Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: August 2017

Paying voluntary NICs

There are various reasons as to why gaps may arise in an individual’s national insurance contributions (NIC) record, for example, because that person has been on low earnings for several years, they have been living abroad, or because they have been unemployed and have not been claiming benefits. In certain circumstances therefore, it may be possible, and beneficial, to pay voluntary Class 3 National Insurance Contributions (NICs) as this can safeguard entitlement to a future state retirement pension and certain other state benefits.

Broadly, voluntary contributions may be paid for any tax year in which the individual is aged over 16 and is:

  • employed, but not liable to pay Class 1 and/or Class 2 contributions (because earnings are too low to qualify for paying NICs);
  • excepted from paying Class 2 contributions (because earnings from self-employment have not reached the entitlement threshold);
  • not working;
  • resident in the UK but living or working on secondment abroad; or
  • self-employed.

An individual may get national insurance credits if there are unable to work, entitled to certain benefits, or in other specific circumstances, for example being on an approved training course or attending jury service. In addition, someone who cares for a child, or a sick or disabled person, payment of Home Responsibilities Protection (HRP) may cover gaps in a NIC record.

Topping up

Class 3 NICs are voluntary, so if a gap in contributions is discovered, the choice of whether to make good the shortfall is entirely up to the individual concerned. However, if the individual wishes to obtain full entitlement to benefits such as the state pension, contributions should be topped up in good time.

Voluntary contributions are payable at the rate of £14.25 per week for 2017/18. There are two main ways of paying Class 3 NICs:

  • monthly: by direct debit – download application form CA5603 from the GOV.uk website;
  • quarterly: HMRC will issue a bill every 13 weeks (if the individual lives in the UK), which can be paid at a bank, Post Office, or by Girobank.

Generally, the shortfall must be made up within six years. For example, Class 3 contributions for the 2011/12 year would need to be paid by 5 April 2018. Whilst the contributions do not need to be made until that date, the rate may increase, so it may be cheaper to do it sooner rather than later.

A self-employed individual may be exempt from paying Class 2 contributions because their income is below the small profits threshold (£6,025 for 2017/18), but he or she can currently pay voluntary Class 2 contributions to maintain their NIC record. These amounts are considerably cheaper than Class 3 contributions (the rate for 2017/18 is £2.85 per week) and they protect entitlement to more benefits. Class 2 NICs will be abolished from April 2018, so it may be worth checking NIC records before then.

In certain circumstances it is possible to pay up to an additional six years of voluntary Class 3 NICs to enhance entitlement to a basic state retirement pension. This is over and above those allowed under the usual time limits outlined above. See the GOV.uk website for further details.

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SDLT on second homes

Stamp Duty Land Tax (SDLT) is payable on the purchase of residential property in increasing portions of the property price above £125,000.

Current rates of SDLT on individual and additional properties are as follows:

  • Purchase price up to £125,000 – SDLT rate Zero; additional property rate 3%
  • The next £125,000 (portion from £125,001 to £250,000) – SDLT rate 2%; additional property rate 5%
  • The next £675,000 (portion from £250,000 to £925,000) – SDLT rate 5%; additional property rate 8%
  • The next £575,000 (portion from £925,000 to £1.5m) – SDLT rate 10%; additional property rate 13%
  • The remaining amount (portion above £1.5m) – SDLT rate 12%; additional property rate 15%

Note that SDLT no longer applies in Scotland, where a Land and Buildings Transaction Tax (LBTT) is charged instead.

Additional property

A higher rate of SDLT will be charged on purchases of additional residential property which completed on or after 1 April 2016.

If contracts were exchanged after 25 November 2015, then the higher rates apply if the purchase was completed on or after 1 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rates will not apply.

The amount of the additional charge will be 3% on top of the normal SDLT charge.

Example

Leo buys a second residential property on 25 July 2017 costing £300,000. This transaction will attract SDLT as follows:

£125,000 x 3% = £3,750

£125,000 x 5% = £6,250

£50,000 x 8% = £4,000

Total SDLT due £14,000

Broadly, the higher rates will not apply if at the end of the day of the transaction an individual owns only one residential property, irrespective of the intended use of the property.

