Year End Tax Review 2019/20

Interesting savings

All interest you receive is taxable, unless it is from an ISA, but banks and building societies no longer deduct tax from interest paid to individuals. For most taxpayers the rate of tax payable on that interest is 0%, so no tax is in fact due.

This zero tax rate applies where your savings income falls within your Savings Rate Band (SRB), which is worth up to £5,000, or within your Personal Savings Allowance (PSA), which is worth £1,000 for basic rate taxpayers or £500 for higher rate taxpayers. Any savings income which falls outside the SRB or PSA is taxed at your marginal Income Tax rate (currently 20%, 40% or 45%).

The available SRB depends on how much other taxable non-savings income you receive, such as salary, pensions, trading profits or rent. If you can control the type of income you receive you can reduce the total tax you pay for the year.

Max out your state pension

Individuals who reach State Pension Age (SPA) on or after 6 April 2016 need to have accrued 35 complete years of National Insurance Contributions (NIC) to receive the full state pension. To receive any UK state retirement pension, you need at least ten complete NIC years.

You can check how much state pension you are due to receive through your personal tax account on gov.uk. We can help you with this.

It is possible to plug gaps in your NIC record by paying voluntary Class 2 or Class 3 NIC. This payment generally needs to be made within six years of the gap year, but there are a number of exceptions which extend that period.

You may also qualify for NI credits for some years if you were claiming state benefits, Child Benefit or were a foster carer. The NI credits were not always applied automatically, so it’s worth checking your own NIC record.

If you have already paid enough NIC to get the full state pension, you may consider taking further rewards from your company in other forms, such as dividends or private pension contributions.

Tipping points

When your total income reaches certain thresholds, it tips any extra income into a tax band where a higher rate of tax is charged. This can also mean you lose part or all of your Savings Allowance, Child Benefit, Personal Allowance, or Pensions Annual Allowance.

Taxpayers who live in Scotland have slightly different tax thresholds than those that apply in the rest of the UK (see above), but the principle is the same. You may be able to save tax by moving income from 2019/20 to 2020/21, or by making certain payments in 2019/20 rather than in 2020/21.

Say you are a 20% taxpayer in 2019/20, but expect that a bonus due in March 2020 will tip you into the 40% band (over £50,000). If you ask your employer to delay paying the bonus until after 5 April 2020, you’ll pay the tax on that income later. You should also retain all your £1,000 Savings Allowance, and may still stay out of the 40% band for 2020/21. We don’t yet know the 40% threshold for 2020/21 but it is likely to be at least £50,000.The main thresholds for 2019/20 are:

• basic Personal Allowance: £12,500 – basic rate tax (20%) starts
• higher rate threshold: £50,000 – 20% rate increases to 40% and Savings Allowance reduces from £1,000 to £500
• married couple’s allowance: transfer of 10% of Personal Allowance is possible where the higher earner has income of no more than £50,000
• Child Benefit clawback: income between £50,000 and £60,000
• withdrawal of Personal Allowance: income between £100,000 and £125,000
• additional rate: income above £150,000 – 40% rate increases to 45%, Savings Allowance removed, and pension annual allowance reduced

Income that can easily be moved from year to year includes:

• bonus from your own company
• dividends from your company
• encashments of life assurance bonds
• withdrawal of taxable income from pension schemes in ‘drawdown’.

'Making good' benefits

Where an individual receives a benefit from their employer they can avoid being taxed on it if they ‘make good’ the value of benefit by reimbursing the employer. There are strict time limits for doing this.

All reimbursements of taxable nonpayrolled benefits for 2019/20 must be made by 6 July 2020, which aligns with the date for submitting the forms P11D.

The dates for making good on payrolled benefits-in-kind provided in 2019/20 are:

• 1 June 2020 for the value of road fuel used
• 5 April 2020 for all other benefits

The deadlines for making-good specifically don’t apply to interest payable on beneficial loans and overdrawn directors’ loan accounts. Where such loans exceed £10,000 at any point in the tax year there is a taxable benefit if insufficient interest is paid. This taxable benefit can be avoided if interest at least equal to the official rate is reimbursed, where the borrower is contractually obliged to pay it. The official rate for 2019/20 is 2.5%.

