Employment Status, IR35 & the Off Payroll Working Rules

IR35 is a legislation designed to stop workers incorrectly claiming to be contractors working on a self-employed basis, rather than employees, for tax benefits. Contractors and freelancers need to make sure that they are IR35 compliant.

It is not always clear whether someone is an employee or self-employed and there have been many court cases to resolve disputes over this question. A number of principles have been established by those cases which help to decide the question, however there is no single test and ultimately it comes down to the overall picture, taking into account all those principles.

For a person or entity engaging an individual to carry out work for them, it is important that they identify if that person will be their employee as this may mean they need to operate a payroll and account for PAYE. Failure to do so could result in interest and penalties for unpaid PAYE.

Who is responsible?

When the person is providing their service through their personal company (or via a partnership of which the individual is a partner) the responsibilities of the engaging entity depend on their size.

• If the engaging party is ‘small’ there is no obligation on it to consider whether, if the individual was engaged directly rather than via their personal company, they would have been an employee rather than self-employed. Instead, the personal service company must make this assessment and if so, it must effectively operate PAYE on the income from that engagement. The rules governing this are referred to as ‘IR35’.

• If the engaging party is ‘large’ they are obliged to consider whether the individual would be an employee if they were engaged directly rather than via their personal company and if so, they must withhold tax and account and NIC on the payment made to the company. Or, if there is another intermediary between them and the personal service company, such as an employment agency, they are obliged to notify that intermediary of their decision so that it can withhold tax and NIC on the payments it makes to the personal service company. The rules governing this are referred to as the ‘off payroll working’ rules.

‘Large’ for this purpose means any two out of the following three criteria - 50 or more employees, annual turnover of at least £10.2m and balance sheet assets of at least £5.1m.

What factors are taken into consideration?

Long-term contractors and freelancers who work through a limited company will need to ensure their contracts accurately reflect the relationship with their clients. Contracts will need to be checked for each project on renewal and must provide clear evidence to support the contractor’s/freelancer’s status as a self-employed professional rather than an employee.

HMRC investigations are not confined to the detail contained in an individual contract and will ‘look beyond’ the contract to examine the actual working practices between contractors and their clients. If HMRC decides the relationship is of an employment nature, they will seek to recover all income tax and National Insurance contributions due over the period of the contract affected.

There are 3 main areas to look at when determining IR35 status:

• Supervision, direction and control of the worker

• Right of substitution

• Mutuality of obligation

Without the presence of all three, there can be no contract of service and there contractor is therefore not subject to the IR35 rules.

We go into more detail on these below.

Supervision, direction and control of the worker

In short, this looks at what degree of supervision, direction and control a client has over a contractor in respect of what, how, where and when they complete their work/contract.

Supervision, Direction, and Control are tests of ‘employment’ that could put a contract inside IR35.

• Supervision means the extent to which the client oversees the contractor’s work.

• Direction means the client directing how the contractor completes the project or assignment, by providing instructions, guidance, and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it progresses.

• Control is where the client controls the work the contractor does and how they do it. This also includes the power to move the contractor from one task to another.

  Contractors and freelancers should have control over when and how they work, not the client. Having a project basis to the work performed is a crucial indicator of IR35 status.

Right of substitution

If a contractor can send a substitute in their place, rather than having to do the work themselves, then this is an indicator of a genuine contractor relationship, rather than an employee-employer relationship.

If a client, however, is only interested in a particular person’s skillset etc., and no substitute can be sent, this would be an indicator of an employment relationship.

Mutuality of obligation

On order to be a contractor, there must not be a mutuality of obligation, where there is an obligation for the client to offer work and also an obligation for the contractor to accept it.

In other words, a contractor would work on a project-to-project basis with no obligation to carry on working for the client once that work has been completed. An employee on the other hand, would need to be handed work to do, and would need to continue to do such work even after specific projects have been completed.

Though not conclusive, if a contractor is allowed to work for a number of clients at the same time, this would be an indicator of a genuine contractor relationship, rather than one of an employee who can often only work for one company.

A contract that would be IR35 compliant would state that the client does not have an obligation to offer the contractor more work and that the contractor doesn’t have an obligation to do that work. On the other hand, if a contract states some form of exclusivity, a number of working hours or pattern, or any reference to an ongoing basis of working, this would be indicative of an employment relationship and not IR35 compliant.

