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.

Fulfilment House Due Diligence Scheme

The new Fulfilment House Due Diligence Scheme will open for online applications on 1 April 2018. From that date, businesses in the UK that store any goods imported from outside the European Union (EU) owned by, or on behalf of, someone established outside the EU, will need to apply for HMRC approval if those goods are offered for sale. The deadline for applications from existing businesses falling within the scope of the scheme is 30 June 2018, and there are penalties for late applications. For businesses that commence trading on or after 1 April 2018, the application deadline date is 30 September 2018.

Businesses that only store or fulfil goods that they own, or only store or fulfil goods that are not imported from outside the EU, are not required to register.

Registered businesses must carry out certain checks and keep certain records from 1 April 2019. Businesses covered by the scheme will not be allowed to trade as a Fulfilment Business from this date if they do not have approval from HMRC. Those that do, risk a £10,000 penalty and a criminal conviction.

From 1 April 2019, registered businesses will be required to keep a record of:

  • overseas customers’ names and contact details;
  • overseas customers’ VAT registration numbers;
  • the type and quantities of goods stored in the warehouse;
  • import entry numbers;
  • the delivery addresses; and
  • notices that the business will need to give its overseas customers, which explain their tax and duty obligations in the UK.

Records must be kept for six years – a penalty of £500 may be imposed for failure to comply with this requirement.

Early preparation in this area is recommended to ensure that the application for approval is made on time, and that systems are in place to gather and maintain the necessary records.

Further information can be found on the GOV.UK webpage: Fulfilment House Due Diligence Scheme.


Consider a partnership

Whilst forming a partnership can be an extremely flexible way for two or more people to own and run a business together, it is important to appreciate that under this type of trading vehicle, the partners themselves do not have individual protection. If one of the partners resigns, dies, or goes bankrupt, the partnership has to be dissolved, even though the business itself may not need to cease. Although there is no legal requirement to do so, it is highly recommended that, on forming a partnership, a formal partnership deed is drawn up. Many partnerships ask a solicitor to help with this, but it is possible for the partners to drawn one up themselves.

Broadly, the partnership agreement sets out what each partner is responsible for and what he or she can expect from the business. Each partner of the firm will be self-employed, taking a share of the profit and paying income tax and NICs personally on that share. However, each partner will also be personally responsible for any (and potentially all) debts that the partnership incurs.

It may be worthwhile considering forming a partnership with a sleeping partner, who usually receives a smaller annual share of the partnership’s profits. In simple terms, a sleeping partner normally contributes money to the business but doesn’t get actively involved with running it.

HMRC obligations

The partnership needs to appoint one of its officers (the nominated officer) to fill in the partnership tax return each year and send it to HMRC. This return includes a Partnership Statement, which shows how profits or losses have been divided amongst the partners. The nominated partner also has to give each partner a copy of the Partnership Statement to help them complete their own personal tax return correctly.

Partners are individually responsible for submitting their own self-assessment tax returns. However, the partnership must register with HMRC by 5 October in the business’s second tax year, or a penalty may be incurred.

With regard to VAT, where a sole trader takes in one or more partners there is a change in business entity for VAT purposes. If the sole trader is VAT registered, the change must be notified to HMRC within 30 days and his/her VAT registration will be cancelled. Alternatively, an application may be made (on form VAT 68) for the VAT registration to be transferred to the partnership. The partnership itself must register if the VAT taxable turnover is more than the VAT registration threshold (currently £85,000).

Limited liability partnerships

In some circumstances it may be worth considering the formation of a limited liability partnership (LLP). This type of trading vehicle is similar to an ordinary partnership in that a number of people or limited companies join together and share the costs, risks, and responsibilities of the business. They also take a share of the profits, and pay income tax and NICs on their share of the partnership profits. However, under an LLP, debt will be limited to the amount of money each partner invested in the business and to any personal guarantees given to raise business finance. This, in turn, affords members some protection if the business runs into difficulties because their liability will be restricted in general terms to the level of their investment.