Despite the exclusion for beneficial loans, most people should try to pay any interest due on a loan by the 6 July following the tax year, to avoid any doubt as to whether a benefit arises at the time the P11D form is being prepared.

Cash and finance costs

Individual landlords of residential properties are subject to restrictions on how much interest and finance costs they can deduct from rental income.

In 2019/20 individual landlords are permitted to deduct just 25% of their interest and finance charges for tax purposes. From 6 April 2020 all such finance costs will be disallowed. In place of the blocked interest the landlord receives a 20% tax credit to set against his Income Tax bill. This restriction of interest deductions doesn’t apply to corporate landlords.

Where the property business is supported by borrowing, the increased taxable income can push the landlord’s total income into higher tax bands, leading to the loss of allowances or the clawback of Child Benefit.

The example below compares an English landlord’s tax position in 2019/20 (when he deducts 25% of the £32,000 interest paid) with his position in 2020/21, when all his interest is blocked. The amounts of Personal Allowance (£12,500) and Basic Rate Band (£37,500) are estimated for the later year. The figures will be different for Scottish taxpayers, who pay tax on property income at slightly different rates.

If your residential property business is supported by large borrowings, you need to urgently consider whether to restructure that business to avoid significantly higher tax bills. Your choices may include:

• selling one or more residential properties to reduce your borrowings
• selling all residential property and reinvesting in commercial buildings (the interest restrictions don’t apply)
• letting homes as Furnished Holiday Lettings (which are not affected, but require detailed conditions to be met)
• transferring the properties into a company

The last option is not easy as the lender will have to agree to transfer your property loans to the company. The transfer of properties is likely to incur land tax charges for the company, and may well generate a taxable Capital Gain in your hands.

Since April 2017 individual landlords with turnover of no more than £150,000 should use the ‘cash basis’ to draw up their accounts. This has the effect of taxing income in the year it is received and expenses in the year they are paid. It may benefit you if your tenants tend to pay late. You can opt out of the cash basis if you wish.

We can help you model the financial future for your residential property lettings.

Planning gains

Everyone has an annual exemption for Capital Gains Tax (CGT) of £12,000 for 2019/20. This is wasted if you don’t make Capital Gains in the tax year. You can’t carry forward any unused exemption to a different tax year or transfer the exemption to another person.

If you are planning to dispose of assets which will create Capital Gains, you can save tax if the disposals are spread over several tax years. This is easy to do if your assets can be split into separate chunks, like shares. Each sale can then be calculated to produce a gain of less than £12,000.

If the asset must be sold in one go, you could reinvest part or all of the gain in Enterprise Investment Scheme (EIS) shares, but you must be prepared to take a risk. This will defer the gain until the EIS shares are sold. You can sell sufficient EIS shares in later years, so the gain is covered by your annual exemptions.

When you give a valuable asset to a relative, the disposal is treated like an open market sale, and the deemed gain is taxable. However, gifts to your spouse or civil partner don’t create immediate taxable gains, as the recipient takes over the transferor’s CGT cost. You can use this transfer between spouses to share the ownership of a property, and hence the gain, and thus use two annual exemptions in one tax year.

Legal advice should always be taken when giving away land or buildings, or a share in such property. Stamp duty land tax (or similar taxes in Scotland or Wales) may be payable if the property is mortgaged.

Payroll

Most employees, with very limited exceptions, must be paid at least the National Minimum Wage (NMW) or the National Living Wage (NLW). These hourly rates vary according to the age of the worker, so it’s crucial to keep a sharp eye on the birthdays of your younger workers to ensure they are paid at the right rate for their age band.

The second trap you can fall into is to ignore some of the hours worked. All overtime hours, time spent training or standing in line for security checks, must be counted. Workers who undertake sleep-in shifts must be paid the NMW for the whole shift.