Other factors

In addition to the 3 areas covered above, we outline a few further considerations:

• Financial risk – Regular work and regular payment are indicative of employment. Any errors made by the contractor should be rectified in the contractor’s own time, and they should have their own professional indemnity insurance if they are to be viewed as a contractor

• Use of own equipment – Contractors should use their own equipment rather than equipment supplied by their client, unless there is a valid reason such as safety or practicality.

• Employment benefits – If a contractor is entitled to holiday pay, sick pay, pension, this is all indicative of employment.

• Corporate involvement and being part and parcel of an organisation – If a contractor has any corporate involvement with the client (even for small things such as having a security pass), this could have an impact on IR35 compliance. If a contractor becomes embedded in their client’s organisation, such as having staff reporting to them, this would be indicative of an employment too.

• Being in business on your own account – If a contractor can demonstrate they are in business on their own account (such as having their own office, business stationery, a website, other clients, advertising, invoicing etc.), this will be indicative of a contractor.

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Please note that the above provides an introduction and an outline to IR35 and is not exhaustive; you should seek professional advice on whether IR35 applies to you.

Please contact us to find out how the above applies in your circumstances.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Upcoming changes to VAT in the Construction Industry

HM Revenue & Customs (HMRC) will be introducing a new set of regulations for VAT that will apply to the construction industry from 1st March 2021.

These regulations are known as the Domestic Reverse Charge (DRC).

What is the purpose of the DRC?

The DRC has been brought in to combat ‘missing trader’ fraud, where VAT registered traders that charge VAT on their sales invoices and then don’t declare or pay this VAT to HMRC.

Who and what will it affect?

The DRC will apply where:

• The individual or business is registered for VAT,

• Payments are subject to the Construction Industry Scheme (CIS), and

• The supplies are at the standard (20%) or reduced (5%) VAT rates.

Supplies between subcontractors and contractors will be subject to the DRC unless they are connected to a contractor that is the end user (someone who uses the construction services for themselves rather than selling the services as part of their construction business).

How does it work?

Under the DRC, the customer receiving the specified service has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT, subject to the normal rules for VAT recovery.

A numerical example to help clarify how the DRC works:

Currently, a supplier/subcontractor invoices a contractor £1,000 plus VAT of £200. The contractor pays them £1,200, then recovers the £200 in their VAT return.

Under the DRC rules, the supplier invoices the contractor £1,000 (no VAT is chargeable, but there is a statement on their invoice saying it is subject to the reverse charge). The contractor pays the supplier £1,000. The £200 VAT payment is all dealt with on the contractor’s VAT return, with a £200 ‘input’ and £200 ‘output’ VAT, which cancel each other out so there is essentially no VAT payment.

Essentially the ‘recipient of the works and services (where they are a contractor and not an end user) up the chain of supply will, instead of paying the VAT to the party charging it (the supplier/subcontractor), retain that VAT and pay it to HMRC (essentially discharging the VAT liability of the supplier of the works and services).

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Please contact us to find out how the above might apply in your circumstances.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Are you making use of your tax allowances?

With the end of another tax year on the horizon, we outline some tax tips to help ensure individuals utilise their tax allowances and maximise their tax efficiency.

Pension contributions

For most individuals, the pensions annual allowance is £40,000 (or 100% of earnings if less). For individuals in a position to make use of their annual allowance, and are not at risk of exceeding the £1,073,100 pension lifetime allowance, making additional contributions now is generally advisable from a tax perspective. Individuals receive tax relief on those contributions (the government essentially pays in an additional amount to individuals’ pensions when they make contributions) at a minimum of 20%, but higher levels of tax relief are available to those paying tax at the higher or additional tax rates.

In addition, unused allowances from the previous three tax years can be carried forward.

The annual allowance is tapered down to a minimum of £4,000 for high-earning individuals, and any contributions exceeding the annual allowance will receive no tax relief and individuals will be faced with an annual allowance charge, so careful planning needs to be considered when making contributions.

Individuals can also make a contribution of up to £2,880 into a child’s pension, which will be topped up to £3,600 with tax relief. This is often an excellent form of financial planning as it provides the child with a significant head start when saving for their long-term financial future.

For more information on pension contributions, see our dedicated blog post.

Tax Efficient Investments

ISAs

This year’s ISA allowance remains at £20,000 per tax year. Investments within an ISA can generate income that is free of income tax and can generate capital gains without there being any charge to capital gains tax.

Individuals can also make contributions into Junior ISAs of up to £9,000 per tax year for each child.

Other tax efficient investments

Other tax efficient investments include the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs).

