Bad news for small businesses! When a Company/business goes bust, or into liquidation because it’s insolvent, the liquidator pays cash out in a specific order. Some creditors rank more highly than others, for instance secured bank loans and employee wages rank highly and trade creditors generally rank at the bottom of the list. HMRC has been ranked at the bottom of the list for many years but, from April 2020, 4 different taxes will become preferred and rank higher than normal trade creditors. These taxes are; Income Tax, VAT, CIS tax and Employee’s National Insurance. This means that, soon, trade creditors will rank even lower as a creditor when trading with a business that suddenly goes bust. But, two other taxes - Corporation Tax and Employer’s National insurance - will continue to rank at the bottom with trade creditors.
Contractors, who work through their own Limited Companies, sometimes think that the 24 Month Rule and IR35 are connected but they are not. You are caught by IR35 if you are working more like an employee than a self-employed person and in this case you would have to apply PAYE and NI to your sales income. The 24 month rule relates to travel and subsistence expenses. If you go to a work site which is temporary, you will get tax relief on your travel and subsistence, but if you work there for more than 40% of your time for more than 24 months, you must stop claiming for these costs. So, it is quite possible to be caught by the 24 month rule but to be outside of IR35.
If you sell digital products to EU consumers, and these require nil/minimal human intervention, you need to register for VAT in each EU country where the customers are based. The simplest way to do this is to join the UK VAT Mini One Stop Shop (MOSS) which will register for you. Google ‘HMRC VAT MOSS’ to find out more.
Under MOSS, you must charge foreign VAT on affected sales (different EU nations have different VAT rates), file a MOSS return every calendar quarter, and pay over any foreign VAT, charged by you, to HMRC. For small numbers of such sales, you could potentially avoid the issue by adding a human intervention to the sales process, for instance making a follow-up call. This then makes it a UK sale, rather than an EU sale, so you can then just charge UK VAT.
I’ve been doing part-time photography and I’m also employed full-time. My photography made a loss - can I get a tax refund?
Well, if you have made a serious time commitment to make the photography work as a business, then you have quite possibly made a “trading loss”. If you make a trading loss, you can set it against your other income – including your employment income – which could then result in a refund of tax. However, if you only made a minimal time commitment, then it will be seen as receiving a bit of income from a hobby. In this case HMRC would probably not allow the claim for loss relief. This is a very grey area with no clearly defined criteria but the question of time commitment is crucial.
Entrepreneurs’ Relief is a reduced rate of Capital Gains Tax that applies when ones sells certain business assets; or all/part of a business; or more than 5% of shares in a small company in which you work or hold office. It does not apply to non-business assets such as disposal of an investment property.
If you qualify for (and claim) Entrepreneurs’ Relief, you pay Capital Gains Tax at 10% - instead of the normal rate for such assets. Since 6th April 2017, the normal Capital Gains Tax rates for the disposal of business assets have reduced to 10% and 20% (depending on your total taxable income and capital gains). So, although Entrepreneurs’ Relief is still useful, it is less valuable than it used to be.
One of the most common times that taxpayers claimed Entrepreneurs’ Relief was when incorporating a sole-trader business (or partnership) – because Entrepreneurs’ Relief could be claimed on the value of any goodwill transferred. With effect from December 2014, the right to claim Entrepreneurs’ Relief when transferring one’s business to one’s own company was removed.
Another area where Entrepreneurs’ Relief was commonly claimed was when winding up a Company and making a capital distribution to the shareholders. It was the case that if one ceased trading and wound up one’s Company, any cash distributed to the director/shareholders could be treated as Capital rather than income and Entrepreneurs’ Relief could be claimed. Now this law has been tightened and if the taxpayer concerned returns to that trade within two years of winding up the original Company, then the cash distributed will be taxed as dividends and subject to income tax/dividend tax rather than Capital Gains Tax. This could mean HMRC going back and taxing the cash at 32.5% rather than the 10% Entrepreneurs’ Relief rate!
