TAXANGLES A newsletter for proactive planning... In this edition... September 2021 Issue Disposing of an asset on which capital allowances have been claimed Are you trading? Tax-efficient childcare Paying inheritance tax in instalments Special capital gains tax rule for transfers of assets between spouses Client Focus- Chamai’s Kitchen www.compassaccountants.co.uk
PAGE 2 Disposing of an asset on which capital allowances have been claimed Capital allowances are the tax equivalent of depreciation, and the mechanism of providing tax relief for certain items of capital expenditure. However, with the exception of cars, capital allowances are not available where accounts are prepared under the cash basis; instead relief may be available as a deduction in computing profits under the cash basis capital expenditure rules. Plant and machinery capital allowances Plant and machinery capital allowances are available for items such as machinery, fixture and fittings, tools, computer equipment, plant and vehicles. Capital allowances may be given at different rates. 100% allowances The annual investment allowance (AIA) is given at the rate of 100% on qualifying expenditure up to the AIA limit. This is set at £1 million until 31 December 2021, reverting to £200,000 from 1 January 2022. Special rules apply where the accounting period spans 31 December 2021. 100% first-year allowances are also available in limited cases, such as for expenditure on new zero emission cars and goods vehicles 18% writing down allowances Writing down allowances on main rate expenditure is given at the rate of 18% on a reducing balance basis. Main rate capital allowances are available for most plant and machinery. 6% writing down allowances Some items, such as high emission cars and long life assets are allocated to the special pool and attract writing down allowances at the lower rate of 6%. Enhanced capital allowances For a limited period companies are able to claim enhanced capital allowances in respect of qualifying expenditure that is incurred between 1 April 2021 and 31 March 2023. A super deduction of 130% is available where the expenditure would otherwise qualify for main rate capital allowances at 18%, and a 50% firstyear allowance is available where the expenditure would otherwise qualify for special rate capital allowances of 6%. Balancing charges and allowances The capital allowance system provides tax relief for the net capital expenditure (cost less sale proceeds) over the life of the asset. Consequently, when an asset is sold, is it necessary to take account of the disposal proceeds. If the capital allowances that have been claimed over the life of the asset exceed the cost less disposal proceeds, it may be necessary to claw back some of the allowances. This is done by means of a balancing charge. Let’s assume a van is purchased for £10,000 and the AIA allowance is claimed, providing immediate tax relief for the full £10,000 of expenditure. Continued on page 3...
PAGE 3 If the van is sold three years later for £5,000, the net cost to the business is £5,000 (cost of £10,000 less proceeds of £5,000). However, without adjustment, the company would have received tax relief of £10,000. The position is corrected by means of a balancing charge of £5,000. The balancing charge effectively increases the profits that are charged to tax. Where the AIA or a 100% first year allowance has been claimed, the balancing charge will be equal to the sale proceeds. There will not always be a balancing charge on disposal – it depends on whether the tax written down value is more or less than the sale proceeds. If it is more, there will be a balancing charge and if it is less, there will be a balancing allowance. Example A car is purchased for £15,000 on which main rate capital allowances are claimed at the rate of 18%. In year 1, the writing down allowance is £2,700, in year 2, it is £2,214 and in year 3 it is £1815. At the end of year 3, the written down value is £8,271. If the car is sold for £8,000, balancing allowances of £271 will be available; however, if the car is sold for £10,000, a balancing charge of £1,729 will arise. The net allowances equal the cost less the disposal proceeds. The balancing allowance increases taxable profits in the year of sale, while a balancing allowance will reduce the taxable profits. Add proceeds to the pool Unless the item is in a single asset pool, balancing charges and allowances are calculated globally for the ‘pool’ rather than on an individual asset-by-asset basis. Thus, when an asset is sold, it is not necessary to calculate the balancing charge individually for that asset – instead, the sale proceeds are simply added to the pool. Super-deduction and balancing charges Special rules apply where an asset has benefited from the super deduction of 130% and depending when the asset is disposed of, it may be necessary to inflate the sale proceeds when working out the balancing charge.
