In these difficult economic times, tenants may struggle to pay their rent, leaving landlords out of pocket. In the absence of insurance that makes good the cost of unpaid rent, the way in which the landlord is able to secure relief for the bad debt depends on whether the landlord uses the cash basis or the accruals basis to prepare their accounts.

Cash basis

The cash basis is a simple way of preparing accounts that is based on money in and money out. It is the default basis of accounts preparation for most unincorporated landlords with annual rental income of £150,000 or less.

Under the cash basis, income is only taken into account when it is received, and relief is only given for expenses when they are paid. This methodology provides automatic relief for bad debts as if the rent is not received, it is not taken into account in calculating the rental profit.

If the rent is received at a later date or the landlord is able to recover some or all of the unpaid rent through an insurance policy, it is simply brought into account as a receipt of the property rental business on the date that it is received.

Accruals basis

Landlords may use the accruals basis if they are not eligible for the cash basis, as may be the case if their annual rental income exceeds £150,000 or they operate their property business through a limited company. A landlord who is eligible to use the cash basis may elect to use the accruals basis instead.

Under the accruals basis, income and expenditure are matched to the period to which they relate, regardless of whether it has received or paid out. This is done by taking account of debtors, creditors, prepayments and accruals.

Where the accruals basis is used and the rent is unpaid, the rent for the period would be taken into account in calculating the profit for that period, and the balance sheet would show a debtor for the unpaid rent.

However, the tax legislation provides relief for bad and doubtful debts. Relief is given as a deduction when it becomes clear that the debt is bad or doubtful. Where a tenant is slow to pay but eventually pays, no relief is available – the rent is still taken into account for the period to which it relates regardless of when it is actually received.

HMRC requires businesses to register for VAT if their taxable turnover exceeds £90,000 in the last 12 months or is expected to exceed this threshold within the next 30 days. Registration must be within 30 days of the end of the month in which the limit is exceeded (or, if the limit will be exceeded in the next 30 days, by the end of that 30-day period). Failing to register when required could result in penalties, back payments of VAT owed and interest charges. HMRC reviews tax returns to determine whether a taxpayer should have registered for VAT, therefore application should be made within the time limit.

However, there are circumstances where HMRC may exercise discretion and will waive registration even if the application is late.

One valid reason for applying for an exception is if a business temporarily exceeds the turnover limit. For example, if a business typically has a steady turnover below the VAT registration threshold except for a one-off sale, it can apply for an exception by demonstrating that it expects its turnover to fall below the deregistration threshold of £88,000 in the following 12 months.

VAT exemption (rather than exception) can be applied for where a business primarily makes zero-rated supplies as the business will always be in a refund position. Application can be made even if the business also makes some taxable supplies.

Application process

HMRC guidance states that initial contact with HMRC must be made by phone to request both form VAT1 (application for registration) and VAT5EXC (VAT exception form). Whilst form VAT 1 can be obtained online, form VAT5EXC cannot, hence the need for the phone call. On receipt of both completed forms, HMRC will write within 40 working days confirming whether or not the exception application has been accepted.

Form VAT5EXC requires the business to confirm its operations, expected turnover and the nature of its taxable supplies. Any additional supporting information such as an explanation of the reasons for the temporary increase in turnover and turnover projections for the twelve months following the exceeded registration limit should also be submitted.

Late registration

If a business realised it has exceeded the threshold after the 30-day notification period, it can still request HMRC to exercise discretion in waiving registration. However, a business that exceeded the limit due to a temporary ‘blip’ will not be granted exception if it expects its supplies to exceed the registration threshold in the following 30 days.

Should the application for retrospective exception be made, HMRC is required to consider information which:

• would have been available at that time; and

• would have led to the granting of exception from registration at the earlier date.

There is a particularly important question on form VAT5EXC that requires careful consideration as HMRC has been known to rely heavily on the answer in court:

“Please explain why you thought, at the time your turnover went over the registration limit, your turnover would be back below the deregistration limit within the next 12 months”.

In the recent case of Dawn Kaffel v HMRC [2025], the First Tier Tribunal dismissed an appeal against HMRC’s decision to deny an exception, quoting the answer Mrs Kaffel stated to this question. The tribunal noted that the taxpayer, a relationship counsellor, was still experiencing exceptional demand due to Covid at the time of (late) registration and had taken no steps to reduce her future turnover. Mrs Kaffel’s response to the question above referred to future plans to reduce her workload rather than giving a reason for a temporary increase. The tribunal stated that this indicated an expectation that the turnover would exceed the limit in the following twelve months.

Practical point

If a business is granted an exception, it must continue to monitor its taxable supplies on a monthly basis to determine if and when it incurs a further liability to register for VAT.

For UK unincorporated businesses, the cash basis is now the default method for calculating taxable profits. Under this basis, income is taxed when received and expenses are deducted when paid, therefore there is no need to take into account debtors and creditors, prepayments or accruals. A further advantage is that, as income is only taken into account when received, relief for bad debts is given automatically. Capital expenditure is deducted as an expense, unless the capital expenditure is of a type for which relief by deduction is specifically disallowed under the cash basis (e.g. cars). Most sole traders and partnerships comprising entirely of individuals automatically fall within the cash basis, unless they opt out.

However, not every business can use the cash basis and, even where it is available, some may deliberately choose to remain on the accrual basis.

Excluded businesses

Under the accrual basis of accounting, income and expenses are recorded when earned or incurred, regardless of when the money is received or paid. The accrual basis must be used where a business is excluded from being allowed to use the cash basis. In practice, this applies where a business falls into one of HMRC’s excluded categories. If a trader is excluded, the accrual basis is not a choice – it is compulsory. Common examples of excluded traders include limited companies and LLPs. Certain farming and creative businesses using specific tax reliefs (e.g. profit averaging or herd basis) are also not eligible, neither are partnerships that include a corporate partner. Businesses where the structure or circumstances mean that cash accounting is not appropriate are also required to use the accrual basis, e.g. where financial statements are prepared in accordance with International Financial Reporting Standards.

Opting out

However, a business does not have to follow the cash basis. For some businesses, preparing accounts on the accrual basis may be beneficial.

A business may wish to opt out if the business:

· Works on long-term projects or has significant work in progress. The accrual method helps in tracking costs and revenues throughout the project lifecycle, ensuring better financial management and planning.

· Holds a large volume of stock. Such high stock businesses often have significant fluctuations in the level and amount of stock. The accrual basis enables the business to calculate profit margins and stock turnover ratios more accurately.

· Gives customers credit. Accounting on the cash basis will not show any bad debts whereas the accrual basis does.

