for tax purposes. You would consequently need to pay tax in the UK on all worldwide income within the tax year.

To declare your foreign employment income, you will need to complete the ‘Employment’ pages of the Self-Assessment Tax Return (SATR), which is SA102. You’ll need to fill in a separate ‘Employment’ page for each job, directorship or office held within that tax year. One of PRO-TAXMAN’s experienced team can help with this.

If your foreign employment income was taxed abroad, you DO NOT include the tax paid on the SA102. You need to complete the ‘Foreign’ pages of the SATR (SA106). On page F6, there is a section titled: Foreign tax paid on employment, self-employment and other income. As well, as this section, you need to include details in the ‘Any other information’ box (on page TR 7) of where on your tax return this income is included (in this case, the ‘employment’ pages). This will then create a Foreign Tax Credit, which can be used to reduce any UK tax payable on the same employment income.

If no foreign tax was suffered, you do not need to complete the ‘Foreign’ pages.

If you were non-resident, then you do not need to include any foreign employment income on your UK SATR.

Finally, if you qualified for split-year treatment, you only need to include the foreign income earned in the UK part of the year.

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Not putting a property in joint names prior to selling is an easily avoided mistake – read our blog to see if this would benefit you.

Potential benefits of putting a property into joint names prior to sale

Where a property qualifies in full for private residence relief, it is perhaps academic, from a tax perspective at least, whether a couple own it jointly or it is the one name only. In either case, the relief shelters any gain that arises and there is no tax to pay.

However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.

Take advantage of the no gain/no loss rules for spouses and civil partners

There are some breaks in the tax system for married couples and civil partners, and one of them is the ability to transfer assets between each other at a value that gives rise to neither a gain nor a loss. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. This enables a couple to utilise available annual exempt amounts and lower tax bands.

Capital gains tax on residential property gains is charged at 18% where total income and gains do not exceed the basic rate limit (set at £37,500 for 2019/20) and 28% thereafter.

Case study

Ron and Rita have been married a number of years and in addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.

Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).

If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000 after deducting his annual exempt amount of £12,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of £24,640 (£88,000 @ 28%).

However, as Rita has her basic rate band and annual exempt amount available, making use of the no gain/no loss rule to put the property in joint names prior to sale can save the couple a lot of tax. Each will realise a gain of £50,000.

As far as Ron is concerned, £12,000 of his gain will be sheltered by his annual exempt amount, leaving a chargeable gain of £38,000 on which tax of £10,640 will be payable.

Rita will also have a gain of £50,000, of which the first £12,000 is covered by her annual exempt amount, leaving a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.

By taking advantage of the no gain/no loss rule to put the property into joint names prior to sale, the couple will be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110.

Partner note: TCGA 1992, s. 58.

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What to do if you need to change your tax return

You made it and filed your self-assessment return for 2018/19 by the 31 January 2020. However, having felt pleased with yourself, you realise to your horror that you have made a mistake and need to correct your return.

Can you do this and if so, how and by when?

Yes, you can

If you have made a mistake on your return, for example entered a number incorrectly or forgotten to include something, all is not lost. As long as you are within the time limit, the error can be corrected by filing an amended return.

How?

If you are in time to file an amended return, the process that you need to follow will depend on whether you filed your return online or on paper.

Online returns

If you filed your return online, you simply amend your return online. To do this:

  1. Sign in to your personal tax account using your User ID and password.
  2. Once in your account, select ‘Self-Assessment Account’. If this does not appear as an option, simply skip this step.
  3. Select ‘More Self-Assessment details’.
  4. Choose ‘At a glance’ from the left-hand menu.
  5. Choose ‘Tax Return options’.
  6. Choose the tax year for the year you want to amend.
  7. Go into the tax return, make the changes you want to make, and file the return again.

Remember to check that it has been submitted and that you have received a submission receipt.

Check the revised tax calculation too in case you need to pay more tax as a result of the changes, but remember to take account of what you have already paid.

Paper return

If you opted to file your return on paper by 31 October 2019, to make a change you will need to download a new tax return. This can be done from the Gov.uk website. Fill in the pages that you wish to change and write ‘Amendment’ on each page. Make sure you include your name and unique taxpayer reference (UTR) on each page too. Send the corrected pages to the address to which you sent your original return.

Commercial software

If you used commercial software to file the return, contact your software provider to find out how to file an amended return. If your software does not allow for this, contact HMRC.

When

You have until 31 January 2021 to make changes to your 2018/19 tax return.

If you have missed the deadline, you will need to write to HMRC instead. This may be the case if you find a mistake in your 2017/18 return after 31 January 2020. In the letter, you will need to say which tax year you are amending, why you think you have paid too much or too little tax and by how much. You have four years from the end of the tax year to claim a refund if you have overpaid.

Changes to the tax bill

If amending the return changes the amount that you owe, you should pay any excess straight away. Interest will be charged on tax paid late. If your 2018/19 liability changes, your payments on account for 2019/20 may change too.

If as a result of the changes made to the return you have paid too much tax, you can request a repayment from your personal tax account.

Partner note: See www.gov.uk/self-assessment-tax-returns/correction.

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Property Tax

Landlords – you must file your self-assessment tax return by 31 January 2020 to avoid a late filing penalty. Here’s what you need to know:

The self-assessment deadline is looming. Self-assessment tax returns for the year to 5 April 2019 must be filed online by 31 January 2020 if a late filing penalty is to be avoided.

