Year End Tax Review 2020/21

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.

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 2020/21 to 2021/22, or by making certain payments in 2020/21 rather than in 2021/22.

Say you are a 20% taxpayer in 2020/21 but expect that a lump sum termination payment due in March 2021 will tip you into the 40% band (over £50,000). If you ask your employer to delay paying the termination payment until after 5 April 2021, you’ll pay the tax on that income later. You will also retain all of your 2020/21 £1,000 Savings Allowance and may still stay out of the 40% band for 2021/22. We don’t yet know the 40% threshold for 2021/22 but it is likely to be at least £50,270. The main thresholds for 2020/21 are:

• 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 couples: 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 threshold: £150,000 – 40% rate increases to 45%, Savings Allowance removed, and
• pension annual allowance reduced where income (including employer pension inputs) above £240,000

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’.

Let properties

For periods from 6 April 2020, individual landlords of residential properties have been unable to deduct interest or finance costs from their rental income for tax purposes. In place of the blocked interest the landlord receives a 20% tax credit to set against their Income Tax bill. This restriction of interest deductions doesn’t apply to corporate landlords or to individuals letting out qualifying furnished holiday lets.

Where the property business is supported by borrowing, the increased taxable income caused by the restrictions on interest deductions 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 they could deduct 25% of the £32,000 interest paid) with their position in 2020/21, when all the interest is blocked. The figures will be different for Scottish taxpayers, who pay tax on property income at slightly different rates, but the principles are the same.

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, where the interest restrictions don’t apply
• letting homes as Furnished Holiday Lettings
• 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.

End of the holiday

To boost the property market after the first COVID-19 shutdown, the Chancellor introduced a Stamp Duty Land Tax (SDLT) holiday for residential properties. If you are buying your first or only home in England or Northern Ireland for up to £500,000, you will pay no SDLT, where the deal is completed by midnight on 31 March 2021.

If you are purchasing a holiday home, or a buy-to-let investment property, the 3% surcharge of SDLT still applies on the full value of the deal.

Where the property is located in Wales, Land Transaction Tax (LTT) applies. The starting rate for LLT has been raised to £250,000 for those buying or replacing their main home by 31 March 2021. However, there is no LTT reduction at all where the property is to be let out or used as a second home.

In Scotland, purchasers of residential property also enjoy a holiday for Land and Buildings Transaction Tax (LBTT) until 31 March 2021. In this case, the LBTT starts to bite at £250,000 for the acquisition of the main home. Purchasers of second homes or buy-to-let properties must pay an additional LBTT surcharge of 4% on the full value.

Where you are planning to buy a residential property, you need to complete by 31 March to save tax. It is very unlikely that these land tax holidays will be extended.

Innovate to accumulate

Companies that invent new production methods or products can claim enhanced tax relief for the Research and Development (R&D) costs. Small and medium-sized companies can claim 230% of qualifying R&D costs and a 14.5% payable tax credit if this extra deduction results in a loss!

This is a very attractive relief and it’s easy to claim. You can ask HMRC for an advance assurance that your company, and its R&D projects, will meet the requirements for R&D tax relief. We can help you do this.

The main benefit of advance assurance is that HMRC won’t raise further questions about your initial R&D claim or for R&D claims submitted in respect of the next two accounting periods.

A company can apply for advance assurance if it:

• hasn’t claimed R&D tax relief before
• has an annual turnover of £2 million or less
• has fewer than 50 employees

You need to apply for the R&D tax relief within two years from the end of the accounting period in which the R&D costs were incurred. So, if your company has been innovative in the recent past, don’t delay your application for R&D tax relief!

Prepare for off-payroll working

If you provide your personal services through your own company, the way you are taxed may change for contracts performed for large organisations from 6 April 2021, due to the off-payroll working rules.

Where your final customer is not small, it must determine whether the relationship with you is a deemed employment. It may do this using the HMRC online tool called “CEST” (Check Employment Status for Tax). Your customer may ask you to provide information to feed into the CEST tool before April 2021, 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 NIC deducted from the gross amount. Additionally, the client will have to pay employers’ NIC, which may impact on the fees that they are willing to agree with you for work.

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 your customer’s accounts and advise on how to tell whether that organisation may have to apply the off-payroll rules to your contracts.

Selling your business

If you are wondering whether, or when, you should dispose of your business, a sensible first step is to form an outline plan.

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 (£12,300 for 2020/21).