PAGE 4 Are you trading? Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. It is therefore necessary to understand what constitutes trading, and when a trade commenced or ceased. Indicators of trade To determine whether a trade exists, historically the courts have looked for the presence of absence or certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists. NOITATERPRETNI EGDAB Profit-seeking motive An intention to make a profit supports trading, but by itself is not conclusive. The number of transactions Systematic and repeated transactions suggest a ‘trade’ Transactions that are similar to those of an existing trade may themselves be trading Existence of similar trading transactions or interests Repairs, modifications or improvements to make the assets more easily saleable or saleable at a greater price may suggest trading Change to the assets The sale of an asset in a way which is typical of trading organisations may suggest trading, whereas a sale to raise emergency cash is less likely to indicate trading The way in which the sale was carried out Where money has been borrowed to purchase the asset and the funds can only be repaid by selling the asset, this may suggest trading – money may be borrowed to facilitate the purchase of an asset at a profit The source of finance Interval between sale and purchase Assets that are the subject of trade will normally be sold quickly; an intention to sell an asset shortly after purchase will support trading, whereas an asset that is held indefinitely is less likely to be the subject of a trade Method of acquisition Assets that are inherited or acquired as a gift are less likely to be the subject of a trade. Overall impression It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.
PAGE 5 Tax-efficient childcare Childcare is expensive; however, the tax system can provide a helping hand. In recent years, there has been a shift from tax relief for employer-supported childcare and vouchers to a Government top-up scheme. Government scheme The Government operate a tax-free childcare scheme whereby parents deposit money into an account which can be used to meet childcare costs and the Government provide a tax-free top up. To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expect to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top up. Eligible parents can access the tax-free top up by setting up an online childcare account for their child. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled). The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11th birthday (or up to the child’s 17th birthday if the child is disabled). The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care. Employer-supported childcare and childcare vouchers Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies for National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers, regardless of the number of children that they have. Continued on page 6...
PAGE 6 It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules. Workplace nurseries No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for exemption to be forthcoming. Which is best? Where a parent could potentially benefit from more than one scheme, they should evaluate the options and can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds. Special capital gains tax rule for transfers of assets between spouses Although married couples and civil partners are assessed individually for capital gains tax purposes and each has their own annual exempt amount, a special rule allows them to transfer assets between them at a value that gives rise to neither a loss nor a gain. This can be very useful from a tax planning perspective. The special rule applies only where the spouses or civil partners are living together or, where they separate, until the end of the tax year of separation. Operation of the rule For the purposes of the rule, any actual consideration that may pass between the spouses or civil partners is ignored. Instead, the amount of the consideration is deemed to be the amount that gives rise to neither a gain nor a loss. This will be the: ·original cost of the asset; plus ·any subsequent allowable costs. Example Sue and Simon have been married for 27 years. Sue purchased a painting ten years ago for £10,000. She spends £500 having the painting re-framed. She sells it to Simon for £3000. However, as the no gain/no loss rule applies, the actual consideration is ignored, and Sue is deemed to have sold the painting to Simon for £10,500. Rather than making a loss of £7,500 had the actual consideration been used, she breaks even. The deemed proceeds are £10,500, and the original cost plus subsequent allowable expenditure is also £10,500. Sue is, however, unable to utilise the actual loss. Likewise, had the actual consideration been in excess of the allowable cost, she would not have been taxed on the gain. Continued on page 7...
PAGE 7 Simon takes on Sue’s base cost, standing in her shoes for any subsequent disposal. Making use of the rule The rule can be useful to change ownership of an asset prior to sale to make best use of available annual exempt amounts by transferring an asset, or a share of an asset, to a spouse or civil partner. Example Sue and Simon decide to sell the painting in October 2021, having secured a buyer who is willing to pay £20,000 for it. In May 2021, Sue sold an antique vase, realising a gain of £13,000. Simon has not made any disposals in 2021/22, and has no plans to do so. As Sue has already used up her annual exempt amount for 2021/22 of £12,300, if she were to sell the painting, the gain of £9,500 would be liable to capital gains tax in full. If Sue is a higher rate taxpayer, she would pay capital gains tax of £1,900 on the gain on the painting (£9,500 @ 20%). However, as Simon still has his annual exempt amount available, if they can make use of the no gain/no loss rule to transfer the painting to Simon prior to sale. If Simon subsequently sells the painting to the third party, the gain of £9,500 would be covered by Simon’s annual exempt amount and the whole gain would be tax-free. Paying inheritance tax in instalments Where inheritance tax is payable on an estate, it must normally be paid by the end of the sixth month after that in which the death occurred. For example, if the deceased died on 22 August 2021, inheritance tax on the estate would be due by 28 February 2022. The six-month deadline does not leave very long if the executors need to sell assets in order to realise funds from which to pay the inheritance tax on the estate. Continued on page 8...