Landlords will need to complete the property income pages. Particular care should be taken where the landlord has a loan or a mortgage as the way in which relief is given for financing costs is changing and the position for 2018/19 is different to that for 2017/18.

The way in which relief for finance costs is given is moving from relief by deducting the finance costs when computing profits to giving relief in the form of a basic rate tax reduction. The 2018/19 tax year is a transitional year.

What costs are eligible for relief?

Interest payable on loans to buy land or property which is used in the rental business is eligible for relief, as is interest on loans to fund improvements or repairs. It should be noted that it is not necessary for the loan to be secured on the let property – the rule is that interest is allowable on borrowings up to the value of the property when first let. Thus, if a landlord borrowed against their main home to fund a buy-to-let investment property, the interest on that loan would be allowable on the loan up to the value when the property was first let. If the mortgage on the residential property is more, the allowable interest is proportionately reduced.

Relief is also available for the costs of getting a loan.

It should be noted that it is only the interest and other finance costs which qualifies for relief – no relief is available for any capital repayments which may be made.

The position for 2018/19

For 2018/19, relief for 50% of eligible finance costs is given as a deduction in computing the profits of the property rental business and relief for the remaining 50% is given as a basic rate tax reduction. This makes completing the property pages of the tax return slightly tricky as the information must go in two places.

The first box which needs to be completed is Box 26. This is where allowable loan interest and other financial costs need to be entered. Amounts entered in this box are deducted in computing rental profits. Therefore, as only 50% of the allowable finance costs for 2018/19 are relieved in this way, only 50% of the costs for that year should be entered in this box.

The remaining 50% is entered in Box 44, helpfully titled ‘Residential finance costs not included in box 26’. The amount entered in this box is used to calculate a reduction in the landlord’s tax bill. The reduction is equal to 20% (the basic rate of income tax) of the amount entered in Box 44.

If you have any unrelieved finance costs from earlier years, these should be entered in Box 45. Any balance of residential finance costs which is unrelieved may be carried forward to future years for relief by the same property business.

Partner note: Self-assessment UK Property notes (SA105); see www.gov.uk/government/publications/self-assessment-uk-property-sa105.

 

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As business owners we all want to make sure our company is a great place to work. Have you considered giving your employees or even their family members educational scholarships?

Partnership rather than a limited company. We explain why in today’s blog.

Employer-funded scholarships

Special tax rules apply to scholarships, which include exhibitions, bursaries or other similar education endowments.

Provided certain conditions are met, there will be no tax or reporting implications where an employer funds a ‘fortuitous’ scholarship for an employee’s family member. Broadly, this means that there must be no direct connection between the employee working for the employer and their family member getting the scholarship.

A scholarship is ‘fortuitous’ if all the following apply:

  • the person with the scholarship is in full-time education
  • the scholarship would still have gone to that person even if their family member did not work for the employer
  • the scholarship is run from a trust fund or under a scheme
  • 25% or fewer of the payments made by the fund or scheme are for employment-linked scholarships

If the scholarship does not qualify for exemption, the employer must report it to HMRC on form P11D and pay Class 1A NICs on the cost of providing it.

Unfortunately, in a family company, directors’ children are unable to take advantage of this provision because the tax legislation deems there to be a benefit in kind. However, in some circumstances a remoter relative (for example a grandparent) could establish such a scheme provided that the student was validly employed and their parents are not involved with the company.

Sandwich courses

An employee in full-time employment may leave that employment for a period to attend an educational establishment but continue to receive payments from their employer, for example where the employee is on a ‘sandwich’ course. Such payments will be treated as exempt from income tax, provided the following conditions are satisfied:

  1. The employer must require the employee to be enrolled at the educational establishment for at least one academic year and to attend the course for at least 20 weeks in that academic year. If the course is longer, the employee must attend for at least 20 weeks on average, in an academic year over the period of the course.
  2. The establishment must be a recognised university, technical college or ‘similar educational establishment’, open to the public and offering more than one course of practical or academic instruction.
  3. The payments must not exceed a specified maximum figure for the academic year. This figure must include lodging, subsistence and travel allowances but does not include any tuition fees payable to the establishment by the employee. Note that:
  • the exemption can apply to payments of earnings payable to the student for periods spent studying at the educational establishment
  • it cannot, however, cover payments made for any periods spent working for the employer, whether during vacations or otherwise
  • the current maximum figure is £15,480 per academic year
  • in principle, the limit is all or nothing: if it is breached then the whole amount is taxable. However, if an increased payment is made during the academic year then this does not invalidate earlier payments made within the agreed limit

Qualifying payments will also be exempt for Class 1 National Insurance Contributions purposes.

Example

Jack’s employer pays for him to attend college on a course that starts in September 2018 and finishes at the end of the academic year in June 2019. Jack works for his employer over the Christmas and Easter periods, during which he is paid his normal monthly salary. His income while working during holidays will be subject to tax and Class 1 NICs, because the exemption only applies to income when attending college.

Jack’s employer pays him £3,000 in September 2018 for the first term of the academic year followed by two further payments of £3,000 each in January 2 and April 2019 to cover terms 2 and 3. These three amounts of £3,000 each will be exempt from tax and NICs because they meet the qualifying conditions, including being less than the financial ceiling of £15,480.

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