· Buys assets or stock on credit. Under cash accounting, such assets are not eligible to claim tax relief until payment is made which could significantly delay tax relief on large purchases.

· Plans to incorporate. Accounts prepared using the cash basis will need to align with company accounting using the accrual basis from the first year of incorporation. Accounts prior to incorporation will need to be carefully prepared to ensure no overlap in figures.

· Needs financial statements for loans or grants. Lenders and investors usually require financial reports prepared on an accrual basis because this basis shows the financial health of the business more clearly. The cash basis does not show debtors or creditors. If there are outstanding invoices at the year-end, then the cash flow may not be adequate and investors will want to know whether their money is secure.

Practical point

The cash basis for income tax is separate from the VAT cash accounting scheme. Therefore, a business can use the cash basis for income tax but still use the standard accrual method for VAT submission, or vice versa.

It is reasonable to assume that if a person pays too much tax, HMRC will automatically send the overpayment back to them. Unfortunately, this is not the case, and where a taxpayer is due a tax refund, they may need to claim it.

Why an overpayment may arise

There are various reasons why a person may pay more tax than they need to. For example, where a taxpayer is in Self-Assessment and makes payments on account, if their circumstances change and their income falls, they may have paid more than they need to. An employee may pay too much tax if they have been given the wrong tax code, or if they have only worked for part of the tax year and not had the benefit of their full personal allowance.

Determining if you have overpaid tax

There are various routes by which a tax overpayment can come to light. For example, taxpayers who do not complete a Self-Assessment tax return and have paid too much tax will receive either a P800 calculation or a Simple Assessment letter. These are normally sent out between June and March following the end of the tax year. The letter will tell them that they have paid too much tax and how to claim a refund. If the taxpayer is within Self-Assessment, they will not receive a letter. However, they may find out that they have overpaid tax when they complete their Self-Assessment tax return. However, if HMRC’s return software is used to complete the return, remember the tax calculation does not take into account any payments that have already been made, and when these are deducted from the amount that the taxpayer owes, it may become clear that the taxpayer has paid too much.

A taxpayer can also check whether they have paid too much by looking at their personal tax account online or via the HMRC app.

Claiming the refund

Where a taxpayer needs to claim a tax refund, there are various ways in which this can be done. A claim can be made online using the tool on the Gov.uk website at www.gov.uk/claim-tax-refund. A tax refund can also be claimed through the taxpayer’s personal tax account or via the HMRC app. The refund will normally be made within five days of making the claim online.

If the tax calculation letter tells the taxpayer that they will receive a cheque, they do not need to claim a refund. The cheque will normally be sent within 14 days of the date on the letter.

Where the taxpayer is within Self-Assessment, HMRC may not issue a tax refund if a tax payment, for example, a payment on account, is due within 45 days. Instead, they will set the refund against the next tax bill.

Interest is paid on overpaid tax at a rate of 1% below the Bank of England base rate, subject to a minimum level of 0.5%.

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The Construction Industry Scheme (CIS) is a tax deduction scheme requiring contractors to deduct tax from payments made to subcontractors working in the construction industry. Contractors must register for the scheme and verify the tax status of subcontractors that they engage. They are also required to submit monthly returns online to HMRC detailing all payments made to subcontractors in the previous month.

Contractors must deduct a percentage of tax from these payments and remit the withheld tax to HMRC by the 22nd^h of the month following online payments (19^th of the month for postal payments). The deduction rate is 20% for registered subcontractors and 30% for unregistered. Many subcontractors, however, are unaware that they can apply to HMRC to obtain gross payment status, which allows for no tax deductions.

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Gross payment status

When subcontractors initially register for CIS, they are automatically assigned net payment status. Gross payment status can be obtained only after successfully completing three tests:

• The business test

The business must undertake construction work (or provide labour for construction work) and have a business bank account. HMRC will check the application to ensure that these tests are met and will verify the bank account details provided.

• Turnover test

For sole traders, the annual turnover (excluding VAT and materials) must exceed £30,000. In the case of partnerships, each individual partner must have a turnover of £30,000. If the partnership includes corporate members, the turnover limit of £30,000 is multiplied by the number of relevant persons associated with each corporate partner. For companies, the turnover limit is also multiplied by the number of relevant persons, which includes directors and, for close companies (those with five or fewer directors or beneficial owners), any beneficial owners of shares. An individual is counted only once if they hold both director and beneficial owner status.

• Compliance test

Failing the compliance test is a common reason for rejection by HMRC. Importantly, the requirement for timely compliance is part of the CIS legislation and is applied strictly.

HMRC’s Construction Industry Scheme Reform Manual at CISR46060 states that any of the following will result in a failed compliance test:

• “Four or more late submissions of the contractor’s monthly return CIS300, or VAT return within the preceding 12 months where the returns were less than 28 days late

• Any submission of the contractor’s monthly return CIS300, VAT or SA return within the preceding 12 months made later than 28 days after the due date

• A contractor’s monthly return already due but remaining outstanding at the date of application

• Any SA return due in the qualifying period but outstanding at the date of application

• Any Corporation Tax return (CT600) due in the qualifying period but outstanding at the date of application

• Any VAT return due in the qualifying period but outstanding at the date of application”.

Late payments will also result in automatic refusal, for example, if any PAYE, VAT or CIS remittance of £100 or more within the preceding 12 months was paid more than 14 days after the due date. Similarly, refusal will be actioned if more than three remittances of £100 or more are paid late but within 14 days of the due date in the preceding 12 months. Importantly, any late NI contributions will result in an automatic refusal.

Annual review

HMRC will review any gross payment status annually and, should the subcontractor fail any of the tests, gross status will be withdrawn. If the subcontractor is a company, HMRC will review the company itself, rather than individual directors or shareholders.

Practical point

Whether there is any benefit in gross status depends on whether the subcontractor is disciplined enough to put money aside, ensuring that tax payments are made by the correct dates. The benefit of holding gross status is mainly cash flow, but also that such status demonstrates that the business is compliant, possibly giving a competitive edge when bidding for contracts.

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Starting in self-employment can feel daunting. There may be a website to create, a business bank account to open, pricing to set and possibly premises to secure. In the midst of these priorities, many new sole traders overlook a key requirement – registering with HMRC. Failing to register on time can lead to penalties, including possible backdated obligations.

Is registration mandatory?

Registration becomes mandatory when gross income exceeds £1,000 in a tax year. Termed the ‘trading allowance’, the £1,000 is income before deduction of tax-allowable expenses. From a date to be announced (but by 2029), if gross trading income is between £1,000 and £3,000, a business will still need to register but instead of submitting a full self-assessment return, there will be a simplified online system. The trading allowance itself will remain at £1,000, but the change will affect who must file a full return. Voluntary registration is possible and may be relevant should a loss be incurred.