Entrepreneurs’ Relief can reduce your tax rate to 10% on gains of up to £1m. However, this is a lifetime limit, so if you have already taken advantage of this relief in the past you may not be able to make a further claim on the disposal of your business.

The Budget on 3 March 2021 may well introduce changes to Capital Gains Tax, possibly increasing the rates or reducing the reliefs available for business disposals. If you want to be sure of benefiting from capital gains reliefs, take advice and be prepared to act quickly.

If you 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 anti-avoidance legislation which will tax the capital gain as income.

Excited about electrics

The taxable benefit for having an electric company car is currently nil, but from 6 April 2021 the taxable benefit will increase to 1% of list price, and to 2% for 2022/23.

Where a business buys a new electric car, it can claim 100% of the cost as a capital allowance in the year of purchase, if the car is acquired before 1 April 2025. The electric car must be brand new and not second-hand to qualify for this 100% First Year Allowance.

If a business installs electric vehicle charging points before 31 March 2023, it can claim 100% of the cost in the year. There are also Government grants available for individuals who install electric vehicle charging points at their home.

Where employees are permitted to freely charge up electric vehicles at work, there is no taxable benefit for the use of that free electricity. Drivers of electric company cars who pay for their own charging can claim a tax-free allowance from their employer of 4p per business mile driven.

Drivers who use their own electric cars for business journeys can claim the normal mileage rates of 45p per mile for the first 10,000 miles and 25p for any additional business miles driven in the tax year.

Benefits-in-kind

Many employees were required to work at home in 2020. Their employers may have helped facilitate this by providing equipment or paying to boost their home internet service. Generally, these costs are not taxable on the employee if there is no significant private use of the asset or service.

Other benefits, such as company cars, remain taxable even if the employee was furloughed. We can help you check which benefits are taxable and which are tax-free in 2020/21.

In some cases, an employee can avoid being taxed on a benefit if they ‘make good’ the value of benefit by reimbursing their employer. There are strict time limits for doing this.

All reimbursements of taxable nonpayrolled benefits for 2020/21 must be made by 6 July 2021, which aligns with the date for submitting the forms P11D.

The dates for making good on payrolled benefits-in-kind provided in 2020/21 are:

• 1 June 2021 for the value of road fuel used
• 5 April 2021 for all other benefits

The deadlines for making good specifically do not 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 2020/21 is 2.25%.

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.

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 2022 for the 2019/20 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 Furnished Holiday Letting if it qualified as such in 2018/19, but otherwise would not in 2019/20

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.

VAT on digital services

UK businesses that sell digital services (such as eBooks or software) to nonbusiness customers in EU countries are now required to register for VAT in each of the EU countries where their customers belong and apply the correct local VAT rate to the sales. Alternatively, the business may register for VAT in just one EU country and use that VAT number to access the non-Union VAT MOSS scheme to report VAT charged on those sales.

There is no de minimis turnover threshold for non-Union VAT MOSS, so a UK business must report VAT due, even if it only makes one digital services sale to a non-business customer in an EU country. The VAT MOSS registration must be completed within ten days of the end of the month in which the first sale is made.

VAT on goods crossing borders

The UK is no longer treated as an EU country since the Brexit transition period ended on 31 December 2020. This has some significant implications for VAT and duties on international transactions.

All imports of goods into Great Britain (different rules apply for imports into Northern Ireland) are subject to VAT, customs duty and customs declarations at the point of entry. These taxes and duties must normally be paid before the goods can be released from the port.

Payment of the import VAT may be deferred if the buyer has a VAT deferment account or has been granted access to “Postponed VAT Accounting”. This allows the importer to account for the VAT on their next VAT return. However, to use Postponed VAT Accounting, you must have an EORI number and register for HMRC’s Customs Declaration Service (CDS).

Customs declarations are complicated and must be correct. An experienced customs agent or freight forwarding company may be needed to complete this process (for a fee!).

Any goods that leave Great Britain are zero-rated for VAT purposes and will be subject to duty and VAT when they arrive in the destination country. Proof of export must be retained to support the zero-rating.

If you buy low value goods from overseas suppliers (not exceeding £135) you will need to account for VAT on your own VAT return by doing a reverse charge entry. If your business is not VAT registered, you will get a VAT invoice from the overseas seller, who is obliged to register for UK VAT.

Where you trade in goods that move between Great Britain and Northern Ireland, you should register for the free Trader Support Service (TSS), which can advise and help with the necessary paperwork that will be needed.