TAXANGLES A newsletter for proactive planning... In this edition... Capital allowances for cars Making a loan from a personal company to a family member When do you need to register for VAT Dealing with a Simple Assessment letter Calculating adjusted net income and why it matters Tax Diary July 2025 Issue www.compassaccountants.co.uk
PAGE 2 Capital allowances for cars Where the cash basis is used, it is not possible to deduct the full cost of the car in the year of purchase – such a deduction is prohibited under the cash basis capital expenditure rules. No annual investment allowance The annual investment allowance (AIA) allows immediate write-off for the full purchase cost in the year of acquisition, as long as enough of the £1 million AIA allowance for the year remains available. Unlike vans, cars do not qualify for the AIA, and unless the car is eligible for a first-year allowance, it is not possible to obtain 100% relief immediately. Full expensing and 50% first-year allowance not available Similarly, companies are unable to benefit from full expensing or the 50% first-year allowance for new cars that are not eligible for the 100% first-year allowance. 100% first-year allowance for electric cars While the AIA and full expensing are unavailable, a 100% first-year allowance is available for expenditure on new electric cars. This provides immediate relief for the full cost of a new electric car in the year of purchase. The 100% first-year allowance is only available in respect of expenditure on a new electric car; it is not available on the purchase of a secondhand electric car. Writing down allowances are available instead. Writing down allowances If the first-year allowance is not available and simplified expenses have not been claimed, relief for expenditure on a car used for business purposes is given by means of writing down allowances. The rate of the allowance depends on the car’s CO2emissions. Main rate writing down allowances at the rate of 18% are available for new and second-hand cars whose CO2 emissions are 50g/km or less (including secondhand electric cars). New or second-hand cars with CO2 emissions of more than 50g/km qualify for special rate capital allowances at the rate of 6%. Private use adjustment If a car is used for both personal and business use, capital allowances are only available in respect of the business use. For example, if a sole trader uses their car for both business and private use and estimates that business use accounts for 60% of the total use, an adjustment would be needed to account for the private use. To do this, the writing down allowance would be reduced by 40%. Consider simplified expenses instead Sole traders and partnerships can take advantage of the simplified expenses system and deduct an amount 3 EGAP NO TNOC Cars are a special case when it comes to capital allowances. While capital allowances may be claimed on cars used in a business, partners and sole traders have the option of using the simplified expenses system instead.
PAGE 3 based on the business mileage in the tax year when calculating their taxable profit. The deduction is given at a rate of 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business mileage. Where simplified expenses are used, capital allowances cannot be claimed as well. Likewise, if capital allowances have been claimed, the simplified expenses system cannot then be used. Companies are not able to claim simplified expenses and instead obtain relief for expenditure on cars in the form of capital allowances. Making a loan from a personal company to a family member There are many possible situations in which a person may make a loan to a family member, for example, a parent may lend money to an adult child to provide them with a deposit for a property. Where the parent has a personal or family company and there are unextracted profits in the company, it may seem sensible for the company to lend the money rather than for the parent to do so personally. However, this may have tax consequences which can be easily overlooked. these rules, a tax charge will arise on the company on any amount of the loan which remains outstanding nine months and one day after the end of the accounting period in which the loan was taken out. Loans to participators Associates Where the company is a close company (broadly one under the control of five or fewer people) as most personal and family companies are, the loans to participators rules need to be considered. Under The reach of the loans to participators rules is wide. The recipient of the loan does not need to be a participator (broadly a shareholder) for the charge to apply – it also applies where the loan is made to an The charge (known as the ‘section 455 charge’) is payable at the rate of 33.75% of the outstanding loan balance. This is the same rate as the upper dividend tax rate. 4 EGAP NO TNOC
PAGE 4 associate of the participator. This includes a relative of the participator, which for these purposes means a spouse or civil partner, a parent, grandparent or remoter forebear a child, grandchild or remoter issues or a sibling. It also applies where a loan is made to a partner of a participator. Example Louise is the director and sole shareholder of her personal company, L Ltd. The company makes a loan of £100,000 to Louise’s daughter Sophie to help her get on the property ladder. The loan is interest free. It is made on 1 January 2025. The company prepares accounts to 31 March each year. If the loan remains outstanding on 1 January 2026 (as is the expectation), despite the fact that Sophie is not a participator in L Ltd, the company will need to pay section 455 tax of £33,750 on 1 January 2026. The tax will become repayable nine months and one day after the end of the accounting period in which the loan is repaid, so in that way it is a temporary tax. However, it may be a significant cost to the company in the interim. Benefit in kind charge If the loan balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will also arise as the loan is made to a member of the director’s family or household. The charge will be based on the difference between the interest payable at the official rate and that actually paid, if any. The company will also pay Class 1A National Insurance on the taxable amount. Planning issues While it is possible to make a loan from a personal or family company of up to £10,000 for up to 21 months tax-free, tax consequences will arise where the loan is for a higher amount and/or is made for a longer period. This does not mean it will never be beneficial to make a loan to a family member – it is a question of weighing up the cost of paying the section 455 tax and tying up the associated funds until after the loan has been repaid against the interest that the family member may pay if they were to borrow the money elsewhere. The section 455 tax will be repaid if the loan is repaid, while any interest paid on a third-party loan will not. The cost of the benefit in kind charge should also be factored in.