EIS, SEIS and VCTs are all HMRC approved tax-advantaged investments, which offer an income tax reducer, as well as Capital Gains Tax advantages and reliefs.

More information on these, see our dedicated blog post on tax efficient investments.

Owner-managed businesses

The dividend allowance enables shareholders to receive tax-free dividends of £2,000 per tax year. In addition, the basic rate of tax on dividends in excess of the allowance is 7.5%, rising to 32.5% for higher rate taxpayers. If individuals are basic rate tax payers and they have distributable profits in their company, the general advice is to best utilise the lower tax rates as far as possible.

When dividends are added to the various other ways to extract profit from a company, such as salary, pension contributions, benefits-in-kind, rent and interest payments among others, as well as looking at how these could be paid to family members to increase tax efficiency, there is a lot of scope to extract profits from a company in a tax efficient matter to make best use of available allowances and lower tax rates.

As a general rule for all businesses, whether they are sole traders, partnerships or companies, it is advisable from a tax perspective to ensure expenditure is incurred before the end of the tax year or the accounting period, rather than just after, so that tax relief on that expenditure is realised sooner.

Capital gains tax (CGT)

Individuals can each make capital gains (profits on the sale of assets chargeable to CGT) of up to £12,300 in the current tax year without having to pay any CGT, by utilising their annual exemption.

Any unused annual exemption cannot be carried forward to future tax years so from a tax perspective, it is generally advisable to ensure that assets are sold before 5th April so that the current year annual exemption isn’t wasted and the following year’s annual exemption is available to utilise against any future asset sales.

On the other hand, if the disposal is a one-off, individuals may wish to consider delaying selling the asset until after 5th April so that it falls into the next tax year, therefore delaying the need to pay any CGT by another year.

In addition to the above, there are numerous tax planning opportunities available for couples, such as transferring assets or parts of assets between spouses and civil partners to utilise their annual exemption. The transfer of an asset to a spouse or civil partner is not subject to CGT, and the combined annual exemption between spouses and civil partners is £24,600.

Inheritance tax (IHT)

Gifts made by individuals are potentially chargeable to IHT. When made by an individual during their lifetime and these are made to another individual, these gifts are commonly referred to as potentially exempt transfers (PETs). If the donor does not survive 7 years from the date of the gift, the gift will be subject to IHT.

There are a number of IHT exemptions available which enable individuals to make gifts in their lifetime without making a PET and therefore not having to worry about the 7 year rule. These are briefly outlined below.

Annual exemption - Individuals can make gifts up to a total of £3,000 per tax year free of IHT. Unused exemptions can be carried forward for one year, so £6,000 can be gifted in a tax year free of IHT if the previous year’s annual exemption hasn’t been utilised.

Small gifts - Gifts of up to £250 per donee per tax year can be gifted without an IHT charge. There is no limit to the number of donees/individuals the donor can make these small gifts to.

Gifts on marriage – Gifts made in the event of marriage carry their own exemptions. £5,000 can be gifted to children in the event of their marriage and £2,500 to grandchildren. There is also a £1,000 exemption on gifts to any other individuals getting married.

Normal Expenditure out of income – Gifts can be exempted from IHT if they are made regularly and out of excess income. The donor must have sufficient income after their usual living expenditure and after making the gifts (and the gifts must be regularly made and form part of the donor’s normal expenditure) to maintain their usual standard of living. This exemption is used most by individuals who have high levels of income but modest living costs.

Conclusion

As you can see, there are a myriad of different tax planning opportunities (and there are many more than just the ones listed here), and it is often difficult to decide what route to go down, so seeking professional advice is strongly recommended.

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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Tax Relief on Pension Contributions

Updated February 2023

When paying into pensions, individuals receive income tax relief on any contributions they make at the highest rate of income tax they pay (known as the marginal rate), provided the total gross pension contributions paid into their pension schemes (including contributions paid by employers and other people, as well as the individual’s own contributions) don’t exceed the lower of:

• Their annual earnings; and

• The annual allowance (see section below).

If an individual doesn’t have any earnings (for example, if they don’t work) or earn less than £3,600 each year, they can make gross contributions of up to £3,600 (£2,880 net) each year to a personal pension, self-invested personal pension (SIPP), or stakeholder pension receiving basic rate income tax relief at 20% on their contributions. Individuals can pay in higher amounts than their maximum limit, but don't receive tax relief on the excess amounts.

How are pension contributions actually paid?

Pension contributions can be paid either through a workplace pension scheme, essentially as part of an employment, or by making personal pension contributions outside of an employment.