All the NMW rates will increase for the first pay period that begins on or after 1 April 2020, and it is important to get these pay calculations exactly right. Tips and gratuities can never be counted towards the NMW paid.

If you underpay by £100 or more across your whole payroll, HMRC can include your details on a list of employers in default, which is published quarterly.

The penalty for failing to pay the correct amount of NMW can be up to £20,000 per employee.

Prepare for off-payroll working

If you provide your personal services through your own company to large or medium-sized organisations, the way you are taxed may change for payments from 6 April 2020, due to the off-payroll working rules.

Where your final customer is not small (it is large or medium-sized), it must determine whether the relationship with you is a deemed employment. It may do this using the HMRC online tool called “CEST”. Your customer may ask you to provide information to feed into the CEST tool before April, to help it form its determination.

Your customer (or the agency you deal with) should tell you the outcome of the employment status determination and you can object if you disagree with the result.

Where your work is treated as a deemed employment, the payments made to your company for that work must have income tax and employee’s NI deducted from the gross amount. VAT is charged on the gross invoiced amount as normal if your company is VAT registered.

Where your relationship with your customer is not deemed employment, your invoices should be paid with no deductions, as now.

A quick way to determine whether your customer is “small”, and not affected by the off-payroll rules, is to check whether its last accounts have been audited. “Small” companies are not audited, and small is also defined as not meeting two or more of these criteria:

• Annual turnover: more than £10.2m
• Balance sheet total: more than £5.1m
• Average number of employees: more than 50

The last set of accounts filed at Companies House will tell you if the company has been audited, and should give you the figures to check against the above criteria.

We can help you check the accounts and advise on how to tell whether your customer is on the boundary of small or medium-sized.

Selling your business

For many people the New Year prompts a review of their life goals. If you are wondering whether, or when, you should sell your business, a sensible first step is to form an outline plan for its disposal.

The sale of a successful trading company will generate a Capital Gain. This would normally be taxed at 20% after deduction of your annual exemption (£12,000 for 2019/20).

Entrepreneurs’ Relief can reduce your tax rate to 10% on a gain of up to £10m, but this relief is under threat from a preelection promise to review and reform it. If you want to be sure of benefiting from this relief, take advice and be prepared to act quickly.

To be eligible to use Entrepreneurs’ Relief you must meet these conditions for at least 24 months ending with the date of the sale:

• be an employee, director or company secretary of the company or of another company in the same trading group
• hold at least 5% of the ordinary share capital of the company
• hold at least 5% of the voting rights of the company
• be entitled to at least 5% of the distributable profits available to the equity holders
• be entitled to at least 5% of the profits and assets available for distribution to equity holders on the winding up or
• be entitled to receive at least 5% of the total proceeds on the sale of the entire company

If you plan to sell your company and carry on the business on a smaller scale as an individual or partnership, or start up the same business again within two years, you can be caught by antiavoidance legislation which will tax the gain as income.

Money for miles

If you use your own car for a business journey, perhaps to travel to a customer, you can claim mileage expenses for that journey. Many employers pay the full taxfree amount of 45p per mile, which drops to 25p for miles in excess of 10,000 in one tax year.

If your employer doesn’t pay the full rate, you can claim tax relief on the shortfall, either on your tax return or on form P87. You need to submit your claim within four years of the end of the tax year in which you made the business journey. Claims for 2015/16 must reach the tax office by 5 April 2020.

Once HMRC has accepted your mileage claim for one tax year, subsequent claims for up to £1,000 per year can be made by phoning the tax office on 0300 200 3300.

Elect in good time

Events don’t always turn out as expected. For example, you may need to wait for a later profit or loss to arise before you can judge whether it’s right to elect to change the tax treatment of an earlier transaction.

