July 2022 | DSK Partners LLP

Emergency tax codes

Posted on July 28, 2022 by

The letters in an employee’s tax code signify their entitlement (or not) to the annual tax-free personal allowance. The tax codes are updated annually and help employer’s work out how much tax to deduct from an employee’s pay packet.

The basic personal allowance for the tax year starting 6 April 2022 is £12,570 and the tax code for an employee entitled to the standard tax-free Personal Allowance 1257L. This is the most common tax code and is used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

Emergency tax codes can be used if HMRC does not get a taxpayer’s income details in time after a change in circumstances such as:

a new job
working for an employer after being self-employed
getting company benefits or the State Pension

Employees on an emergency tax code will see one of the following codes on their payslip:

1257 W1
1257 M1
1257 X

These codes mean that an employee’s tax calculation is based only on what they are paid in the current pay period. The emergency tax codes are temporary and will usually be updated once the necessary details about previous income or pension payments are sent to HMRC.

Source: HM Revenue & Customs Mon, 25 Jul 2022 00:00:00 +0100

Construction services taxed at VAT zero or 5% rate

Posted on July 28, 2022 by

Whilst most businesses in the UK charge VAT at the standard rate of 20%, there are a number of different VAT rates and exemptions that businesses should be aware of. In the UK, there are three separate VAT rates, the standard rate @ 20%, reduced rate @ 5% and the zero rate @ 0%.

HMRC has published an updated version of their guidance titled VAT rates on different goods and services. The guidance provides a list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT.

The guidance lists the following construction services which can be taxed at the zero or 5% rate.

Taxed at the zero rate:

Substantial reconstructions to protected buildings that are buildings used as a dwelling, for a relevant residential purpose or for a relevant charitable purpose
The installation of a bathroom or lavatory, constructing ramps and widening doorways or passageways for disabled people in their own home
Construction and first freehold or long leasehold sale of a new building for a relevant charitable purpose
Construction and first freehold or long leasehold sale of a new building for relevant residential purposes
Construction and first freehold or long leasehold sale of new domestic buildings
First freehold or long leasehold sale of a commercial building converted into a dwelling or dwellings
First freehold or long leasehold sale of buildings converted for relevant residential purposes
First freehold or long leasehold sale of buildings converted for relevant charitable purposes

Taxed at the reduced rate of 5%:

Converting existing premises by increasing the number of dwellings within the building
Renovating a dwelling that has been empty for at least 2 years

Source: HM Revenue & Customs Mon, 25 Jul 2022 00:00:00 +0100

Tax relief on replacement of domestic items

Posted on July 28, 2022 by

The replacement of domestic items relief has been in place since April 2016. The relief allows landlords the ability to claim tax relief when they replace movable furniture, furnishings, household appliances and kitchenware in a rental property. The allowance is available for the cost of domestic items such as free- standing wardrobes, curtains, carpets, televisions, fridges and crockery.

The amount of the deduction is based on:

the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent), plus
the incidental costs of disposing of the old item or acquiring the replacement,
less any amounts received on disposal of the old item.

There is an important distinction to note if deciding if a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s internal guidance provides an example highlighting the fact that a brand new budget washing machine costing circa £200 is not an improvement over a 5 year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation).

Also, if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.

Source: HM Revenue & Customs Mon, 25 Jul 2022 00:00:00 +0100

Gifts with reservation

Posted on July 28, 2022 by

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

0 to 3 years before death 40%
3 to 4 years before death 32%
4 to 5 years before death 24%
5 to 6 years before death 16%
6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. If this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to Inheritance Tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted. We would be happy to help you understand what options are available to reduce your liability to Inheritance Tax whilst at the same time protecting your assets.

Source: HM Revenue & Customs Mon, 25 Jul 2022 00:00:00 +0100

Settlement legislation – non-trust settlements

Posted on July 28, 2022 by

The settlement legislation seeks to ensure that where a settlor has retained an interest in property that the income arising is treated as the settlor’s income for all tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner. In general, the settlements legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved.