If a main home is sold after a new home is purchased, the higher rate will be payable. However, a refund can be obtained is the old home is sold within three years of buying the new one.

Exceptions

The higher rates are not payable on the purchase of a new property if the chargeable consideration is less than £40,000.

In addition, the charge is not payable where:

  • someone else holds a lease on the property with more than 21 years to run;
  • a lease is purchased that has less than 7 years to run.

The higher rates will not be applicable if an individual’s other residential properties meet either of the two criteria above, or each have a value of less than £40,000 when the new property is purchased.

Finally, the higher rates will not apply to purchase of mobile homes, caravans or house boats; or to purpose built student accommodation.

Mileage rates for electric and hybrid cars

Some confusion has been reported over how businesses should calculate mileage expenses rates for electric and hybrid company cars. This confusion has arisen largely because HMRC’s advisory fuel rates, or approved mileage allowance payments, only cover petrol and diesel cars. There are no separate ‘approved’ rates for electric or hybrid vehicles.

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Currently, whilst HMRC do recognise that employees should be reimbursed for costs incurred for business travel, they do not currently recognise electric charging costs as a ‘fuel’ expense and do not therefore, currently publish separate rates.

HMRC’s advisory fuel rates can be used to work out mileage costs in certain situations, for example, where an employer reimburses an employee for fuel they have used on business travel in a company car, or where an employee is required to repay the cost of fuel used for private travel. Where the employer uses the advisory fuel rates (or lower rates) then no liability to tax or NICs will arise on the payments and they do not need to be report to HMRC.

The treatment of mileage rates is relatively straight-forward for hybrid cars – they are treated as either petrol or diesel for the purpose of the advisory fuel rates, so employers can just use the appropriate current rates.

The situation is more difficult for employers with employees who drive electrics car as company vehicles. Such employers could use the advisory fuel rate based on the lower of the petrol or diesel tariff, or the calculated cost of the electricity used from a domestic supply to charge the car. Another option would be to pay a rate that can be calculated accurately as a true cost to the employee. Whichever method is used to reimburse mileage, it is imperative that the employer maintains adequate records to substantiate that the correct amount has been paid. Failure to keep adequate records may lead to additional tax and NIC liabilities, and penalties.

VAT: zero-rating of adapted motor vehicles

Finance Act 2017 introduced legislation designed to end perceived abuse of the VAT relief on substantially and permanently adapted motor vehicles for disabled wheelchair users.

The amended rules, which took effect from 1 April 2017, now specify a limit on the number of vehicles within a specified period of time that an individual can purchase under this relief.

An eligible individual will be able to purchase one vehicle every three years. There are some instances when this limit can be exceeded, so if an individual’s car is written off or stolen or if the vehicle has ceased to be suitable for the disabled person’s use because of changes in the person’s condition.

In addition to the new limitations above, there is now a mandatory requirement for eligibility declaration forms to be submitted to HMRC. This form clarifies exactly what information an individual needs to provide to support their claim to a zero rated supply.

Motor dealers are also required to send information regarding these zero-rated sales to HMRC.

Individuals in breach of these new requirements may be denied the benefit of the zero rate, or may be subject to a penalty (under VATA 1994, s 62) if the declaration they make is incorrect.

August 2017 Q & A

Q. My wife has a part time job but doesn’t earn enough to pay tax. Can she get tax relief on contributions made to a pension scheme?

A. Yes, even if you are not earning enough to pay income tax, you still qualify to have tax relief added to any contributions you make to a pension plan. However, the maximum you can pay in is £2,880 a year, or 100% of your earnings, subject to the ‘annual allowance’ restrictions.

Tax relief is added to the contributions at the basic rate of tax (currently 20%), so if you pay in £2,880 net, tax relief of £720 will be added, meaning that the gross contribution into the pension will be £3,600 (£2,880 x 100/80).