Dividend tax is the very unpopular income tax that came into effect from April 2016. Before then tax wasn’t paid on dividends unless you were in the Higher Rate tax bracket - where you paid 25p tax for every £1 received. From April 2016, Basic Rate Tax payers have had to pay 7.5 pence on every £1 received in dividends, and 32.5p in the £1 for Higher Rate tax payers. If you live abroad and are non-resident you don’t pay this tax, and institutions don’t pay this tax either, but UK based owner managers of small companies do have to pay it – so it is principally a tax on small businesses.
If you acquire a second residence i.e. you have two properties and live part time in each one, it is worthwhile making a formal election for one of them to be your Principal Private Residence (PPR).
Make this election within two years of the date when you started to occupy both residences, simply by writing a letter to HMRC.
If you don’t make the election within two years, then HMRC can decide (based on how long you reside in each residence or where your family lives etc.) which one is your main residence is - and you are then stuck with their decision – and it may not be to your advantage. By electing for one of them to be your PPR, you will have the right to change your PPR status from one residence to the other which can prove extremely tax efficient.
For example: A couple live in Wiltshire and buy a flat in London for their student son. After their son graduates, and leaves the flat, the couple (now retired) use the flat during the week to visit galleries/friends etc. Years later, they sell the flat making a profit of £170,000 and will have to pay Capital Gains Tax of about £40,000.
If they had simply written to HMRC to make a PPR election within two years of using the flat, they could have made the London flat the PPR and consequently, most or even all of the profit would be exempt from Capital Gains Tax.
In fact, even if they had made a PPR election on behalf of their Wiltshire home, they could later have switched the PPR to the London flat, which, if nothing else, always makes the last 18 months of the gain exempt (9 months from April 2020).
So, the advice is: make that election - even if it you think you will never use it!
It depends on whether this sponsorship can be expected to benefit your trade.
In order for the sponsorship to be tax deductible, it has to be “wholly and exclusively” for the purpose of the trade. This means that if your business could gain extra trade or customers by the sponsorship – for example, if your business is a local shop – then it can be argued that the sponsorship is tax deductible. If, however, the sponsorship won’t lead to extra trade – for example, it is obscure and the people who see the advertising would never have cause to use your business, HMRC may treat the sponsorship costs as not tax deductible. Also, if they think that you rather than your business is benefiting, it may be treated as a taxable Benefit in Kind on you.
Most importantly, it depends on the deal. So get your calculator out! But do watch out for excessive mileage penalties in lease agreements.
Tax treatment varies depending on the method used to acquire a car – but it is often not tax efficient for a Company to own/lease a car because of high benefits-in-kind on company cars.
Car on HP (if the invoice is addressed to you/your company, it is an HP agreement or outright sale)
You can claim capital allowances on the purchase value of a car (dependent on the list price, CO2 emissions and type of fuel, possibly 18%, or 8% per year, even 100% for electric cars).
When selling the car, Sole Traders/Partnerships can get full tax relief on the car’s loss in value; Companies can’t claim this so have to keep claiming the appropriate annual Writing Down Allowance (8% or 18%).
You cannot recover any VAT back on the cost of the car (excepting taxi and car hire businesses)
You get tax relief on the HP interest element of HP payments.
Leased cars (if the invoice is addressed to a third party such as a finance company, it is a lease agreement)
At the end of a lease period (for (say) three years), you either hand the car back, or buy it. Commonly there is a large down-payment followed by monthly payments.
If you are VAT registered, you can claim back 50% of the VAT on the lease payments (100% for taxi and hire firms) – which is a major advantage over HP agreements;
You get tax relief on the lease payments net of any VAT claimed back, but you need to spread the tax relief over the period of the lease rather than match it against the payments made in a period.
For cars with CO2 emissions over 130g/km, only 85% of the net lease costs obtain tax relief.