This is why the law allows you extra time, after you have submitted your tax return, to submit a tax election or claim. The elections you may need to make by 31 January 2021 for the 2018/19 tax year include:

• to set trading losses against your other income
• to average the profits made from farming, or as an author or artist
• to treat a property as continuing to qualify as commercial Furnished Holiday Letting if it qualified as such in 2017/18, but otherwise would not

You need to wait for a certificate to arrive before making a claim for your investment under the Venture Capital Schemes – EIS, SEIS or SITR – so the claims period for those schemes is five years after the tax return submission date.

Corporate tax claims generally need to be made within two years of the end of the accounting period in which the transaction occurred.

We can help you check what claims or elections you need to make.

The ATED trap

The Annual Tax on Enveloped Dwellings (ATED) applies when a company (and certain other bodies) owns a UK residential property worth over £500,000. The charge applies for the year from 1 April, but the ATED return, and any payment due, must reach HMRC by 30 April within that period (i.e., by 30 April 2020 for 2020/21).

This annual charge starts at £3,650 and increases, through valuation bands, up to £232,350 for 2019/20. The charge is based on the property’s value as at 1 April 2017, or the purchase date if later.

The owner can claim 100% relief from ATED if the property is let commercially, is under development, or if certain other conditions apply, but the relief must be claimed on an ATED relief form by 30 April for each year.

There are steep penalties for late submission of ATED returns, which are payable even if there is no ATED charge to pay. HMRC can check whether an ATED return is due by accessing the Land Registry database to see who owns which properties.

VAT registration issues

The VAT registration threshold has been frozen at £85,000 until at least 31 March 2022. This may bring more businesses into the VAT fold if they increase their prices with the rate of inflation.

This threshold can be a harsh cliff edge, as once VATable turnover exceeds it the business must charge VAT on all eligible sales. It must also keep its VAT records in a digital format and submit its VAT returns using MTD-compatible software.

For your UK sales, you must check the cumulative total of your VATable sales (including zero-rated items) for every rolling 12-month period and register for VAT within 30 days, once this total exceeds £85,000.

Do this calculation every month, as if you tally up your sales just once a year for your accounts, you may miss this 30 day deadline. If your sales suddenly take off, you may be too busy to remember to register for VAT within 30 days. If you register later than the law demands, you can suffer a penalty.

For example, say your annual sales (accruing evenly throughout the year) are £83,000. If you increase your prices by 3% in January 2020, by 31 October 2020 your turnover in the previous 12 months will be £85,075 and you will have to register for VAT within 30 days.

You could restrict your price increase to keep your turnover under £85,000, but if your purchase costs are increasing this will cut your profit margins. Alternatively, you could perhaps restrict your sales by taking longer holidays, if you can afford it.

Another idea is to hive off a part of your business into a separate legal entity, so that each new business has turnover under £85,000. However, this must not be an ‘artificial’ split.

The two businesses should have a bank account each, keep separate business records and file separate tax returns. Ideally, the businesses should provide different services or goods to separate groups of customers. There must be separate contracts with any common suppliers.

Many businesses, may wish to register for VAT earlier than needed. Early registration allows you to claim back VAT on your start-up expenses. You can reclaim VAT on services used within the six months before your VAT registration date, and on goods acquired within four years before that date (if they are still held at the date of registration). The VAT paid on an expensive shop refit could be lost if you delay VAT registration for too long.

However, it’s a balancing act – if you register earlier than required, you must account for VAT on sales made after your registration date that could otherwise have been VAT-free.

You can’t change the VAT registration date requested once you’ve applied to register. It’s very important to plan your VAT registration, to ensure the registration date falls at the optimum time for your business.

Businesses that sell digital services (such as eBooks or software) to nonbusiness customers in EU countries are not required to register for VAT in those EU countries, if the total value of their digital sales to other EU countries is less than £8,818, but this threshold only applies while the UK is a member of the EU.

When the UK is no longer treated as a member of the EU, you will need to register for VAT in an EU country if you sell any digital services to non-business customers in EU countries. You will also have to charge the correct rate of VAT on your digital services provided in each EU country where your non-business customers belong.