PAGE 5 When do you need to register for VAT and how do you do it? If you are running a business, regardless of whether you operate as a sole trader, in partnership or the business is run as a limited company, you will need to register for VAT if your total taxable turnover in the previous 12 months exceeds the VAT registration threshold of £90,000 or if you expect your taxable turnover to be more than £90,000 in the next 30 days. Taxable turnover The trigger for registration for a UK-based business is its taxable turnover. For VAT purposes, this is everything that is not exempt from VAT or outside the scope of VAT. It includes zero-rated goods; reduced rate goods and goods charged at the standard rate. In working out your taxable turnover, you must also take into account: ·goods hired or loaned to customers; ·business goods used for personal reasons; ·goods received in barter or part-exchange or as gifts; ·services from other countries that are subject to the reverse charge; ·goods and services subject to the domestic reverse charge; and ·building work over £100,000 that the business did itself. Registration deadline Where taxable turnover in the previous 12 months exceeded £90,000, the business must register for VAT within 30 days of the end of the month in which the threshold was exceeded. The registration is effective from the first day of the second month after which the threshold is exceeded. Example Bella is a sole trader. On 7 July 2025 her VAT taxable turnover in the previous 12 months exceeded £90,000 for the first time. Bella must register for VAT by 30 August 2025. Her registration is effective from 1 September 2025. Where taxable turnover will exceed the VAT registration threshold in the next 30 days, the business must register for VAT by the end of that 30-day period. The registration is effective from the date that the business realised that the threshold would be exceeded. 6 EGAP NO TNOC If both you and your business are based outside the UK and you supply goods or services to the UK (or expect to do so in the next 30 days), you must register for VAT regardless of your taxable turnover.
PAGE 6 Example Cameron signs a contract to deliver goods worth £102,000 on 17 July 2025. He must register for VAT by 16 August 2025. His registration is effective from 17 July. He must therefore charge VAT on those goods. Where a business registers late, it must pay VAT on taxable goods and services supplied after the date by which it should have registered. A late registration penalty may also be charged. Businesses which exceed the threshold temporarily can apply for a registration exception. Registration process A business can register for VAT online (see www.gov.uk/register-for-vat/how-register-for-vat). The information required will depend on whether the business is run by an individual or as a partnership, or by a company. To register as an individual or partnership, you will need your National Insurance Number, an identity document (such as a passport), bank account details, your unique taxpayer reference (UTR), details of your annual turnover and an estimate of your taxable turnover for the next 12 months. For a company registration, the company registration number, bank account details, UTR, annual turnover and estimated turnover for the next 12 months will be required. In certain circumstances it is not possible to register online and registration must be done by post, such as if you are applying to join the agricultural flat rate scheme. Voluntary registration A business whose taxable turnover is below the VAT registration threshold can register for VAT voluntarily. If you do this, you will need to charge VAT on taxable supplies that you make, but you can claim back VAT on things that you buy for your business. Voluntary registration is worthwhile if you make zero-rated supplies but incur VAT on items that you buy.