Registration time limit

The registration deadline is 5 October after the end of the tax year in which gross trading income exceeded £1,000. If late but any tax due is paid on time (by 31 January), HMRC has indicated that penalties may not apply provided certain conditions are met. These include having a reasonable excuse, the failure not being deliberate and notifying HMRC without unnecessary delay. Voluntary disclosure generally results in lower penalties.

However, if registration is late and tax unpaid or paid late, HMRC can levy a ‘failure to notify’ penalty. Penalties range from 0% to 30% of the potential lost revenue for non-deliberate failures but can be as much as 100% of the unpaid tax, for deliberate and concealed cases. The penalty may be reduced if individuals fully cooperate with HMRC or make an unprompted disclosure.

Making Tax Digital

Penalties for failure to notify and register for self-assessment will continue to be charged as detailed above. Failure to also sign up for MTD will incur late submission penalty points rather than failure to notify penalties.

An individual or business will be charged a penalty point every time a MTD quarterly or tax return deadline is missed. If four penalty points are received, HMRC will issue an automatic £200 charge.

Backdating self-assessment

Declaration is required from the date trading commenced; this may mean submitting returns backdated to cover all relevant years.

Penalties for late filing of returns are:

· £100 fixed penalty for each late return (even if no tax owed)

· After three months: £10 per day (maximum charge = £900)

· After six months: additional £300 or 5% of outstanding tax (whichever is greater)

· After 12 months: further £300 or 5% of outstanding tax (whichever is greater)

Note that HMRC can charge both failure to notify and late filing penalties for the same situation as they are separate offences for different obligations.

If HMRC discovers non-compliance, then it can review up to 20 years outstanding returns if the behaviour is deemed as ‘deliberate’ and six years if ‘careless’, but the usual number of backdated years is four.

Late VAT registration

Separate rules apply to VAT registration. A business must register when its taxable turnover exceeds the £90,000 registration threshold. If the business fails to register on time, HMRC may backdate the registration to the date it should have occurred. The business will then be required to pay VAT on sales made since that date, even if not charged to customers at the time. In addition, late registration penalties may be levied based on the amount of VAT due and the length of the delay, with higher penalties for longer delays or deliberate non-compliance.

Practical point

In some cases, a business that temporarily exceeds the VAT threshold can apply for an exception from registration. To qualify, it must demonstrate that its taxable turnover will not exceed the £88,000 deregistration threshold within the following 12 months. However, HMRC is increasingly refusing exceptions, particularly where businesses have not adequately monitored turnover on an ongoing basis.

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Most businesses expand via recommendation; however, there may come a time when a more effective method of expansion is needed such as acquiring another business. When one company buys another, the arrangement is usually structured either via a share purchase or an asset purchase. Each method has its advantages and each method its own specific tax issues.

Share purchase

In a share purchase, the buyer acquires the shares of the target company and takes ownership of the entire business. This includes all assets, liabilities, tax history and any existing risks. While this method may appear simple from an operational standpoint, it may expose the buyer to unforeseen liabilities. Even if the buyer obtains warranties and indemnities, they are only worth anything if the seller has the money to back them up. Stamp duty will also be payable at 0.5% of the purchase price.

Another important issue is the use of tax losses. In some cases, the company being acquired may have accumulated losses that could potentially be valuable as they can be offset against future profits, reducing tax liabilities. However, tax rules can restrict the use of such losses and care is needed to ensure that there is no ‘change in the nature or conduct’ of the business.

A ‘change of ownership’ occurs where:

· one person acquires more than 50% of the ordinary shares in the company; or

· two or more persons each acquire a holding of at least 5% of the ordinary shares and these holdings combined total more than 50% of the company’s ordinary share capital; or

· two or more persons acquire a further holding of ordinary shares which takes each of their holdings to at least 5%, and those holdings combined exceed 50% of the company’s ordinary share capital.

A ‘change in the nature or conduct’ of the trade concerns a major change in:

· the product or service supplied by the company;

· the customer base to which the product/service is being supplied; or

· the market(s) in which the trade operates.

For this loss restriction to apply, both the major change in the nature/conduct and the change of ownership must take place within a period of five years, starting not more than three years prior to the date of the change of ownership.

In addition, when another company is purchased, it becomes ‘associated’ with the existing company. This would lower the profit thresholds for the 19% small profits rate and the 25% main rate, effectively increasing the overall tax burden.

Asset purchase

Under an asset purchase, the buying company purchases specific assets (machinery, stock, customer lists, intellectual property, contracts, goodwill, etc.) directly from the target company. The benefit is that the buyer selects which assets and liabilities to acquire, offering greater control and flexibility compared with a share purchase which is effectively ‘all or nothing’. The flexibility comes with being able to allocate part of the purchase price to assets that qualify for capital allowances’ (CA) and use that amount as the new starting value for potentially claiming future capital allowances.

Note that should the seller have already claimed CA on the assets, the value may be restricted as HMRC does not permit both parties to claim full relief on the same value. However, assets revalued at a higher price will enable CA to be claimed by the buyer on the balance.

A further benefit of an asset purchase is that the buying company does not inherit the selling company’s history, thereby reducing the risk of being liable for past debts.

Other tax considerations

Should assets purchased include commercial property, SDLT may be payable by the buyer at rates up to 5% of the property’s value. There may also be the potential for a VAT charge should the transfer not be deemed as being of a going concern, thereby increasing the purchase cost.

Practical point

While Business Asset Disposal Relief (BADR) will primarily be of interest to the seller, it may impact negotiations and method of acquisition. Sellers may want a share sale to qualify for BADR, whereas the buyer may prefer an asset sale for ‘clean’ tax reasons, to minimise risk and avoid inheriting historical liabilities.

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There are many reasons why shareholder-directors of private family companies may decide to split a single business into two or more separate entities. Often, these companies have grown to a point where different members are responsible for distinct divisions or activities and, as the business expands, individuals may wish to take control of their own area independently. Disagreements about strategy or management can also lead to separation, each shareholder director taking over part of the business they have been running. A demerger may also be used to separate higher-risk activities from more stable operations or as a precursor to selling part of the business.

Whatever the motivation, the objective is usually to carry out the demerger as tax efficiently as possible for both the company and its shareholders, while ensuring that each resulting entity continues to trade. Although it is not always possible to avoid tax charges entirely, with careful tax planning it may be possible to reduce any income tax and/or defer capital gains tax (CGT). However, stamp duty may still be payable unless specific reliefs can be claimed.