Workplace pension schemes

Individuals can obtain tax relief in 3 different ways on their contributions, depending on the type of scheme.

1. The employer deducts contributions from the employee’s pay before it is subject to tax – the net pay arrangement.

2. The employer deducts contributions from the employee’s net pay – the relief at source arrangement.

3. Pension contributions are deducted through a salary sacrifice arrangement.

The net pay arrangement

Under the net pay arrangement, the employer deducts contributions from the employee’s pay before it is subject to tax, meaning that tax relief is received at the highest rate of tax (the marginal rate).

The relief at source arrangement

Under the relief at source arrangement, the employer deducts contributions from the employee’s net pay. The pension provider then claims back basic rate tax relief at 20% and adds this to the pension pot. If an individual is a higher or additional rate taxpayer, they need to claim back the extra tax relief at their marginal rate, usually through their tax return.

The salary sacrifice arrangement

When pension contributions are paid through a salary sacrifice arrangement agreed with an employer, this is treated as an employer contribution, with the same effect for the individual as receiving tax relief as above under a net pay arrangement but also with a saving on National Insurance Contributions.

Personal pension contributions

If an individual has set up their own scheme (such as a personal pension, self-invested personal pension or a stakeholder pension scheme), the contributions that are paid into the scheme are usually treated as being paid net of basic rate income tax relief, in much the same way as a relief at source workplace pension.

The pension provider claims back basic rate tax relief at 20% and adds this to the pension pot. If an individual is a higher or additional rate taxpayer, they need to claim back the extra tax relief at their marginal rate, usually through their tax return.

The annual allowance

The annual allowance is a limit to the total amount of contributions that can be paid to defined contribution pension schemes, and the total amount of benefits that can be built up in defined benefit pension schemes each year, for tax relief purposes.

The annual allowance is currently capped at £40,000 although this is subject to a further restriction for high earners (see the tapered annual allowance section below). A lower limit of £4,000 may apply where individuals have already started accessing their pensions (see the money purchase annual allowance section below).

The annual allowance applies across all of the schemes an individual belongs to; it’s not a ‘per scheme’ limit and includes all of the contributions that the individual pays, their employer pays or anyone else who pays on their behalf.

Where the annual allowance is exceeded in a year, the individual won't receive tax relief on any contributions paid that exceed the limit and will be faced with an annual allowance charge.

The available annual allowance for the current year is increased by any unused annual allowance from the previous 3 years (but this does not apply to the money purchase annual allowance).

The tapered annual allowance

The tapered annual allowance applies to high earners. For every £2 of ‘adjusted income’ (essentially an individual’s net income, plus pension contributions made by them and/or their employer) above £240,000 per annum, £1 of annual allowance will be lost. The maximum reduction will be £36,000 meaning that individuals with an adjusted income of over £312,000 will have their annual allowance capped at £4,000.

Where an individual’s ‘threshold income’ (generally an individual’s net income, less the gross amount of any personal pension contributions) is under £200,000, the tapering above will not be applied, even if their adjusted income is over £240,000.

The money purchase annual allowance

If an individual has taken flexible benefits from their pension and they want to continue to make contributions, they will have a reduced annual allowance of £4,000 towards their defined contribution benefits. The reduced allowance will apply where individuals have withdrawn more than the 25% tax free pension commencement lump sum.

The reduced allowance includes both individuals’ own contributions and any other contributions paid on their behalf, such as an employer or a third party.

Conclusion

As you can see from this brief introduction to pension contributions, the current rules are very complicated and as is so often the way, the devil is in the detail. In the right circumstances and with specialist advice, however, pension contributions can attract up to 60% tax relief.

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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Tax on electric cars and low emission vehicles

With the government’s aim to reduce emissions (which will culminate in a ban on new petrol or diesel cars 2040, as announced by Theresa May’s government a couple of years ago), there is an ongoing push for the use of electric, hybrid and other low emission vehicles and tax breaks form part of this strategy.

In this article we look at the tax treatment for businesses, as well as employees (including directors).

Businesses

Capital Allowances

Capital allowances is the practice of allowing a business to get tax relief on tangible capital expenditure (e.g. cars, vans, equipment etc.). It is essentially known as the tax man’s version of depreciation, and writes off a percentage of the value of the item against taxable profits, each year, unless the Annual Investment Allowance (AIA) or First Year Allowance (FYA) apply.

Businesses can deduct the full value of an item that qualifies for the AIA against profits. Most capital expenditure is eligible for the AIA, though cars are not (but vans and other commercial vehicles are). The current AIA stands at £1 million of qualifying expenditure per year.

