Stamp Duty Land Tax

With effect from 1 April 2021, foreign resident purchasers of residential property in the UK and Northern Ireland will be subject to a 2% surcharge on the Stamp Duty Land Tax they would otherwise pay. This is intended to reduce house price inflation and make property available for first-time buyers.

 

Property

A restriction on income tax relief for finance costs against rental income on residential property has been phased in over the last four years. This began in 2017/18; for 2020/21, finance costs will no longer be allowed as a deductible expense, but rather as a reduction in tax liability on rental income at 20%. The rules are complicated and can produce unpredictable results.

Non-resident companies

As announced in past Budgets, and following consultation, foreign resident companies with income from UK rental properties become liable for corporation tax rather than income tax from 6 April 2020. The Budget included technical changes to allow such companies relief for financing costs that might otherwise fall in a gap between the income tax and corporation tax rules.

Annual Tax on Enveloped Dwellings

The annual tax charges on residential properties worth more than £500,000 that are owned through companies and other envelope arrangements will go up for 2020/21 by a little over 1.6% on average. The charge on a property worth between £500,000 and £1 million rises from £3,650 to £3,700, and the maximum charge on a property worth more than £20 million rises from £232,350 to £236,250.

 

VAT

rest of the world, because they currently have to pay the VAT and claim it back later.

Domestic Reverse Charge

In a missing trader fraud, supplier collects VAT from a customer (who claims it back from HMRC) but disappears without paying it to the authorities. To reduce the risk of this, a reverse charge makes the customer liable to pay the VAT due on purchases. If a supplier cannot charge VAT, a fraudulent one cannot steal it. Domestic reverse charges (DRC) already exist in relation to substantial transactions in mobile phones and some other types of supply.

To counter missing trader fraud in the construction industry, HMRC planned to introduce a DRC on 1 October 2019 for supplies of construction services. In the middle of arguments about Brexit, there was a risk that the construction industry could not cope with such a radical change, so the Government decided to defer it for a year. It has been confirmed that it will be brought in on 1 October 2020. The rules and guidance available last year were criticized for lack of clarity and the likelihood that many of those affected would not be ready to comply. Anyone who buys or sells construction services should consider as a matter of urgency how they will be affected.

Sanitary products

Following a long-running public campaign, the Chancellor announced that VAT on womens sanitary products (charged to 5% VAT since 2001) will be abolished from 1 January 2021.

Digital publications

The Chancellor announced an extension of zero-rating to the digital versions of books, newspapers, magazines and academic journals, in line with their physical counterparts, with effect from 1 December 2020. In a recent tax case the Upper Tax Tribunal held that digital newspapers should be zero-rated under present law, but has appealed the judgment. Other businesses have put in claims for back tax on the strength of the decision. That case will not be affected by the change in the Budget, which will only apply going forward.

Call-off stock

Although the UK has now left the EU, in the transitional period we are still supposed to apply EU VAT law  and also to benefit from it when dealing with other countries. The Budget includes a simplification in relation to call-off stock that is physically held in another country to be available at short notice for a particular customer. If a UK trader holds its own stock in another country, it is normally necessary to register for VAT there; however, Member States are allowed to ignore call-off stock holdings for registration purposes in certain circumstances. The EU revised the rule in 2018 to take effect in January 2020; because the UK was, contrary to expectations, still a Member State at that time, we are enacting it.

It will continue to apply to foreign businesses holding call-off stock in the UK, and UK businesses holding call-off stock in the EU, at least until December 2020. The situation after that will depend on whatever deal is negotiated, but it is likely that UK businesses will not then enjoy any simplifications, and will have to register for VAT and appoint a fiscal representative if they hold stock in an EU country.

 

Inheritance Tax

As previously announced, the nil rate band remains frozen at £325,000 until the end of 2020/21. The residential nil rate band (RNRB) enhancement on death transfers applies where a taxpayers residence (or assets representing one following a sale) is left to direct descendants. It has been phased in over four years, and the full value of £175,000 applies from 6 April 2020. A married couple will be able to leave £1 million free of IHT to their descendants (£325,000 plus £175,000 from each parent), but the rules are complicated. The Budget contained nothing new on IHT.