Capital gains tax

CGT payable by shareholders is one of the main concerns in any demerger. When assets are transferred from the original company to a new company, the transaction is typically treated as a disposal at market value, even if no money changes hands. However, ‘roll over relief’ allows such transfers to take place without triggering an immediate CGT liability, provided certain conditions are met.

There are two principal methods of carrying out a demerger without incurring income tax or CGT: the statutory ‘exempt’ demerger and the ‘non-statutory liquidation’ method.

· Statutory exempt demerger

A statutory exempt demerger allows a company to separate its business through what is termed ‘a distribution in specie’. Under these rules, the original company must remain a trading company and there must be a genuine intention to continue operating the separated businesses rather than selling. Provided the transaction is carried out for bona fide commercial reasons and no consideration is given (other than the assumption of liabilities by the receiving company), the transfer can take place on a ‘no gain, no loss’ basis, allowing the individual shareholders to receive new shares, and defer any gain until the new shares are finally sold.

To comply, the original company must have sufficient distributable reserves to cover the value of the assets being transferred.

Stamp duty

Stamp duty may be reduced or eliminated if the transaction qualifies as a reconstruction or demerger. The conditions being that:

• The transaction is being carried out for genuine business purposes.

· The shareholders in the new company (or companies) broadly reflect the ownership of the original company.

· The transfer is being made wholly or mainly in exchange for shares in the new company.

· Typically, the companies involved must be trading companies or part of a trading group.

Advance clearance from HMRC should be sought to confirm that that the transaction will be tax neutral and stamp duty reconstruction relief applies. Note that even where advance clearance is obtained, the distributing company is required to submit a return to HMRC within 30 days of making the distribution, setting out details of the transaction.

· Non-statutory demerger

Where the statutory conditions cannot be satisfied, companies may need to rely on the ‘non-statutory route’. This is where the original company is placed into voluntary liquidation and the business assets are distributed to new companies owned by the shareholders. However, this method requires the original company to cease, with its operations effectively split between two or more new companies.

Other taxes

VAT also needs to be considered in a demerger. The transfer of a business should not have any VAT implications but again, only if conditions are met, including the continuation of the same type of business activity by the receiving company as a going concern.

Practical point

Other reconstruction techniques could be considered should a demerger not be possible such as a reduction in capital (where a new holding company is incorporated to own the shares of the split companies) or a ‘share for share exchange’ (where the shareholders of the main company exchange their interests to a new company and receive shares in that new company as consideration).

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Employees often incur expenses in doing their job and they may be able to claim these back from their employer through the expenses system. Where an employer reimburses expenses, there may be tax implications to consider.

Exemption for paid and reimbursed expenses

A tax exemption applies to certain paid and reimbursed expenses. It is available if the expenses which are paid or reimbursed by the employer would be fully deductible from an employee’s earnings had the employee met the cost themselves.

Employees are allowed a deduction for expenses which are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. The tax legislation also allows a deduction for a number of specific expenses, such as certain travel expenses and fees and subscriptions paid to bodies approved by HMRC.

As long as this test is met, the exemption applies regardless of whether the employer meets the cost at the outset or the employee pays initially and is reimbursed by the employer. For example, if an employee is required to attend a meeting at a client’s office, the employee would be able to deduct the associated travelling costs if they met them themselves. As this test is met, if the employer pays the cost, for example by purchasing a train ticket for the employee, or reimburses the employee’s travel costs, the exemption would apply and there would be no tax consequences in either case.

However, if the test is not met, and the employer paid or reimbursed the employee’s expenses, the amount paid or reimbursed would be taxable. An example of this would be where an employer reimbursed the cost of the employee’s home to work travel (which is not tax deductible).

Forthcoming changes

There are some anomalies in the tax legislation that mean no tax charge arises where the employer provides an employee with a benefit, but a tax charge will arise if the employee provides the same thing and is reimbursed by their employer. For example, an employer can provide an employee with an eye test and corrective appliances without triggering a tax charge, but if an employee books and pays for an eye test and is reimbursed by their employer, the amount reimbursed is taxable as the employee is not entitled to a deduction for the cost of an eye test.

To counter this, new exemptions are to be introduced which will level the playing field in respect of certain benefits, meaning that the tax outcome is the same regardless of whether the employer provides the benefit or reimburses the employee for the costs.

From 6 April 2026 exemptions will be introduced to ensure that where an employer pays for or reimburses an employee for the cost of eye tests, flu vaccines or homeworking equipment no tax charge will arise. This will align the tax position with that where these benefits are provided directly by the employer.

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Unincorporated landlords pay income tax on the profits of their property rental business. This is currently at the normal income tax rates. However, this is set to change from 6 April 2027 when property income will have its own tax rates. The bad news is that the new property tax rates will be two percentage points higher than the current income tax rates.

Current rates and new rates

For 2025/26 and 2026/27, unincorporated landlords pay income tax on their rental profits at 20% where it falls in the basic rate band, at 40% where it falls in the higher rate band and at 45% where it falls in the additional rate band.

For 2027/28 onwards, rental profits will be taxed at the new property tax rates which are, respectively 22%, 42% and 47%.

The new property tax rates only apply to landlords running an unincorporated property business; corporate landlords will continue to pay corporation tax on their profits.

Interest and finance costs

Where unincorporated landlords incur interest and finance costs, for example, mortgage interest, relief is given as a basic rate tax reduction.

When the new property tax rates come into effect from 6 April 2027, the rate used to calculate the tax reduction will be the property basic rate of 22%.

Allocation of personal allowance

The rules which determine the order in which income is taxed are also changing from 6 April 2027. Currently, allowances and reliefs are allocated so as to give the best result for the tax year.

For 2027/28 onwards, this will no longer be the case. The personal allowance will first be set against employment income, trading income and pension income (taxable at 20%, 40% and 45%) rather than property or savings income (taxable at 22%, 42% and 47%).

Mitigating the effects

Provisions contained in the Renters’ Rights Act 2025 will limit a landlord’s ability to increase rent to compensate for the tax rise. Where the landlord is increasing rents before these provisions bite, they may wish to factor in the forthcoming tax rises.

The cash basis is the default basis of accounts preparation for unincorporated landlords with rental income of less than £150,000. Under the cash basis, income is taxed when received and expenses relieved when paid.

Where possible, landlords should advance income, so it is received before 6 April 2027 to save 2% in tax. In contrast, they could consider delaying expenses until on or after 6 April 2027 so that relief is given at the new (higher) property rates.

