from A newsletter for proactive planning... In this edition... Separating couples – Importance of checking your child benefit claim Common NMW errors to avoid Dealing with gift hold-over relief ‘nudge’ letters Get your overlap relief figure Relief for pre-trading expenses Tax Diary- November November 2023 Issue www.compassaccountants.co.uk
PAGE 2 Separating couples – The importance of checking your child benefit claim The High-Income Child Benefit Charge (HICBC) is a tax charge that claws back child benefit where the claimant or his or her partner have adjusted net income of at least £50,000. Where both parties have income in excess of this, the charge is levied on the partner with the highest income. The charge is equal to 1% of the child benefit paid for the tax year for every £100 by which adjusted net income exceeds £50,000. Once adjusted net income reaches £60,000, the charge is equal to the child benefit for the tax year. To avoid receiving a benefit that has to be paid back, a couple may elect not to receive the benefit. However, it is important to claim it to access the associated National Insurance credits, particularly where the claimant’s income is not sufficient for the year to be a qualifying year for state pension purposes. Check who is the claimant For child benefit purposes, the claimant may not be the person who actually receives the child benefit – HMRC regard the claimant as the person who signs the claim form. The claimant can elect for the benefit to be paid to someone else, for example, a husband may complete the form and sign it, but elect for the child benefit in respect of their child to be paid to his wife. While a couple remain together, this may not matter. However, if a couple separate, it is important to be clear which partner is the claimant to avoid unnecessary and unexpected tax charges. The Meades case A recent case highlighted the importance of checking child benefit claims on separation. In 2021, HMRC issued Mr Meades with an amendment to his 2019/20 tax return on the basis that he was liable for the HICBC for that year. Mr Meades married his former wife in 2010. In 2012, he claimed child benefit in respect of their child, electing for the benefit to be paid to his ex-wife (the child’s mother). The couple separated in July 2017 and the marriage was dissolved on 4 April 2019. Mr Meades provided financial support to his former wife and met household bills. Mr Meades remarried in November 2019. He lived with his new wife as a married couple throughout 2019/20. The couple did not revise their child benefit claim on separation. Consequently, Mr Meades remained the claimant. As he provided financial support for his child, he was entitled to claim the benefit. The tribunal found that HMRC were right to assess him for the HICBC for 2019/20 as he was the claimant and his income exceeded £50,000. It did not matter that the benefit was paid to his ex-wife. cont on page 3:
PAGE 3 Lessons On separation, it is advisable to review child benefit claims to check who is the claimant. Mr Meades would not have been liable for the HICBC after he separated from his ex-wife had she been the claimant as he would have been neither the claimant nor the claimant’s partner. Had the couple reviewed their claim and realised this, Mr Meades could have ended his claim and a new claim could have been made by the child’s mother. This would have prevented him from being liable to the charge. It would also have prevented Mr Meades’ new partner from a potential liability to the charge in respect of the benefit paid to his ex-wife, which would have been the case had her income been both more than £50,000 and higher than that of Mr Meades – as they lived together as a married couple throughout 2019/20, she was potentially liable for the charge as the claimant’s partner. Common NMW errors to avoid Workers are entitled to be paid the National Living Wage (NLW) or National Minimum Wage (NMW) for their age. Employers who fail to do this run the risk of financial penalties and of being ‘named and shamed’. To help employers avoid mistakes, HMRC have produced a checklist of 18 common errors. These are listed below. Common error 1 Making deductions or taking payments from workers for items or expenses connected with their job which reduce the worker’s pay below the statutory minimum. Common error 2 Making wage deductions or taking payments from workers for the employer’s own use or benefit where the employer is free to use the money for their own benefit, and making the deduction or taking the benefit reduces the worker’s pay below the statutory minimum. Common error 3 Failure to pay for additional time added on to a worker’s shift, for example, team handovers between shifts or time spent passing through security checks on entry and exit. Common error 4 Failure to pay a worker for any time during their shift when they are at the workplace and are required to be available for work, even if no work is being provided at that time. Common error 5 Failure to pay a worker for travelling time. cont on page 4:
PAGE 4 Common error 6 Failure to pay the worker for time spent training Common error 7 Failure to pay the worker sufficient money for time worked during a sleep-in shift. Common error 8 Incorrectly applying the minimum wage accommodation offset when living accommodation is provided to the worker by the employer. Common error 9 Paying the NMW apprentice rate to a worker who is not a genuine apprentice. Common error 10 Paying the NMW apprentice rate before a worker starts their apprenticeship or after it ends. Common error 11 Continuing to pay the NMW apprentice rate to an apprentice who is aged 19 or over or when they have completed the first year of their apprenticeship. Common error 12 Failing to pay an apprentice for the time that they have spent training or studying as part of their apprenticeship. Common error 13 Failure to apply the annual increases to the NLW and NMW which take effect from 1 April each year. Common error 14 Failing to increase the rate paid when a worker moves into the NLW or a higher NMW age bracket. Agerelated increases apply when a worker turns 18, 21 or 23. Common error 15 Including an element of pay that does not count towards the NMW (such as tips) when checking whether workers have been paid at least the NLW/NMW for their age. Common error 16 Failing to pay the NLW/NMW to a person on work experience or to an intern when they are entitled to it. Common error 17 Failing to take account of excess hours worked by salaried staff which reduce the worker’s pay below the statutory minimum. Common error 18 Failure to distinguish between different types of worker (e.g., salaried, time, output or unmeasured) and to calculate the NLW/NMW accordingly.