However, in most everyday situations involving gifts, dividends, shares, partnerships, etc. the settlements legislation will not apply. For example, if there is no “bounty” or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income.

HMRC’s manuals provide the following two indicative examples of how the legislation applies to non-trust settlements.

Direct gift of shares to minor children

Mr and Mrs X each own 50 of the 100 issued ordinary shares in X Ltd. They each decide to give 10 shares to each of their children aged 12 and 15. The children each then hold 20 shares, 10 from each parent. We would treat the dividends paid to the children as the income of their parents.

Indirect gift of shares from parent

Mr J owns 60 of the 100 issued £1 shares in J Limited. Mr J is the sole company director and is the person responsible for making all the company’s profits because of his knowledge, expertise and hard work. On starting up the company, Mr J allowed his mother to subscribe £40 for 40% of the shares but shortly afterwards she gifted them to her grandchildren. The circumstances are such that the decision to issue 40 shares at par is a bounteous arrangement (as were the shares in Jones v Garnett). The true settlor here is Mr J rather than the children’s grandmother. ITTOIA/S629 therefore applies and attributes the dividends received by the children to Mr J for tax purposes.

Source: HM Revenue & Customs Mon, 25 Jul 2022 00:00:00 +0100

Business records if self-employed

Posted on July 28, 2022 by

If you are self-employed as a sole trader or as a partner in a business partnership, then you must keep suitable business records as well as separate personal records of your income.

For tax purposes, the business records must be held for at least 5 years from the 31 January submission deadline for the relevant tax year. For example, for the 2020-21 tax year where online filing was due by 31 January 2022 you must keep your records until at least the end of January 2027. In certain situations, such as when a return is submitted late, the records must be held for longer.

If you are self-employed, you should also keep a record of:

all sales and income
all business expenses
VAT records if you’re registered for VAT
PAYE records if you employ people
records about your personal income
grant details if you claimed through the Self-Employment Income Support Scheme because of coronavirus

You don't need to keep the vast majority of your records in their original form. If you prefer, you can keep a copy of most of them in an alternative format, as long as they can be recovered in a readable and uncorrupted format. For example, a scanned PDF document.

If your records are no longer available for any reason, you must try and recreate them letting HMRC know if the figures are estimated or provisional. There are penalties for failing to keep proper records or for keeping inaccurate records.

Source: HM Revenue & Customs Mon, 25 Jul 2022 00:00:00 +0100

Entitlement to National Minimum Wage

Posted on July 21, 2022 by

Employers must ensure they are paying staff the new National Minimum Wage (NMW) and National Living Wage (NLW) rates for the period from 1 April 2022 – 31 March 2023. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The rate for the NLW is £9.50. The hourly rate of the NMW (for 21-22-year-olds) is £9.18. The rates for 18-20-year-olds is £6.83 and the rate for workers above the school leaving age but under 18 is £4.81. The NMW rate for apprentices is £4.81.

HMRC’s manuals discusses the legal entitlement for employees to be paid the NMW. Most workers in the United Kingdom who are over compulsory school leaving age (and those who ordinarily work in the United Kingdom) are entitled to be paid at least National Minimum Wage rates.

This entitlement to the NMW is set out in the National Minimum Wage Act 1998, section 1 as follows:

(1) A person who qualifies for the National Minimum Wage shall be remunerated by his employer in respect of his work in any pay reference period at a rate which is not less than the National Minimum Wage.
(2) A person qualifies for the National Minimum Wage if he is an individual who-

is a worker.
is working, or ordinarily works, in the United Kingdom under his contract, and
has ceased to be of compulsory school age.

It is important that employers ensure they pay employees at least the minimum wage to which they are entitled. There are penalties for non-payment of minimum wages of up to 200% of the amount owed. The penalty is reduced by 50% if all of the unpaid wages and 50% of the penalty are paid in full within 14 days.

The maximum fine for non-payment can be up to £20,000 per employee. Employers who fail to pay, face up to a 15-year ban from being a company director as well as being publicly named and shamed.