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Should any taxpayer find they are struggling to pay their tax bills by the usual deadlines, there are official ways to spread the payments. How such payments are made depends upon the type of tax owing, the amount outstanding and whether the taxpayer is employed, self-employed or a company. Regardless of the plan undertaken, interest charges will accrue, although penalties are typically not levied.

Time to Pay (TTP) scheme

HMRC’s most recently published Annual Report and Accounts (2024/25) states that over 913,000 customers were paying taxes under a TTP arrangement, with total tax owing of approximately £6.16 billion (total debt balance = £44 billion of which 14% is being paid under an instalment process).

A TTP arrangement, whilst not an automatic right, is a formal negotiated agreement allowing payment of unpaid tax to be made over a period of typically 12 monthly instalments. Longer arrangements can be made with HMRC manager approval but will only be granted in ‘exceptional cases’. The self-employed can apply for a TTP arrangement online provided that the latest tax return has been filed and the debt is less than £30,000; the system permits 12 months of instalment payments by default. The application must be made within 60 days of the payment deadline (i.e. for a self-employed taxpayer, the agreement must be in place by 31 March) and the taxpayer must not have any other payment plans or debts with HMRC. Applications that do not fulfil the online requirements need to be made by phoning HMRC initially and, if accepted, then a formal written agreement will be issued. Details of income and expenses must be declared.

TTP proposals can be rejected (or rescinded) for various reasons such as a history of late submission of returns, failure to respond to previous correspondence or not keeping HMRC informed of the taxpayer’s financial situation if a TTP is already in place. If a proposal is rejected, the taxpayer may face additional penalties and interest charges, and HMRC may take further action to recover the debt.

TTPs can also be used for VAT, PAYE, Class 4 NIC and corporation tax arrears (although the conditions differ and are stricter). For example, HMRC requires proof that the business is a viable going concern demanding full financial disclosure, including bank statements and cashflow forecasts.

PAYE coding adjustments (employees)

If the taxpayer is employed or receives a taxable pension and the underpayment is £3,000 or less, HMRC will automatically collect the outstanding tax via restriction in the taxpayer’s code for the following year (unless the box on the tax return specifically asking not to collect this way has been ticked). This method of collection enables the debt to be repaid over 12 months interest-free.

Short-term deferral

In very limited cases, HMRC may allow short-term deferral of a payment without a formal TTP arrangement, typically for only a few days or weeks. HMRC needs to be contacted as soon as possible, and this would be relevant if the taxpayer was suddenly involved in an accident, for example.

Budget Payment Plan (BPP)

The BPP is a voluntary scheme for self assessment taxpayers enabling regular monthly or weekly payments by direct debit towards the next tax bill. The taxpayer chooses how much to pay and how often. A BPP can only be used by taxpayers who are up to date with their tax position at the time of application. Note that, although this plan may give peace of mind that a future tax bill will be paid, the taxpayer is not given any interest and therefore they would be better saving into a deposit account.

Practical point

If self assessment tax is outstanding on three specific trigger dates, a 5% late payment penalty is charged. These dates are usually 30 days, six months and 12 months after the due date for the tax. Therefore, for a payment due on 31 January 2026, the 5% penalty can be avoided by setting up a TTP arrangement before 2 March 2026 and adhering to the terms of the payment plan, although interest will still be charged.

It is becoming increasingly noticeable that after a purchase is made in a shop or restaurant, the customer is asked ‘Do you want a receipt?’. Answering ‘no’ may help reduce paper, but business customers intending to claim against tax should always answer such a question in the affirmative. Keeping receipts is not a legal requirement for most personal transactions as consumer rights remain valid without one, other evidence (e.g. bank statements) proving that the transaction has taken place. However, for businesses, the situation is very different when claiming expenses against tax.

HMRC’s stance

Receipts and invoices are the primary evidence of expenses incurred relating to business activities. Without receipts, HMRC may disallow expense deductions and, if missing or inaccurate records are found in an investigation, businesses may face significant fines or additional scrutiny.

Recent tax cases highlight HMRC’s increasing insistence on proper documentation. The tax case of Mediability v HMRC [2023] UKFTT 315 (TC) underlines the importance of receipts, providing a real-world example of how a lack of correct evidence can undermine expense claims. In this case the taxpayer attempted to justify business expenses using solely bank statements without supporting receipts. The Tribunal ruled that this was insufficient, and many of the claims were disallowed.

The tax case of the actor, Tim Healy, in T Healy v HMRC [2012] TC01940 is another case which shows that inadequate record-keeping (particularly missing receipts) can cost taxpayers valuable deductions. Mr Healy claimed tax deductions for accommodation, subsistence and taxi fares incurred whilst working in London. Some claims were allowed, but crucially his subsistence expenses and taxi costs claims were not because he could not provide sufficient evidence (i.e. receipts) to show whether the expenses were business related.

Electronic storage

For businesses dealing with the final customer (e.g. restaurants and shops), paper receipts will need to remain. For other businesses, HMRC believes the way of the future is that where paper receipts are issued, businesses wishing to claim tax relief for such expenses must scan and store receipts digitally. Making Tax Digital is the first step towards digital record-keeping.

E-invoicing v paper

Many B2B businesses are moving away or have already moved away from paper receipts, replacing them with e-invoicing.

E-invoicing is the digital exchange of invoice information directly between buyers and customers or suppliers. Unlike traditional paper invoices or PDF documents sent by email, the e-invoicing process typically begins with the supplier creating an invoice using specialised software. The e-invoice is then transmitted electronically to the customer’s system, which automatically receives and processes it. The invoice data is integrated into the customer’s accounting system, eliminating the need for manual data entry and paper handling.

Mandating e-invoicing

In the Autumn Budget 2025, the UK government confirmed plans to introduce mandatory e-invoicing for all VAT invoices from April 2029. Under this scheme, VAT registered businesses will be required to generate, transmit and store invoices in specific electronic formats that tax authorities can automatically process. A detailed implementation roadmap will be published as part of the 2026 Budget.

E-invoicing is not HMRC’s initiative. Many EU countries have already mandated e-invoicing, with others, notably Belgium, France and Poland, introducing implementation in 2026. Different methods are being used by each country and HMRC is looking closely at the success or otherwise of the methods used. For example, Belgium plans to focus initially on how invoices are sent, keeping reporting separate, and France will use approved private platforms to handle invoice exchange, thereby introducing a new layer of digital reporting. Poland intends to tie e-invoicing directly to real-time tax reporting where invoices are sent to the government’s tax platform. Under this process, the system will check each invoice, assign it an official reference number and send to the customer. As every invoice will move through the government’s system, the tax office automatically receives the data.