 

Capital Gains Tax

The annual exempt amount rises from £12,000 to £12,300 for 2020/21. The rates of tax are unchanged at 10% (total income and gains within the taxpayers basic rate limit) or 20% (gains above the basic rate limit) on assets in general, but 18% or 28% on residential property that is not eligible for the main residence exemption, and also on carried interest of investment fund managers. Most trusts enjoy half the annual exempt amount (£6,150) and pay tax at 20% or 28% on chargeable gains.

Main residence exemption

As previously announced, the generous exemption of gains on a taxpayers only or main residence will have two additional restrictions from 6 April 2020. First, the final period exemption, which allows exemption to continue after a person has moved out, will be cut from 18 months to 9 months. The final 36 months remain exempt where the owner is disabled or living in a care home. Second, letting relief, which can exempt an additional gain of up to £40,000 where a property has been let, will be restricted to periods during which an owner was in shared occupancy with a tenant. Up to now, this relief has been very favorable for someone who moves and lets out the former main residence.

Chargeable residential property

Also as previously announced, new rules apply from 6 April 2020 to disposals of UK residential property where a CGT liability arises. A return must be made to HMRC, and a payment made of the estimated tax liability, within 30 days of completion of the sale. This is a considerable advance on the normal CGT payment and filing deadline of 31 January following the end of the tax year. Similar rules have applied to foreign resident sellers of UK property for several years, but they now apply to UK residents as well. There is no obligation to report disposals on which no CGT is payable.

Entrepreneurs’ Relief (ER)

ER reduces the tax on disposals of qualifying assets to 10%. It has been criticized as being excessively generous to people who are already rich, and as ineffective in incentivising entrepreneurs to start businesses. The Chancellor decided against abolishing it altogether, but reduced the lifetime amount of eligible chargeable gains from £10 million to £1 million with effect from 11 March 2020. The effect will be to increase the tax on a £10 million gain from £1 million to £1.9 million. Where a contract was signed before 11 March but the transaction had not been completed, a claim for the higher amount of ER will have to be justified by the taxpayer on the basis that the disposal was not made to obtain tax relief.

There is no change to the £10 million limit for the similar Investors Relief which is for external investors in qualifying trading businesses.

 

Personal Income Tax

It may be unprecedented for a Budget speech not to mention personal income tax. Philip Hammond made big increases in allowances for 2019/20 in his last Budget, and the main ones have been frozen for 2020/21. Income Tax rates are now extremely complicated. An individuals total tax on any given amount will vary depending on the types of income they receive (for example, salary, profits, rent, interest, dividends), but at least someone on the same income will pay the same tax next year as they did this year.

The level of income at which the personal allowance is withdrawn has been £100,000 since the rule was introduced in April 2010, and inflation means that far more people are now affected. Every £2 of income over that level reduces the allowance by £1. This results in an effective marginal rate of tax of 60% in the band of income up to £125,000 in 2020/21, above which the taxpayer will have no personal allowance.

The Scottish Parliament has set different tax rates and thresholds for general income of Scottish taxpayers (details in Table A). The Welsh Government also has the power to set a different rate of income tax for non-savings, non-dividend income for Welsh taxpayers, but has announced that it will not vary the UK rates.

 

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 VAT 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, its 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 cant change the VAT registration date requested once you’ve applied to register. Its 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 non business 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.

Action Point!
Check your total sales on a 12-month rolling basis.

 

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 doesnt 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.

Action Point!
Are you due a tax refund for business journeys?

 

Elect in good time

Events dont 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 its 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.

Action Point!
Have you made all the necessary tax claims?

 

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 anti avoidance legislation which will tax the gain as income.

Action Point!
If you are planning to sell your company, discuss your plans with us without delay.