January 2018 Q&A

Q. I have recently bought a residential property to rent out. To enable me to purchase this property I took out a mortgage on my own home and I used the money to buy the rental property. Can I claim tax relief for mortgage interest against my rental income?

A. You should be aware that the rules for residential landlords claiming tax relief on interest paid changed from April 2017. The answer to your question is, yes, you can offset the interest you are paying on this mortgage against the rental income you are receiving from the purchased property. The HMRC Business Income Manual (at BIM45685) confirms that ‘the security for borrowed funds does not determine the use of those funds’.

Q. I am an IT consultant and I provide my services via my limited company, which operates outside the IR35 rules. I started working on my current contract just over two years ago – although when I started, I did not know that it would last this long. Do the temporary work place rules on allowable expenses apply in this situation?

A. There are a number of circumstances where, even though an employee attends a workplace to perform a task of limited duration or for some other temporary purpose, it will still be treated as a permanent workplace. This will be the case where the 24-month or fixed term appointment rules apply or where the workplace is a depot or base.

The 24-month rule prevents a workplace being a temporary workplace where an employee attends it in the course of a period of continuous work which lasts, or is likely to last, more than 24 months.

HMRC’s guidance on employee travel (Booklet 490) states (at section 3.21):

‘Where it is expected that the employee will attend a workplace to perform a task of limited duration or for some other temporary purpose for a period of less than 24 months, the workplace will be a temporary workplace from the outset.

However, if at a later date circumstances change and the employee is required to attend the workplace for a period that extends beyond 24 months, it will cease being a temporary workplace from the date that the expectation changed.’

Q. How is an estate valued for inheritance tax purposes?

A. Inheritance tax on death will be calculated on the net value of the estate. The net value of an estate is effectively assets less liabilities.

Examples of assets include, land and property, shares and securities, savings, jewellery, paintings and antiques. Assets within an estate on death will also include any assets gifted within 7 years of death.

Liabilities include, credit card debts, loans, overpayments of pensions, outstanding utility bills. The estate will also be reduced by reasonable funeral costs and any income tax or capital gains tax.

An estate will take into account all assets and liabilities of a person. In order for the debt or liability to be an allowable deduction from the estate, it must be owed by the deceased at the date of death. There must be a genuine commercial reason for the liability and if included within the estate, it must actually be a liability that is repaid from the estate.

Liabilities will be paid either out of the estates available cash or can be via the sale of an asset or by the personal representatives taking out a loan.

Employment status case turned on right of substitution

Employment status tax cases often make the headlines in the professional press and the recent case involving Deliveroo riders was no exception. The meal delivery firm won the case in the Central Arbitration Committee (CAC), confirming that its riders are not ‘workers’. This is the latest challenge to the employment status of ‘gig economy’ workers.

In this case, the Independent Workers Union of Great Britain (IWGB) sought to argue that riders were workers, so that they could claim union recognition, thus affording them certain collective rights regarding the minimum wage entitlement, holiday and sick pay, and pension contributions.

The CAC rejected the claim that the riders were ‘workers’, hinging the case on the riders’ ‘ability to turn down a job both before and after accepting it’.

Historically, a genuine right of substitution, whether ‘sideways’ to someone of similar seniority or by way of delegation to a junior, has been regarded as one of the strongest factors favouring self-employment.

The case follows a number of claims brought by workers in the ‘gig’ economy demanding rights such as holiday pay, the minimum wage and pensions contributions. Drivers at Uber won a recent victory when the company lost an appeal at the Employment Appeal Tribunal against an earlier decision to grant them workers’ rights.

The transcript from the Deliveroo riders’ case can be found here.

Abolition of Class 2 NICs delayed

On 2 November 2017, the Government announced a one year delay to the abolition of Class 2 National Insurance Contributions (NICs). Class 2 NICs will now be abolished from 6 April 2019 rather than 6 April 2018.