PAGE 7 Dealing with a Simple Assessment letter Simple Assessment is used by HMRC to collect tax underpayments from taxpayers with straightforward tax affairs. It removes the need for the taxpayer to complete a Self Assessment tax return. HMRC will issue a Simple Assessment where there is an underpayment of tax which cannot be collected through PAYE. Each year HMRC undertake a PAYE reconciliation process and issue a P800 calculation. Where this shows that tax is owing which cannot be recovered through PAYE, they may issue a Simple Assessment. A Simple Assessment letter will be sent by post or issued to the taxpayer’s personal tax account if they have one. The letter will show the taxpayer’s taxable income, tax that has been paid and the amount that is owed. Check if it is correct It is important to check that the figures in the Simple Assessment are correct – HMRC can, and do, make mistakes. You should check the amounts shown in the Simple Assessment against your P60, bank statements, letters from the Department for Work and Pensions, and similar. If you do not understand the figures, it is prudent to take advice. If you think the calculation is wrong, you should tell HMRC, either by writing to them or by calling them. You must do this within 60 days of the date on the letter. You should tell HMRC which figures you think are wrong and what you think they should be. If HMRC agree with you, they will send you a new Simple Assessment with the revised figures. If they think their figures are correct, they will send you a decision letter explaining why. If you still do not agree with them, you can appeal. This must be done within 30 days of the date on which the decision letter was issued. Payment must still be made on time while the appeal is dealt with unless HMRC instruct otherwise. Paying your Simple Assessment Tax owed under Simple Assessment can be paid online, by bank transfer or by cheque. The date by which payment must be made depends on the date on which the Simple Assessment letter was received. Where the letter for the 2024/25 tax year is received before 31 October 2025, payment must be made by 31 January 2026. Where the letter for 2024/25 is not received until after 31 October 2025, payment must be made no later than three months from the date on the Simple Assessment letter. Interest will be charged on payments made late. Partner note: www.gov.uk/check-simple-assessment.
PAGE 8 Calculating adjusted net income and why it matters Adjusted net income is a key measure of income for tax purposes. It is total taxable income before taking account of any personal allowances and after deducting trading losses, pension contributions and certain tax reliefs, such as Gift Aid. The calculation Step 1 Calculate your net income for the year. To do this you first need to work out your taxable income. This will include: income from employment; profits from self-employment; taxable state benefits; most pensions, including the state pension and personal and occupational pensions; interest; dividends; rental income; trust income; and any foreign income. You then need to deduct any trading losses and payments made gross to pension schemes (i.e. without tax relief). The result is your ‘net income’. This is ‘adjusted’ to arrive at your ‘adjusted net income’. Step 2 Deduct the grossed up amount of any Gift Aid donations. Step 3 Deduct the gross amount of any pension contributions in respect of which tax relief has been given. The amount of the contributions must be grossed up at the basic rate of tax (so multiply the amount of the contribution by 1.25). Step 4 Add back any tax relief for payments to trade unions or police organisations. Tax relief of up to £100 is available for payments in respect of superannuation, life insurance or funeral benefits. If this has been deducted in step 1, it should be added back. Example Alison has the following income: 8 egap no tnoC
PAGE 9 ·salary: £60,000; ·rental income: £18,000; ·bank interest: £325; and ·dividends: £1,250. She also made trading losses of £4,000 from a self-employment and Gift Aid donations (net) of £50. She also made contributions of £4,000 to a personal pension scheme net of basic rate tax. Alison’s taxable income is £79,575 (£60,000 + £18,000 + £325 + £1,250). Her net income is £75,575 (£79,575less trading losses of £4,000). Her adjusted net income is £70,512.50 (net income of £75,575 less grossed up Gift Aid donations of £62.50 (£50 x 1.25) less gross pension contributions of £5,000 (£4,000 x 1.25)). Personal allowance A person’s adjusted net income is used to determine whether the personal allowance is reduced or lost. The personal allowance (set at £12,570 for 2025/26) is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. It is lost entirely once adjusted net income reaches £125,140. High Income Child Benefit Charge The High Income Child Benefit Charge claws back child benefit from the claimant or their higher earning partner once adjusted net income exceeds £60,000. The charge is equal to 1% of the child benefit for the year for every £200 by which adjusted net income exceeds £60,000. Once adjusted net income reaches £80,000, the charge is equal to the child benefit for the year.
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