Source: HM Revenue & Customs Mon, 18 Jul 2022 00:00:00 +0100

Tax when you get your pension

Posted on July 21, 2022 by

There are special rules which allow individuals who have set up private pension scheme(s) to benefit from significant tax reliefs when saving for their retirement. There is no overall limit to the amount of employer or employee contributions and no upper limit to the total amount of pension saving that can be accumulated. However, there are important limits that affect the tax reliefs available. For example, you will usually need to pay a tax charge if your private pension pots total more than £1,073,100. There will also be tax to pay if your pension contributions exceed £40,000 in any tax year, unless covered by unused relief from the previous three years, (this £40,000 limit may be reduced for high income earners).

Certain pension benefits can be taken tax-free. In general, you can take 25% of your pension pot as a one-off lump sum without paying tax but the remaining 75% must be used to buy an annuity, to secure an adjustable income or taken as cash (with tax due on the balance). You can also take smaller cash sums from your pension pot and 25% of each chunk would be tax free.

However, it is important that taxpayers are aware of the tax position when receiving pension income. Apart from the special tax-free benefits, pension income is treated as earned income for Income Tax purposes and any Income Tax payable is calculated as per the usual rules. The personal allowance for the current tax year is £12,570. There is no liability to pay National Insurance contributions on pension income.

Income Tax is also due on the State Pension, earnings from employment or self-employment and any other taxable income received.

Source: HM Revenue & Customs Mon, 18 Jul 2022 00:00:00 +0100

Non-resident company taxation

Posted on July 21, 2022 by

Non-resident companies with a trading business in the UK are liable to pay UK Corporation Tax on their profits made through a permanent establishment/branch or agency.

If the non-resident company is deemed liable to pay Corporation Tax, then its chargeable profits are:

any trading income arising directly or indirectly through or from the permanent establishment/branch or agency,
any income from property or rights used by, or held by or for, the permanent establishment/branch or agency except dividends or other distributions received from companies resident in the UK, and
chargeable gains falling within TCGA92/S10B.

There are however some differences in the taxation of non-resident companies as opposed to resident companies. For example, a non-resident company:

is not liable to account for ACT on distributions made before to 6 April 1999,
cannot have 'franked investment income',
cannot have surplus franked investment income for the purposes of ICTA88/S242,
cannot set trading losses against dividend income to augment its trading income for the purposes of absorbing losses brought forward.

Any UK-source income received by a non-resident company which does not carry on a trade in the UK through a permanent establishment/branch or agency is subject to UK Income Tax. Any Income Tax due is calculated at the basic rate only without any allowances, subject to any applicable Double Taxation Agreement.

Source: HM Revenue & Customs Mon, 18 Jul 2022 00:00:00 +0100

NIC threshold increased

Posted on July 21, 2022 by

In the Spring Statement earlier this year, the then Chancellor, Rishi Sunak, announced an NIC tax-cut to take effect from 6 July 2022. This change sees the National Insurance threshold increased from £9,880 to £12,570. This increase means that the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs are now aligned with the personal allowance of £12,570. It was also confirmed as part of the Spring Statement measures that the thresholds will remain aligned going forward.

The NIC tax cut is worth up to £330 for thirty million taxpayers across the UK and represents a £6 billion tax cut. According to government figures this means that around 70% of employees will pay less NICs, even accounting for the introduction of the Health and Social Care Levy.

The NIC PT and LPL remained at £9,880 (as previously announced) from 6 April 2022 – 5 July 2022. Whilst it is unusual for tax rates to change during a tax year the short period remaining after the Spring Statement and the start of the 2022-23 tax year meant that the increase was delayed for 3 months until 6 July 2022. This means that the average LPL will be £11,908 for the 2022-23 tax year which is equivalent to 13 weeks of the threshold at £9,880 and 39 weeks at £12,570.

Source: HM Treasury Mon, 18 Jul 2022 00:00:00 +0100

Month: July 2022

Emergency tax codes

Construction services taxed at VAT zero or 5% rate

Tax relief on replacement of domestic items

Gifts with reservation

Settlement legislation – non-trust settlements

Business records if self-employed

Entitlement to National Minimum Wage

Tax when you get your pension

Non-resident company taxation

NIC threshold increased

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