Q. I am a qualified doctor and pathologist. I have recently registered for VAT as my turnover has exceeded the current VAT registration limits. In addition to my regular doctor’s practice, which I understand is still exempt for VAT, I also write medical reports for insurance companies. I understand that this service is standard rated. However, I have also recently been requested to carry out post mortems. I am statutorily obliged to carry out this work, but I am paid for it. Should I charge VAT on my invoices for this service?

A. As you state, some services will be taxable or exempt, depending on their primary purpose. This is particularly the case in the area of medical reports and certificates, and in these cases, it is necessary to establish their principal purpose, before liability can be determined. Where the service is principally aimed at the protection, maintenance or restoration of health of the person concerned, the supply is exempt. However, where a medical report is done solely to provide a third party with a necessary element for taking a decision for insurance or legal purposes, the supply is taxable at the standard rate.

Where a doctor is compelled by statute to perform a statutory service and charges a fee for it then the supply is outside the scope of VAT (see VAT Notice 701/57, para 4.13). Under Section 19 of the Coroners Act 1998 a coroner can appoint a doctor (pathologist) to carry out a post mortem if necessary. As this is a statutory requirement and the doctor must provide the service, any payment received will be outside the scope.

Q. I started my own business as a sole trader on 1 December 2016. Although it has been quite a slow start, my profits are slowly going up and I am hopeful that they will continue to rise steadily over the next few years. Should I use 30 November or the tax year-end as my accounting year-end?

A. As a general rule of thumb, choosing a year-end earlier in the year, will generally give a business longer to pay its annual tax bill. This, in turn, can help considerably with the business cash-flow.

Taxpayers are generally required to make two equal payments of their income tax liabilities including any Class 2 and Class 4 NIC liability) on account:

  • by 31 January in the tax year; and
  • by 31 July following the tax year,

based on the total income tax payable directly in the previous tax year.

The balance, together with any capital gains tax, is normally payable (or repayable) by 31 January after the tax year.

Rent a room scheme

Although Budget 2017 announced that the Government intends to review the rent-a-room scheme, it currently remains a tax-efficient way of letting out a spare room. Broadly, HMRC’s rent-a-room scheme is an optional exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out spare rooms in their only or main home. The exemption is halved where the income is shared with a partner or someone else. Broadly, as long as income is below the annual threshold, it does not need to be reported to HMRC. If income exceeds the threshold, it needs to be reported to HMRC via the self-assessment system.

In order to qualify under the rent-a-room scheme, the accommodation must be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn’t apply if the house is converted into separate flats that are rented out. The scheme cannot be used if the accommodation is in a UK home which is let whilst the landlord lives abroad.

The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.

Sometimes additional services are provided, for example, cleaning and laundry. The payments for such services must be added to the rent to work out the total receipts. If income exceeds £7,500 a year in total, a liability to tax will arise, even if the rent itself is less than that.

Accounting for tax

Where the annual threshold is exceeded, there are two options available:

  • the first £7,500 is counted as the tax-free allowance and income tax is paid on the remaining income; or
  • the landlord opts to treat the renting of the room as a normal rental business, working out a profit and loss account using the normal income and expenditure rules.

In most cases, the first option will be more advantageous. The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).

To work out whether it is preferable to join the scheme, the following methods of calculation should be compared:

  • Method A: paying tax on the profit from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
  • Method B: paying tax on the gross amount of receipts (including receipts for any related services they provide) less the £7,500 exemption limit.

Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.

Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).

Example

During 2016/17, Flo lets out a room in her home. She receives total income of £11,000 (£10,800 rent plus £200 towards bills). She incurs expenses of £3,000. If she uses method A to calculate her tax liability she will pay tax on £8,000 (£11,000 less £3,000). If she uses method B, she will pay tax on £3,500 (£11,000 less £7,500). Flo is better off using method B.

Even though the tax rules for the rent-a-room scheme are different to the general property income tax rules, a resident landlord will still have certain responsibilities towards tenants, particularly in relation to safety. For further information, see the GOV.UK website at https://www.gov.uk/rent-room-in-your-home.