Businesses can alternatively deduct the full value of an item that qualifies for a FYA. Broadly, certain environmentally friendly items are eligible. FYAs do not count towards the AIA limit.

Until April 2021 low or zero emission cars can qualify the FYA if CO2 emissions do not exceed 50g/km and the car is purchased new and unused. The FYA also applies for zero emission vans, but as commercial vehicles qualify for the AIA, this special FYA for zero emission goods vehicles is not needed by the majority of businesses.

Leased Cars

Where cars are leased, the cost of the lease is deductible from the business profits. The deduction is restricted by 15% if the car has high CO2 emissions, being over 110g/km for leases commencing on or after 1 April 2018 for companies and 6 April 2018 for sole traders and partnerships.

This restriction therefore doesn’t apply to electric or low emission cars, and the full cost of the lease is deductible.

Private Use

In a company, if a vehicle is used privately as well as for business use, it will be subject to a benefit-in-kind. See the employees (including directors) section below. This also applies to employees of a sole trader or partnership.

In a self-employed/sole trade or partnership, if a vehicle is used privately by the owner/partners, the capital allowance or expense deduction needs to be apportioned accordingly. For example, if a vehicle is used 75% for business and 25% privately, then only 75% of the capital allowance or expense is deductible from profits for tax purposes.

Employees (including directors)

Company cars have long been used by businesses to reward and retain staff as an extra perk on top of a standard salary. Unfortunately HMRC is aware of this kind of incentive and levies tax on them. This company car tax is called Benefit-In-Kind (BIK) tax. This is calculated by taking the list price of the car and multiplying it by a percentage.

The percentage of list price of a company car which is taxed as a benefit is determined by the CO2 emissions of the vehicle. For the current 2019/20 tax year, low emission cars (up to 50g/km) are taxed at 16% of list price, or 20% for diesels. As electric cars tend to be more expensive than similar-sized petrol or diesel cars, this tends to discourage employers from providing electric-only company cars.

From 6 April 2020 the policy is being changed to encourage the provision of electric cars and hybrid vehicles. The appropriate percentages for cars with CO2 emissions of up to 50g/km will take into account the range for which the car can be driven using only electric power.

The tax year 2020/21 will be much more tax efficient for buying an electric company car, when 100% FYA can be claimed by the purchaser and the employee will be taxed on only 2% of the vehicle’s list price if registered before 6 April 2020, and 0% if registered after 6 April 2020.

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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Barristers: Sole Trade or Limited Company Pros and Cons

Most barristers operate as sole traders because the Bar Standards Board only allowed barristers to start trading under alternative structures (including limited companies) in 2015.

Tax and National Insurance

As well as offering limited liability status, trading via a limited company can potentially offer tax advantages, but with the current rate of dividend taxation, this isn’t always the case; it will depend on individual circumstances.

As a sole trader, individuals pay income tax at 20/40/45% on their profits regardless of the level of any drawings. In addition, both class 2 and class 4 National Insurance Contributions are payable.

A limited company pays a flat rate of 19% corporation tax on profits. This tax payable by the limited company rather than the shareholder(s) directly.

Income tax is then payable on profits withdrawn from the company. The standard tax efficient approach is to take a low salary (usually up to the National Insurance threshold, and this salary is deductible from the company’s taxable profits thus reducing the corporation tax liability) and take any further profits as dividends. Dividends are subject to a lower rate of income tax, with the first £2,000 of dividends per year being taxed at a zero rate, then the remainder being taxed at 7.5/32.5/38.1% depending on whether they fall within the basic, higher or additional rate bands (as opposed to 20/40/45%).

Other Considerations

Below we list some other other pros and cons of setting up a limited company for barristers:

Pros

• Operating as a limited company offers limited liability to the owners; the risk sits with the company rather than the individual shareholder(s)

• Trading as a limited company can offer more flexibility when it comes to profit extraction; profits can be retained so that the dividends are taken up to a certain tax bracket, or spouses can potentially own shares in limited companies which can sometimes be useful when looking at taking advantage of lower tax rates

Cons

• It generally costs more in accountancy and admin fees to trade as a limited company

• There are also expenses involved in setting a company up, such as getting advice on the best structure, and having to apply to the Bar Standards Board with a fee in order to trade through a limited company

• In some circumstances it can actually be less tax efficient to operate as a limited company, so care should be taken and advice sought before going ahead

• Limited companies can’t use cash basis accounting, whereas sole traders can use the cash basis, as well as claiming HMRC approved flat rate expenses

The above provides a very brief outline of the main pros and cons of operating through a limited company, but there are a number of other considerations, and advice should be sought to determine whether operating through a company is beneficial in individual circumstances.