The delay will allow time for the government to engage with interested parties and Parliamentarians with concerns relating to the impact of the abolition of Class 2 NICs on self-employed individuals with low profits.

The relevant legislation will be contained in the National Insurance Contributions (NICs) Bill, which will now be introduced in 2018 with the measures it will implement taking effect one year later, from April 2019. These measures include the abolition of Class 2 NICs, reforms to the NICs treatment of termination payments and changes to the NICs treatment of sporting testimonials.

Broadly, Class 2 NICs are being removed to simplify the system. Those with profits below the small profits threshold (£6,025) will need to pay Class 3 contributions, which are five times as much as Class 2 contributions, if they wish to build up an entitlement to contributory benefits such as the state retirement pension. Based on 2017/18 rates, the proposed change would mean that people falling into this category would pay £592.80 a year more in Class 3 contributions.

According to the Office for National Statistics, there were 967,000 people with an annual income from self-employment below the small profits threshold in 2015/16. The proposals, as they currently stand, potentially impact on a considerable number of people.

Commenting on the delay, the Low Incomes Tax Reform Group (LITRG) said it was keen for a way to be found for the low-income self-employed to continue to be able to make affordable savings towards their pension at a rate similar to the present Class 2, perhaps by introducing a lower rate Class 3.

Using the IHT gift exemptions

As Benjamin Franklin observed in 1789 ‘In this world nothing can be said to be certain, except death and taxes.’ More than two centuries on, this statement still rings true! These days however, inheritance tax is often referred to as a voluntary tax, because there are various ways to minimise liability to it, or even avoid it all together.


Any assets (cash or otherwise) that a person gives away during their lifetime, that do not fall under the exempt transfer rules, such as transfers between spouses and civil partners and gifts to charities, may escape inheritance tax as a potentially exempt transfer (PET).

There is no limit on the amount of PETs that can be made during a lifetime.

Broadly, for a PET to escape inheritance tax completely the donor needs to survive for seven years after making the gift. If he or she dies within the seven-year period, the PET is partially chargeable depending on the number of years that have elapsed since they made the gift.

The reduction is given in the form of taper relief, a sliding scale used to determine tax liabilities on gifts between three and seven years before death.

Current rates of taper relief and the resulting IHT rate are as follows:

Period before death in which gift made:

  • 0 to 3 years – reduction 0%; tax rate is 40%
  • 3 to 4 years – reduction 20%; tax rate 32%
  • 4 to 5 years – reduction 40%; tax rate 24%
  • 5 to 6 years – reduction 60%; tax rate 16%
  • 6 to 7 years – reduction 80%; tax rate 8%
  • More than 7 years – reduction 100%; tax rate 0%

If the donor dies within seven years of making a PET the value of that PET will be added in to the value of his or her estate to determine how much, if any, inheritance tax is due.

The PET will therefore use up some or all of the available nil-rate band, potentially increasing or even creating an inheritance tax liability for the estate. In addition, if the value of the PET exceeds the level of the nil-rate band in force for the year in which the donor dies, then additional inheritance tax will be payable by the recipient of the gift.

Taper relief may reduce the amount of tax payable. However, taper relief can only reduce an inheritance tax liability resulting from a PET becoming chargeable on death. The relief does not reduce the value of the gift itself.

Taper relief is particularly beneficial for those with large estates. Giving away £1 million and living for seven years takes the money right out of the inheritance tax net. But even if the donor lives for only six years, the £1 million less the nil-rate band is charged at just 8% under taper relief, instead of the full 40% inheritance tax rate.

Lifetime exemptions

The annual exemption enables a person to give away up to £3,000 per annum free of IHT. In addition, any unused exemptions from the previous year, may be carried forward, although any unused exemptions earlier than a year will be lost. This means that if no gifts have been made in the previous tax year, a person could make an IHT-free gift in the current tax year of £6,000. If the amount exceeded the annual exemption available, it could still remain exempt from IHT, if the person making the gift survives seven years.