PAGE 4 PAGE 8 HMRC recognise this, and allow inheritance tax to be paid in instalments in some circumstances. Where the executors wish to pay the inheritance tax in instalments, they must indicate this on the inheritance tax account (IHT400). When payment can be made in instalments The instalment option is only available in certain circumstances and in respect of certain assets: ·Houses – where the estate includes one or more houses, inheritance tax can be paid in instalments where the beneficiaries keep the house/houses to live in. ·Shares and securities – an instalment option is available if the shares or securities allow the deceased to control more than 50% of a company. ·Unlisted shares and securities – payment can be made in instalments if the shares are worth more than £20,000 and they represent at least 10% of the total value of the shares in the company at the price at which they were first sold (their ‘nominal’ value) or 10% of the total value of ordinary shares held in the company, at the price at which they were first sold. It is also possible to pay the inheritance tax due on the whole estate (including that on assets which do not fall into the above categories) if at least 20% of the inheritance tax owed by the estate relates to assets that qualify for payment by instalment, or where paying the inheritance tax in a single lump sum would cause financial difficulty. Interest Interest is charged from the normal due date at the end of the sixth month following that in which the deceased died to the date of payment. Interest is not charged on the first instalment unless it is paid late. Payment over 10 years Where the instalment option is available, payment can be made over 10 years. The first payment must be made by the normal due date of the end of the sixth month following that in which the deceased died. Payment must then be made annually on that date. The amount payable each year is 10% of the tax payable in instalments, plus the associated interest. Asset sold If the asset in respect of which the tax is being paid in instalments is sold, the remaining tax owing must be paid in full. Clearing the balance Where the option to pay in instalments is taken, the outstanding balance can be cleared at any time.
PAGE 4 PAGE 9 In this Month’s ‘Client Focus’ we chat to Mew Harmer, owner of Chamai’s Kitchen -a Compass client- and also staff member at Compass Accountants. Baking cookies began as a hobby for Mew Harmer, but it wasn’t long before she noticed that after eating one, most people asked the same question- “Why aren’t you selling these?” After considering a catering business for some time, she eventually decided to make the leap and ‘Chamai’s Kitchen’ was born. “The response to my cookies had been so amazing- it was clear that I could potentially turn a hobby into a business, so in 2020 I made the first steps. From a young age I have always enjoyed cooking and trying out new ideas and recipes, so it just made sense.” After having a website built, and developing the business, Chamai’s Kitchen took off and before Mew knew it, she was sending cookies through the post and delivering locally. “I started by cooking a variety of different dishes for local take away delivery. I’m originally from a small town in Northeast Thailand, so many of my recipes are Thai influenced, but it was always the cookies that were the most popular!” All of Mew’s cookies are stuffed, and freshly baked on the same day with unique flavours including Oreo and chocolate, Kinder and white chocolate, Dairy caramel chocolate with chocolate chip, Skittles, Biscoff and chocolate and many more. Although, customers aren’t limited to the menu on the website as Mew is happy to create bespoke cookies, with ingredients of a customer’s choice. Once customers pick and choose from the online shop, orders are wrapped in their own unique cookie bag and packaged in a postal box ready to be delivered in one to two days. Being a Compass Client and Compass Employee As a Compass client, Mew’s business is not her only connection to Compass Accountants, she also works as an administrator for the team, so shedidn’t have far to look when she decided she needed to appoint an accountant. Continued on page 10...
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