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Please contact us to find out how the above applies in your circumstances, how you can reduce your tax liabilities and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Tax Benefits of Donating to Charities

We explore some of the tax benefits associated with giving to charity, for both individuals and for companies.

Individuals

Individuals who make donations to charity can do so tax free, and in some circumstances can obtain additional tax relief. There are a number of ways individuals can give to charity:

• Gift Aid Donations

• Donating to Charity via Payroll

• Leaving a legacy in a Will

• Gifts of Land, Property or Shares

Gift Aid Donations

Gift Aid donations are treated as having been made net of the basic rate of tax, allowing the charity to reclaim the tax element from HMRC. The amount donated to charity by the individual is 80% of the total donation and the charity benefits from the remaining 20%. As a result, every £1 given through Gift Aid is worth £1.25 to the charity.

To enable the charity to reclaim the tax, the donor must complete a Gift Aid declaration, in which the donor must confirm that they are a UK taxpayer.

Higher rate or additional rate taxpayers can claim tax relief on the difference between their top rate of income tax and the basic rate of tax reclaimed by the charity. For example, if a higher rate taxpayer makes an £800 donation to charity, the charity receives a total donation of £1,000, and the individual will also receive a £200 tax repayment in respect of that donation, which can be claimed via their self-assessment tax return.

Donating to Charity via Payroll

Payroll giving schemes enable employees to make donations to charity as a deduction from their pay and to receive tax relief at source for those donations. Please note that the relief is only for tax, and not for National Insurance Contributions.

Employers must appoint a payroll giving agency in order to operate the scheme. The employer deducts the donation from the employee’s gross pay for PAYE purposes and pays it over to the payroll giving agency. The payroll giving agency passes the donation on to the employee’s chosen charity.

Leaving a legacy in a Will

Leaving a legacies to a charities is very efficient from an inheritance tax standpoint; the value of the legacy/donation will either be taken off the value of the estate that is subject to inheritance tax, or will reduce the inheritance tax rate from 40% to 36%, provided at least 10% of the estate is left to charity.

Gifts of Land, Property or Shares

Income tax or capital gains tax relief may be available for donations of land, property or shares to charity.

Income tax relief is given by deducting the value of the donation from total taxable income for the tax year in which the gift was made to the charity. Relief is claimed in the self-assessment return.

Where land, property or shares are sold to a charity for more than the cost, but less than their market value, no capital gains tax is payable.

Companies

Limited companies pay less corporation tax when they give the following to charity:

• Money

• Equipment or stock

• Land, property or shares

• Employees on secondment

• Sponsorship payments

Companies claim tax relief by deducting the value of the donations from their total business profits that are subject to corporation tax.

Money

Companies pay less tax when they donate to charities, by deducting the value of the donations from their profits subject to corporation tax.

Certain payments (such as loans or distributions of company profits) are not deductible. Where companies are given something in return for their donations (such as tickets to an event), the value of what is given must be below a certain value.

Equipment or stock

Less tax is also paid when equipment or trading stock is given to charities.

Any equipment given must have been used by the company, and can include things like office furniture, computers, printers, cars, vans, tools and machinery, and full capital allowances can be claimed.

Land, property or shares

If a company gives land, property or shares in another company to a charity, it will be able to deduct the market value of the gift from business profits, and it won’t be liable to any tax on capital gains.

Employees on secondment

If a company temporarily transfers an employee to work for a charity, or if an employee volunteers for a charity in work time, any cost associated with this will be deductible as normal business expenses.

Sponsorship payments

Sponsoring a charity is different to making a donation, because the sponsoring company gets something in return for payment to the charity.

Sponsorship payments can be deducted from business profits and treated as business expenses provided the charity publicly supports the sponsoring company’s products or services, allows the company to use their logo on printed material, allows the company to sell goods or services at the charity’s event or premises, or there are links between the respective websites.

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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Cryptocurrency and tax – Where are we now?

Cryptocurrency has been around for a few years now, with the most well known being Bitcoin, but there are many others such as Litecoins, Ether, Ripple, Ethereum, Zcash, Dash and Monero to name a few.