In addition to the annual exemption, small gifts of up to £250 per year may be made free from IHT. The gift must be an outright gift to any one person each tax year.

Gifts on marriage can also be free of IHT provided that the gift does not exceed set limits. The limits depend on the relationship to the married couple/ civil partners and are as follows:

  • Parents – £5,000
  • Grandparents, great-grandparents – £2,500
  • Bride to groom/ groom to bride/ bride to bride/ groom to groom – £2,500
  • Anyone else – £1,000

These exemptions may be combined in certain circumstances to reduce a potentially exempt transfer (PET).

December 2017 Q&A

Q. My wife and I jointly owned a property that we originally lived in for many years, although it has been rented out for the last 10 years. My wife has recently died and I am now the sole owner of that property. I intend to sell it and give the proceeds to my two children (both aged in their 40’s). Will there be capital gains tax on the sale proceeds?

A. If a residence is transferred between a husband and wife who are living together (or between civil partners), of each other who are living together, whether by sale or by gift, the period of ownership of the transferee is treated as beginning at the beginning of the period of ownership of the transferor (TCGA 1992, s 222(7)(a)). This also applies where the residence is transferred from one to the other on death. When you inherited your wife’s half share in the property, you also took over her principal private residence ‘history’ for that property. This means that if you sell the property now, you will be entitled to PPR relief for all the period you occupied the property plus relief for the final eighteen months of ownership.

Additionally, you should be able to claim the letting exemption to reduce the gain attributable to the ten years that you rented it out.

Q. I am a sole trader and registered for VAT. The business pays for the fuel in my car, which I use for both business and private mileage. How do I account for VAT on the fuel using HMRC’s fuel scale charges?

A. Using HMRC’s scale charges is a way of accounting for output tax on road fuel bought by a business for cars that are then used privately. Broadly, if you use the scale charge, you can recover all the VAT charged on road fuel without having to split your mileage between business and private use. The charge is calculated on a flat rate basis according to the carbon dioxide emissions of the car.

You need to use the fuel scale charge table that has effect for the relevant accounting period.

Q. I have not yet paid my self-assessment payment on account, which was due on 31 July 2017. Will I be charged a penalty for paying late?

A. Interest will be charged on the overdue amount. The charges will accrue from the due date of payment (31 July 2017) to the date the payment is made. The applicable interest rate is currently 2.75%.

Penalties, on the other hand, will only be imposed if the balancing payment (due 31 January 2018) is late. The penalties for late payment under self-assessment are as follows:

  • 30 days late: 5% of the unpaid tax
  • 6 months late: additional 5% of the unpaid tax
  • 12 months late: additional 5% of the unpaid tax.

HMRC may reduce a late payment penalty in ‘special circumstances’, which does not include inability to pay. In addition, a defence of ‘reasonable excuse’ may be available.

In relation to payments on account, the maximum penalty for fraudulent or negligent claims by taxpayers to reduce payments on account is the difference between the correct amount payable on account and the amount of any payment on account made.

OTS outlines future work plans

The Office of Tax Simplification (OTS) has published a paper outlining its future works programme, identifying areas of interest that the office will be looking at in the next twelve months and beyond.

The OTS is currently working on a review of VAT, and expects to publish its report in October or November 2017. Work has also commenced on a high-level paper on the business lifecycle which looks at key events and the various taxes which apply at these points.

The Government has requested a review of capital allowances and the possibility of using instead the depreciation charged in the financial statements. Work has commenced on this and the OTS aims to publish its report early next year.

During the next twelve months, the OTS will begin work on several further projects although not all of these will necessarily be taken forward, or their scope may be modified on further review. The projects include:

  • a wide review of technology asking how recent advances in technology may provide novel opportunities for the simplification of the design or administration of the tax system;
  • further examination of particular areas of the business lifecycle work, such as reliefs for investment;
  • exploring the potential for a review of aspects of the taxation of savings and investments; and
  • exploring the potential for a review of aspects of inheritance tax.