Practical point

Businesses can prepare for mandation of e-invoicing in the UK by considering using accounting software and/or dedicated receipt apps. Many software programs available already automatically extract data from emailed invoices, saving time, reducing errors and ensuring electronic records meet HMRC’s current and anticipated requirements.

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In difficult trading conditions, a sole trader may realise a loss rather than a profit. Where this is the case, it is important that the trader realises that they may be able to claim tax relief for that loss. There is more than one way in which this can be done, and the best route will depend on the trader’s other income and personal circumstances.

The relief must be claimed.

Option 1: against other income of the same or previous tax year

Where the trader has other income, such as income from employment, property or investments, they can claim to set the loss against their income of the same tax year and/or the previous tax year. The trader can make a claim for one or both of these years, depending on the amount of the loss, and the claims can be made in any order.

It is important to note that it is not possible to make a partial claim, for example to prevent the loss of personal allowances. A claim is not mandatory, and where it is not beneficial, for example, because personal allowances may be lost, the trader can take a different route.

Example

Joe is a self-employed decorator. In 2024/25 he made a loss of £12,300. He has a part-time job, from which he earns £14,000. In 2023/24 Joe had total income of £42,000.

If Joe opts to set the loss against his other income of 2024/25, he will waste all but £1,700 of his personal allowance. It is not possible to use only £1,430 of the loss to reduce his income to £12,570 which would be covered by his personal allowance.

However, if he sets the loss against his income of 2023/24, he will reduce his income to £29,700, saving £2,460 in tax.

Option 2: extension to capital gains

Where the taxpayer has claimed relief against other income and is unable to use all the loss, the taxpayer may be able to use the balance against capital gains of that year. Depending on the numbers, this route may result in the loss of the capital gains tax annual exempt amount, although despite this, it may still be worthwhile.

Option 3: Carry forward against future trading profits

Although conventional wisdom is to secure relief for a loss as early as possible, if a claim against other income would waste the personal allowance, it may be preferable to carry the loss forward and set it against future profits of the same trade. Where this route is taken, the loss must be set against the first available trading profits.

Opening and closing years

Additional claims are available for losses made in the opening and closing years of a trade.

A loss made in the first four years of a trade may be set against an individual’s income for the previous three tax years, setting the loss against the earliest of those years first.

Where a loss is made in the final 12 months of a trade (a terminal loss), it may be set against profits from the same trade in the same tax year as the loss and in the previous three tax years. The loss is relieved against the profits of a later year first.

Loss relief cap

The amount of loss relief that a person can claim in any one tax year is in certain cases capped at the higher of £50,000 and 25% of their adjusted net income for that tax year.

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Many digital platforms and online marketplaces in the UK, such as eBay, typically consider a seller to be a trader if they list items frequently or in bulk, or if the individual is perceived as selling items with the intent to generate profit. Being classified as a trader leads to additional fees not applied to private sellers. In addition, if 30 or more sales transactions are completed or total sales exceed approximately £1,707 after fees, eBay and other similar platforms are obliged to report such transactions and certain other information to HMRC as trading. HMRC will therefore expect such income to be declared on a self-assessment tax return. Such platforms will notify the seller that the information has been shared with HMRC.

Trading or not

The £1,707 threshold does not mean that gross earnings below this amount need not be declared as legislation requires declaration above the trading allowance of £1,000. The trading allowance allows taxpayers to earn up to £1,000 in gross trading income or what HMRC terms as ‘casual services’ (which would include selling on eBay or such activities as carers, gardening, etc.) per tax year without having to pay tax or declare to HMRC.

Differentiate – business or hobby

Many would say that such a limit would equate to being a hobby, but HMRC does not rely on any monetary test to determine trading, instead looking at the overall nature of the activity. The difficulty lies in the fact that many activities sit somewhere in between.

HMRC often refers to a set of indicators known as the ‘badges of trade’ when deciding whether an activity constitutes a business. These are not strict rules but guiding principles.

HMRC guidance (in the Business Income Manual at BIM20205) lists the badges as follows:

1. profit-seeking motive;

2. the number of transactions;

3. the nature of the asset;

4. existence of similar trading transactions or interests;

5. changes to the asset;

6. the way the sale was carried out;

7. the source of finance;

8. interval of time between purchase and sale; and

9. method of acquisition.

One key badge is the first ‘badge’ – whether there is the intention to make a profit. If an individual is seeking to make a profit, adjusting prices, marketing their goods or services, or expanding operations, this points strongly towards a business. Consistent losses over time, especially without a credible plan to become profitable, may suggest a hobby instead.

Another significant ‘badge’ is the frequency and regularity of transactions. A one-off or occasional sale is less likely to be considered a business, although legislation does include ‘any venture in the nature of trade’ which allows for the possibility of isolated or speculative transactions being ‘trading’. The quantity of the purchased item can also indicate a trade. The oft-cited tax case under this heading is Rutledge v CIR [1929] 14 TC 490, where the transaction involved the purchase and sale of one million rolls of toilet paper.

The nature of the asset or service is also relevant. Some items are more likely to be traded for profit (e.g. a consignment of mobile phones or the purchase of materials) with the intention of turning those items into products for sale. Items such as furniture, electronics or personal vehicles, whilst having a value, are primarily used for personal enjoyment rather than trading for profit.

The time lag between purchase and sale may be important in establishing whether there is a trade. A short period of ownership suggests trading, whereas an asset held for some time or owned for a time personally before selling is in a stronger position to argue that the asset was purchased as an investment rather than a trading activity.

Practical point

Whether a sale is undertaken for profit or enjoyment, clear records of purchases, holding periods and the intended use of items could help justify the classification of the sale as a trade or hobby to HMRC.

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Legislation has been published in draft for inclusion in the Finance Bill which will bring unused pension pots within the charge to inheritance tax from 6 April 2027.

In light of this change, pension savers may be considering withdrawing pension funds to prevent such a charge. Is this a good idea?

The first point to note is that this is not yet law and, assuming it does come into effect, it will not do so until 6 April 2027. Therefore, there is no need to be hasty. There is also much speculation that the forthcoming Budget will include further pension changes; but as yet, whether this comes to pass and what such changes will look like is not yet known.

Accessing personal pension savings

Anyone with a money purchase pension plan can currently access this once they have reached age 55. This is to rise to 57 from 6 April 2028.