Cryptocurrency has made headlines again with Facebook recently announcing Project Libra, which is a new type of digital currency designed for the billions of users of Facebook (and Instagram and WhatsApp), which is due to be launched in 2020.

What is Cryptocurrency

Cryptocurrency, or cryptoassets, is/are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically.

The  Cryptoasset Taskforce report has identified three types of cryptoassets:

• Exchange tokens – these are intended to be used as a method of payment and encompasses cryptocurrencies like Bitcoin.

• Utility tokens – these provide a holder with access to particular goods or services on a platform using Distributed Ledger Technology (DLT).

• Security tokens – these may provide a holder with particular interests in a business, such as in the nature of debt due by a business or a share of profits in a business.

How is cryptocurrency treated for tax?

In this blog we will focus only on the treatment of exchange tokens, as these are by far the most commonly used and understood form of cryptocurrency and are what most people think of when they think of cryptocurrency.

In guidance published in 2018, HMRC stated that they do not consider that the buying and selling of cryptocurrency to be the same as gambling. As a result, any profit made on cryptocurrency will be either subject to capital gains tax or income tax.

Capital Gains Tax

In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets for a gain. If the cryptocurrency is sold for a loss, this will be allowable as a capital loss.

Disposals for these purposes include:

• cryptocurrencies that are sold for money

• cryptoassets that are exchanged for a different type of cryptoasset

• cryptoassets that are used to pay for goods or services

• cryptoassets that are given away

If cryptoassets are given away to another person who is not a spouse or civil partner, the individual must work out the pound sterling value of what has been given away. For Capital Gains Tax purposes the individual is treated as having received that amount of pound sterling even if they did not actually receive anything.

Certain costs can be allowed as a deduction when calculating if there’s a gain or loss, which include:

• the consideration (in pound sterling) originally paid for the asset

• transaction fees paid before the transaction is added to a blockchain

• advertising for a purchaser or a vendor

• professional costs to draw up a contract for the acquisition or disposal of the cryptoassets

• costs of making a valuation or apportionment to be able to calculate gains or losses

Where cryptocurrency is purchased in tranches and then sold, the cost of the cryptocurrency is pooled in line with the ‘section 104’ rules for shares; each type of cryptocurrency is kept in a ‘pool’. The consideration (in pound sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’.

For example, if a person owns Bitcoin, Ether and Litecoin, they would have three pools and each one would have it’s own ‘pooled allowable cost’ associated with it. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.

If some of the tokens from pool are sold, this is considered a ‘part-disposal’. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss.

Individuals must still keep a record of the amount spent on each type of cryptoasset, as well as the pooled allowable cost of each pool.

Please note there are special rules where cryptocurrency (and shares) is purchased within 30 days of that same type of cryptocurrency is sold.

Income Tax

Individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive from their employer as a form of non-cash payment.

Individuals will also pay income tax and national insurance contributions on cryptoassets received from mining, transaction confirmation or airdrops. We won’t go into detail on these in this blog.

There may also be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits; HMRC taxes cryptoassets based on what the person holding it does. If the holder is conducting a trade then Income Tax will be applied to their trading profits.

Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business.

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Given cryptocurrency and cryptoassets are such new developments, there is a degree of ambiguity regarding the tax treatment due to tax legislation having no consideration of cryptocurrency when the various legislation was enacted. The above provides an introduction to the broad tax treatment of cryptocurrency, but HMRC have said that the tax treatment should be treated on a case-by-case basis.

Please contact us to find out how the above applies in your circumstances.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

Mortgage interest restriction (aka section 24) - How to mitigate the tax liability

Background

Prior to the year ended 5th April 2018 (the 2017/18 tax year), landlords and property investors were allowed to offset 100% of mortgage interest against their property income for tax purposes. From the 2017/18 tax year onwards, the amount of mortgage interest that will be allowed to be offset against property income as a deduction was reduced to 75%. There has been and will be a further reduction of 25% each year until 2020/21 when no allowance will be made to offset mortgage interest against property income in order to calculate the tax due.

HMRC are replacing the deduction with a basic rate (20%) tax reducer, where the amount of tax payable on the rental income profit is reduced by 20% of the mortgage interest paid in the tax year. This is being phased in by 25% each year in line with the phasing out of the income deduction.

In effect, this change means that landlords’ taxable income levels go up and they only receive basic rate tax relief on the mortgage interest they pay, even if they are a higher or additional rate taxpayer.