In the medium term, the OTS will continue to engage with stakeholders on Making Tax Digital and there is likely to be ongoing work on employment status and the ‘Gig economy’.

The OTS is also proposing to undertake a review of the structure of the tax system in other countries, particularly the US, Ireland and the Netherlands to explore whether there are structural features of other countries tax system which would provide simplification opportunities for the UK.

All change for termination payments

As confirmed in the 2017 Spring Budget, the tax rules governing termination payments will change from 6 April 2018.

The term ‘termination payment’ is typically used as a generic summary for a lump sum payment, which is normally (but not always) made to an employee at the time the employment comes to an end. The current rules governing the taxation of termination payments are complex and over recent years, have been subject to manipulation by some employers seeking to minimise income tax and NIC liabilities. The forthcoming changes seek to clarify the rules, particularly in relation to the existing £30,000 tax-free exemption for genuine redundancy payments.


Under the existing rules, it is necessary to look at whether payment in lieu of notice (PILON) is the contractual right of the employee. Broadly, if a contractual right exists, it will be fully taxable as earnings. This ‘contractual right’ element has provided a degree of scope for manipulating arrangements to take payments outside the taxable earnings boundaries – and in doing so, for potentially escaping the charges to tax and NICs.

From 6 April 2018, all PILONs, rather than just contractual PILONs, will be treated as taxable earnings. Therefore, under the new rules, all employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON. This means the tax and NICs consequences are the same for everyone and it is no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.

Aligning income tax and NICs

The existing £30,000 income tax exemption for genuine terminations payment will remain. However, the National Insurance Contributions rules will be aligned with the tax rules so that, from 6 April 2018, employer NI contributions will be payable on the elements of the termination payment exceeding £30,000. The employer NIC charge will be achieved through Class 1A contributions.

Going forward

As with most anti-avoidance measures, it is likely that HMRC will monitor how these changes are operated and, if perceived misuse of the rules is detected, further changes can be expected.

Although the existing £30,000 exemption will remain intact, the circumstances in which the exemption can be applied will, in essence, be restricted to genuine redundancy situations. This will remain a contentious area on which specialist advice will still be recommended.

HMRC launch new business support service

HMRC have launched a new service designed to directly help mid-sized businesses as they expand and grow.

The new Growth Support Service (GSS) will be open to some 170,000 mid-sized businesses registered in the UK who are undergoing significant growth, and who either have a turnover of more than £10 million, or more than 20 employees.

Broadly, a business will be eligible under the ‘significant growth’ criteria if its turnover increased by 20% or more in the last twelve months, where this increase is at least £1 million.

HMRC’s GSS tax experts will offer dedicated support, tailored to the customer’s needs. It has been created to help growing, mid-sized businesses access specific information and services, including:

  • helping with tax queries about the growing business;
  • supplying accurate information and co-ordinating technical expertise from across HMRC;
  • supporting businesses to get their tax right first time and access relevant incentives or reliefs.

Businesses who meet the eligibility requirements can apply online; they will then be contacted by their dedicated growth support specialist at HMRC, to discuss their requirements. The bespoke service will generally last between three to six months.

According to HMRC, the top five industries and sectors that could benefit from the Growth Support Service are:

  • Manufacturing (for example building, printing or maintenance firms);
  • Information and communication (for example IT or software companies, film makers or publishers);
  • Administrative and support services (for example vehicle hire companies, recruitment agencies or call centres);
  • Professional, scientific and technical services (for example law and accountancy firms or quantity surveyors); and
  • Wholesale and retail (for example high street shops, food and drink outlets or car showrooms).

It is worth noting that the HMRC growth support specialists will only deal with tax-related matters. They will not, however, be able to give general business advice, tax planning or tax avoidance advice, or guidance on how businesses should grow.