It should be noted that taking a pension before age 55 (or before age 57 after 6 April 2028) will trigger an unauthorised payment charge. This is potentially very costly and, depending on the amount of the pension pot, which is accessed, could be as much as 55%. At best, the charge will not be less than an IHT charge on unused funds and may actually be more.

Where a person has reached age 55 and wants to flexibly access their pension pot, currently they can take a tax-free lump sum of 25% (capped at £268,275). It remains to be seen whether the Chancellor will opt to change this. Once the tax-free lump sum has been taken, further withdrawals are taxed at the recipient’s marginal rate of tax. When making withdrawals, consideration should be given to whether the tax cost of withdrawing funds is more than the potential IHT charge if they remain in the pension pot at death. For additional and higher rate taxpayers, there are no savings to be had by withdrawing funds in excess of the tax-free lump sum.

It is also important to remember that once a pension pot has been flexibly accessed, the ability to make further contributions is capped by the money purchase pension allowance (currently £10,000 a year) where this is less than earnings.

Consider the beneficiary

Before withdrawing pension funds to save IHT, it is important to assess who would benefit from those funds if they remained in the pension pot at death. If the beneficiary is a spouse or civil partner, the inter-spouse exemption would be in point and there would be no IHT to pay.

Consider the value of the estate

It is also important to consider the likely value of the death estate and whether it would be sheltered by the available nil rate bands and existing exemptions. If the estate (including any unused pension pots) would not be a chargeable estate, there is no IHT to save by withdrawing the funds.

Consider all tax charges

It is really important that the potential IHT saving is not looked at in isolation – all potential tax charges must be considered to assess whether there are overall savings to be had.

Once the tax-free lump sum has been withdrawn, further withdrawals will be taxed at the recipient’s marginal rate. If the amounts withdrawn exceed the personal allowance, there will be income tax to pay.

If the amounts are withdrawn (possibly triggering an income tax charge) and remain in the estate at death, the funds will be taken into account in working out the IHT charge on death – it does not matter whether they are inside the pension pot or not.

Consideration may be given to withdrawing funds and making lifetime transfers. Here it depends on how this is done. If a regular pension is withdrawn and the income is passed on, the gifts out of income exemption will apply as long as the donor has sufficient remaining income to live on. If tax is paid at less than 40% on the amounts withdrawn, there may be some tax savings.

If a lump sum is withdrawn and a capital sum is passed on, the donor will need to live for seven years from the date of the gift for the gift to fall out of charge for IHT purposes. Again, the Chancellor may change this rule.

There is no one correct answer – the best approach will depend on circumstances and may involve something of a gamble on what the Chancellor may reveal on 26 November.

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The 2025 Budget on 26 November 2025 is expected to be crucial for the long-term implications for the UK economy – announcements of tax increases are expected. It is also expected to include further detail confirming HMRC’s digital roll-out (particularly Making Tax Digital) plus further digital implementation in the form of e-invoicing.

E-invoicing has been in use in various forms for a number of years and, internationally, over 80 countries have e-invoicing mandates, with the EU planning an EU-wide requirement from July 2030. Within the UK, its use is voluntary for most businesses, although some larger corporations and those engaged in international trade have had to adopt e-invoicing systems. For example, e-invoicing is mandatory for transaction payments made to and from public entities (e.g. the NHS, government departments or local councils). HMRC is looking to expand and standardise such processing, eventually implementing a system whereby any business’s invoices are automatically submitted to HMRC.

The practicalities

E-invoices can be processed almost instantly, potentially leading to faster payment cycles. Under e-invoicing, invoices are usually in formats such as PDF, XML or JSON. The e-invoice is created by the supplier, the supplier’s software issues the e-invoice, the customer’s software receives and processes the e-invoice, and then the customer issues payment to the supplier. The result is a much faster, more accurate and more compliant invoicing cycle – often cutting days or even weeks from traditional payment timelines.

HMRC’s plan

The government’s aim is to standardise and broaden this system of e-invoicing across the private sector quoting ‘improved efficiency, accuracy, and transparency‘ as the benefits for adoption in a recent consultation document. The consultation invited contributors to give their opinion as to what form(s) of e-invoicing model would work, citing methods such as four-corner (supplier->software provider->buyer), centralised or data share models.

Different models

• Four-corner model: Each party (supplier and buyer) uses a certified software provider to exchange invoice data.

• Centralised model: Taxpayers transmit data to a certified third party enlisted by the tax authorities to act on their behalf. These third parties approve the submissions, time-stamping each transmission.

• Data sharing model: Taxpayers extract e-invoicing data from their accounting systems and transmit that information directly to HMRC in ‘real time’. Each invoice is digitally signed and assigned a unique tax stamp before being sent to the customer.

Practical implementation

HMRC views e-invoicing as an extension of Making Tax Digital and will probably implement the system on a voluntary basis initially. Those taxpayers currently submitting VAT returns will be least affected as they must submit VAT returns digitally already. Making Tax Digital is being rolled out gradually, with those self employed and landlords whose gross income exceeds £50,000 mandated into the system (unless specifically exempt) as from April 2026 and those taxpayers with gross income exceeding £30,000 in April 2027 The intention is to expand further to those taxpayers with gross income of more than £20,000 in April 2028.

Taxpayers who deal in cash transactions will be most affected as they will be required to generate a digital invoice via a mobile app (with or without a customer’s email), record the cash payment and ensure that the invoice is logged into their system, with the next step being transmission to HMRC.

Practical point

Reading the consultation, it would appear that HMRC is intending to mandate e-invoicing looking to build a data sharing feed to HMRC, believing that this will enable the tax authority to ‘simplify tax reporting, reduce error and support businesses to get their tax right’, thereby reducing what HMRC perceives as the ‘tax gap‘. Critics of the system fear that imposing e-invoicing mandates could create additional compliance burdens, particularly for small businesses.

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In the not-too-distant past, incorporation was synonymous with automatic tax savings. However, successive governments have eroded these tax benefits. With additional administration and costs, many directors are considering disincorporation. As ever, there are tax implications for both the company and individual.

Asset transfer

Whatever the reason for disincorporation, when a company with assets closes, HMRC generally treats the company as disposing of those assets to the directors at market value. For the company, this would usually crystallise either balancing charges or allowances. However, where there is a business succession between connected parties, a balancing charge or allowance can be avoided by making an election. The effect is for any actual or deemed disposal proceeds to be ignored and for the capital allowance pool to be transferred at its tax written-down value.

A valid election must be made jointly by the company and individual within two years of the date of succession. The succeeding business then includes the transferred closing written-down value as an addition in its opening capital allowance pool. No writing down allowances are given on the purchase of plant or machinery in the company’s final basis period, and a balancing adjustment is calculated.