As well as the expected increase in tax liability on property income for high earners, there are a few extra specific impacts we will outline:

• Loss of child benefit

• Loss of personal allowance

• Loss of pension allowance

Loss of child benefit

Parents can claim child benefit, but where individuals have income over £50,000, child benefit is reclaimed from them often as a tax charge in their tax return.

If an individual’s income was just under £50,000 prior to the restriction on mortgage interest relief, the restriction may result in their income going over £50,000 and part or all of the child benefit being reclaimed.

Loss of personal allowance

If an individual’s income exceeds £100,000 in a tax year, their personal allowance is reduced by £1 for every £2 their income exceeds £100,000. As the personal allowance is £12,500 in the current 2019/20 tax year, this means that there is an effective tax rate of 60% on income between £100,000 and £125,000.

If an individual’s income is around this level, the restriction on mortgage interest relief can result not only in not getting full tax relief on mortgage interest, but also having some or more income taxed at a rate of 60%.

Loss of pension allowance

Individuals get tax relief when they make contributions to their pension, up to the lower of the pensions annual allowance (£40,000) or their level of earnings.

High earners are subject to a reduction of their pensions annual allowance where their ‘adjusted income’ (being taxable income plus pension contributions made both personally and by an employer) exceeds £150,000. The annual allowance is reduced by £1 for every £2 the adjusted income is over £150,000, down to a minimum of £10,000.

If an individual’s income is around this level, the restriction on mortgage interest relief can result in the annual allowance being restricted.

Reducing the tax liability

What can be done to counteract the additional tax liability caused by the changes?

A few suggestions are outlined below:

• Reduce the mortgage interest

• Transfer rental income to a spouse

• Change of use of the rental property

• Transfer property into a limited company

• Other tax planning

Reduce the mortgage interest

This may seem like both an obvious and potentially unrealistic point as individuals don’t just have mortgages for the sake of it, but depending on individuals’ particular circumstances, it may be more beneficial to pay off mortgages now than to buy more properties and borrow money to do so.

Be aware that if the spouse/civil partner needs to be added to the mortgage, there may be a stamp duty implication, as the assumption of a mortgage is a land transaction. This is made worse by the additional 3% stamp duty rate; care therefore needs to be taken here.

Transfer rental income to a spouse

If an individual’s spouse or civil partner is a basic rate taxpayer, they could transfer part or all of the property to them. This will then mitigate the impact of the mortgage interest restriction, as their tax liability is covered by the basic rate tax reducer.

A declaration of trust and potentially also a HMRC form need to be completed in order to effect the change.

Change of use of the rental property

If the property was changed from a normal residential let to a commercial property, a holiday let or to serviced accommodation, the effect of the mortgage interest restriction can be mitigated, as the restriction only applies to residential properties.

Transfer property into a limited company

The mortgage interest restriction only applies to rental properties held by individuals, not to those held by companies.

An option therefore is to transfer the properties into a company, which also benefit from lower tax rates (corporation tax is currently at 19% on profits). Please note, however, that there are stamp duty and capital gains tax implications of doing so.

There are ways of getting around these completely legally, but this does involve significant forward planning.

Other tax planning

Whilst not strictly a direct mitigation of the mortgage interest restriction, there are a number of other steps that can be taken to reduce individuals’ income tax, capital gains tax and inheritance tax liabilities and generally maximise their tax efficiency. These can include (but are not limited to):

• Pension contributions

• Gift Aid donations and other gifts to charity

• Use of trusts

• Tax efficient investments (ISAs, VCTs, EIS, SEIS etc.)

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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities, and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.

New website!

Welcome to our new-look website!

We have revamped our website to better communicate what it is we stand for, what we do, how we do it and what we specialise in.

We will be writing all of our news & blog items in-house, will be keeping these relevant to what we do and will hopefully be making these relevant and interesting for our readers.

Please do have a look around, and if you have any queries, please do not hesitate to contact us!

Tolley's Taxation Awards Evening

It wasn't to be at the #TaxAwards2019 on Thursday night, but was a fantastic evening and an honour to have even been nominated as top 5 finalists in the UK. We will be able to enter the same category (the Best New Tax Practice) for the next 2 years, so here's to the future!

Tolley's Taxation Awards Shortlisting

We are absolutely delighted (and a little surprised) to be shortlisted as finalists in the Best New Tax Practice category of the Tolley's Taxation Awards!

5 Common Errors in Self-Assessment tax returns

Read our article for Support Local magazine where we discuss the 5 common errors in Self-Assessment tax returns.

The article can be found here.

Get in touch…

If you would like any further information regarding the above, please go to the contact us page.