PAGE 5 Dealing with gift hold-over relief ‘nudge’ letters HMRC are sending one-to-many ‘nudge’ letters to taxpayers who included an invalid claim for gift hold-over relief in their 2021/22 tax return. This may be because a separate claim form was not included with the return, or the claim form was included but not signed. If you receive such a letter, it is important that you do not ignore it – without a valid claim, HMRC will require any capital gains tax due to be paid now rather than deferred. What is gift hold-over relief? Gift hold-over relief is a useful capital gains tax business relief that allows the capital gains tax due on a gift to be deferred by ‘holding over’ the gain, reducing the transferee’s base cost by the amount of the held-over gain. The relief is often used to aid succession planning. Eligible gifts The relief is available for: ·gifts of business assets used for the purpose of a trade or profession carried on by an individual as a sole trader or as a partner in a partnership, by an individual’s personal company or by a member of a trading group where the holding company is the individual’s personal company; ·gifts of unlisted shares and securities in a trading company or the holding company of a trading group where the individual owns at least 5% of the shares (for trustees, the holding must be at least 25%); ·gifts of land deemed to be agricultural land for inheritance tax purposes; ·assets the disposal of which is a chargeable transfer for inheritance tax and not a potentially exempt transfer; and ·certain gifts that are exempt from inheritance tax, such as a gift from a trust for bereaved minors. Mechanics of the relief As a gift by its very nature is not made at arm’s length, any gain arising on disposal is calculated by reference to the market value of the asset rather than the proceeds, if any. For an outright gift, the full gain (calculated using the market value as the consideration) can be held over. The transferee’s base cost is the market value as reduced by the held-over gain. Example Bill gives his son James his workshop, which cost £50,000. At the time of the gift, the market value was £140,000. The gain is £90,000, which Bill and James agree to hold over. James’ base cost is £50,000 – the market value of £140,000 less the held-over gain of £90,000. If the transferor receives some proceeds, the gain computed by reference to the actual proceeds is immediately chargeable. However, the difference between the market value and the proceeds can be held over. cont on page 6
PAGE 6 Example Elizabeth sells her studio to her daughter Dawn for £40,000. It cost her £30,000 and has a market value of £75,000. They claim hold-over relief. The £10,000 difference between the proceeds (£40,000) and the original cost (£30,000) is immediately chargeable. However, the remainder of the gain (the difference between the market value and the proceeds) of £35,000 is held over. Dawn’s base cost is £40,000 (£75,000 – £35,000). Joint claim The claim must be made jointly by the transferor and the transferee on the dedicated claim form. It must be signed by both parties. Dealing with the letter If you receive a nudge letter you should send HMRC a valid claim form signed by both parties or, if the gift is not eligible for the relief, amend your tax return to remove the claim. Get your overlap relief figure If you have unrelieved overlap profits, you will not be able to claim relief for those profits after 2023/24. Overlap profits are profits that have been assessed twice – either in the early years of a business or on a change of accounting date. From 2024/25, unincorporated businesses will be taxed on the profits for the tax year regardless of the date to which they prepare their accounts. Where the accounting period does not correspond with the tax year, the profits from two accounting periods will be apportioned to arrive at the profits for the tax year. As a result, profits are only ever taxed once, removing the problem of overlap profits. The current year basis (under which the profits taxed for the tax year are those for the accounting period ending in that tax year) came to an end in 2022/23. Under the current year basis, relief for overlap profits was given either on a change of accounting date which resulted in more than 12 months’ profits being taxed in a tax year, or on cessation. The 2023/24 tax year is a transitional year moving from the current year basis to the tax year basis. The profits for that year are those from the end of the accounting date in 2022/23 to the accounting date ending in 2023/24 (the standard part) plus those from the end of that period to 5 April 2024 (the transition part). Any unrelieved overlap profits can be deducted from the transition profits. If relief for remaining overlap profits is not claimed for 2023/24, it will be lost. cont on page 7:
PAGE 7 Establishing overlap profits On 11 September 2023, HMRC launched an online service to help unincorporated businesses establish their overlap profits available for relief. The service is available on the Gov.uk website at www.gov.uk/guidance/get-your-overlaprelief-figure. You may be able to make a claim for overlap relief for 2023/24 if: ·your accounting date does not align with the tax year (i.e., it is not a date between 31 March and 5 April inclusive); ·you changed your accounting date to align with the tax year but did not claim relief for overlap profits on the change of accounting date; or ·you changed your accounting date in 2023/24to align with the tax year. You may also be able to claim overlap relief in 2023/24 if you stopped trading in that year. It may be that you are able to find your overlap profits from your previous tax returns, entered as ‘Overlap Profit Carried Forward’ on either the self-employment pages (SA103) or the partnership pages (SA104). If you cannot find your overlap relief figure, you can use the online service to establish your overlap profits – but only if you provided this information in a previous return. Using the service To use the service, you will need to sign in with your Government Gateway user ID and password for Self Assessment. Your agent can also use the service on your behalf. You will need to provide the following information, so it is advisable to ensure that you have it to hand before you start: ·your name; ·the name of your business or a description of it; ·your business address; ·your unique taxpayer reference; ·details of whether your business is a sole trader or a partnership; ·the date that your business started or you became a partner in the partnership (you can provide the starting tax year if you are unsure of the exact date); ·the most recent period of account or basis period used by your business; and ·if you have changed your accounting date, the year or years of the change. You will also be asked for your contact details and whether you would like a response by email or by letter. After providing your information you will receive a confirmation email or letter containing your submission reference. HMRC will generally aim to provide details of your overlap relief within three weeks. However, for complex cases, it may take longer.
PAGE 8 Relief for Pre-Trading Expenses In setting up a trade it is inevitable that expenses will be incurred before the trade actually commences. Expenses may be incurred on acquiring premises and kitting them out, on buying stock, on office supplies, on professional advice, on marketing, on software, on setting up a website, on legal fees and suchlike. These can mount up, so it is important to secure tax relief where possible. Relief for pre-trading expenses is available to both unincorporated business and companies. Relief is only available to the person (individual or company) who incurred the expenditure and commenced the trade. Revenue expenses The general rule is that revenue expenses incurred in the seven years prior to the date on which the trade starts are deductible if they would be so deductible had the expense been incurred once the trade had commenced. The usual rules to determine whether an expense is deductible apply (i.e., whether it is revenue in nature and incurred wholly and exclusively for the purposes of the business). To give effect to the relief, the pre-trading expenses are treated as if they were incurred on the first day of trading and deducted in calculating the profits for the first accounting period. Capital expenses Relief for capital expenses depends on whether the accounts are prepared on the cash basis or not. Where the cash basis is used, if the expense is one that would be deductible under the cash basis capital expenditure rules, as with revenue expenses, the expense is treated as incurred on the first day of trading and deducted in calculating the profits for the first accounting period. However, if relief would be given through the capital allowances system, capital allowances are available for the pretrading expenditure, the expenditure being treated as if it had been incurred on the first day of trading.
PAGE 9 TAX DIARY NOVEMBER 2023 2nd November – P46 (car) – company car changes in the period 6th July – 5th October 19th November – Deadline for payment of PAYE and NICs etc to HMRC’s Accounts Office by non-electronic methods 22nd November – Deadline for online payment of PAYE and NICs etc to HMRC’s Accounts Office For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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