Transferring stock

Similar to the transfer of assets, the transfer of stock is deemed to be at ‘market value’. However, it should be possible for the parties to make a joint election to transfer the stock at its actual transfer value (or, if higher, the book value).

Capital assets

A company that has been in business for a while may have built up a significant value of ‘goodwill’ when they decide to disincorporate. Goodwill is an asset that will be transferred to the new business along with any other ‘relevant’ assets (e.g. land and buildings). HMRC usually taxes such a transfer as a chargeable gain, again at market value as the transfer will take place between ‘connected parties’. However, unlike for assets subject to capital allowances, there are no reliefs available to defer or hold over any gains. As such, this tax charge is often the largest hidden tax cost in disincorporation.

Stamp duty land tax

If a property used by a company is transferred to someone connected to the company (e.g. a shareholder who becomes a sole trader), HMRC treats the transaction as if the individual bought at market value, even if no money changes hands. However, if a property is transferred as a distribution in specie (non-cash), this should be exempt from SDLT. This is provided that the property is not encumbered with a loan and the distribution does not give rise to the creation of a debt.

Where there is a third-party (non-shareholder) loan secured on the property, the transfer will attract SDLT where there is an assumption by the shareholder of liability for the debt.

VAT

As a general rule, when a trade ceases the VAT-registered entity is deemed to make a taxable supply of all goods held by the business. However, on a transfer from a company to sole trader, there should be no VAT charged by virtue of the ‘transfer of going concern’ provisions.

Withdrawing monies

There will be the usual considerations (i.e. tax rates and timing, etc.) when deciding how to withdraw any remaining cash from a solvent company, but the outcome will probably be a straight choice between taking a dividend or a capital distribution.

A capital distribution (only available on the company’s closure if the total amount paid to all shareholders is less than £25,000), will be subject to CGT taxed at either 18% or 24% for 2025/26, depending on the level of the shareholder’s income. Where the distributable amount exceeds £25,000, the shareholders pay income tax at the dividend tax rates, after taking into account the £500 dividend allowance (and any personal allowance, if available).

Practical point

Disincorporation can be a significant step, so it is advisable to consult professionals to ensure compliance and understanding of the implications.

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Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is mandatory from 6 April 2026 for self-employed traders and landlords whose combined gross trading and business income in 2024/25 is £50,000 or more. Those within MTD for ITSA must maintain digital records and submit quarterly updates and a final declaration to HMRC electronically using software compatible with MTD for ITSA.

As the name suggests, MTD for ITSA relies on digital record-keeping and communication. HMRC recognise that not everyone is able to operate in a digital world and those who they accept as being ‘digitally excluded’ can apply for an exemption from MTD for ITSA.

Meaning of ‘digitally excluded’

HMRC acknowledge that there are various reasons why a person may consider themselves digitally excluded. For example, a person may be digitally excluded because:

· their age, a health condition or a disability prevents them from using a tablet, computer or smartphone to keep digital records and to submit returns to HMRC;

· they are a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records and they do not use a computer, tablet or smartphone for business or personal use; or

· they cannot get internet access at their home or business because of their location, and they are unable to get access at a suitable alternative location.

However, HMRC will not accept an application for exemption from MTD for ITSA if the only reason for the application is one of the following:

· the person previously filed a paper tax return;

· the person is unfamiliar with accounting software;

· the person only has a small number of records to create each year; or

· the person will spend extra time or incur additional costs as a result of complying with MTD for ITSA.

Where a person has an existing exemption from MTD for VAT because they are digitally excluded, providing that the person’s circumstances have not changed, HMRC will accept that they are also exempt from MTD for ITSA.

Applying for an exemption

To apply for an exemption from MTD for ITSA on the grounds of digital exclusion, a person will need to write to HMRC ahead of their MTD for ITSA start date. They must provide the following information:

· their National Insurance number;

· their name and address;

· details of how they currently submit their returns (including the use of an agent or other person to submit them on their behalf);

· the reason that they think that they are digitally excluded, including information in support of their claim;

· whether they have an accountant or agent and what they do for them; and

· any additional needs that they have.

An application can be made by an agent on behalf of someone who is digitally excluded.

It should be noted that if a person is unable to use digital returns themselves, for example because of age or disability, but they have an agent or someone else who can keep digital records and file digital returns on their behalf, an exemption will not be forthcoming.

The application should be sent to:

Self Assessment
HM Revenue and Customs
BX9 1AS

Where a person is already exempt from MTD for VAT because they are digitally excluded, they will also need to write to HMRC to apply for an exemption from MTD for ITSA, providing their National Insurance number, their VAT registration number and the reason that they are digitally excluded from submitting their VAT returns using software that is compatible with MTD for VAT.

An agent can apply for an exemption on a client’s behalf.

Other exemptions

The following are automatically exempt from MTD for ITSA and are unable to sign up voluntarily:

· those completing a tax return as a trustee, including a trustee of a charitable trust or a non-registered pension scheme;

· a person who does not have a National Insurance number on 31 January before the start of the tax year;

· a person completing a tax return as the personal representative of someone who has died;

· a Lloyd’s underwriters in respect of their underwriting activity; and

· a non-resident company.

Anyone in the above groups does not need to apply for an exemption as it is automatic.

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Unfortunately, tenants (and their pets) may cause damage to a rental property. Where this is the case, the landlord may be left to repair the damage and pick up the bill. In this situation, can the landlord obtain tax relief for the costs incurred?

Nature of costs

The nature of the work will determine how and when tax relief is available.

Where repairing the damage merely restores the property to the state that it was in before the damage, the associated costs are revenue in nature and can be deducted in calculating the profits of the property rental business. This is the case regardless of whether the landlord prepares their accounts using the cash basis or the accruals basis.

In the event that the landlord needs to replace domestic items, such as furniture or white goods, tax relief for the cost of the replacement is given in accordance with the rules for replacement domestic items. Under these rules, relief is given for the cost of a like-for-like replacement, plus the costs of disposing of the old item and delivery and fitting of the new one. If the replacement is superior to the old item (allowing for technological advances), the deduction is capped at the cost of an equivalent replacement. If any disposal proceeds are received in respect of the old item, this too must be taken into account.

Where the repair is so significant as to constitute an improvement, for example, a significant upgrade to a kitchen after tenant damage, the costs will be capital rather than revenue. Here, relief is given through the capital gains tax system on the disposal of the property. For residential lets, plant and machinery capital allowances are not available.

Deposit recoveries

If the landlord recovers the cost of the damage from the tenant’s deposit, the amount recovered must be taken into account as a receipt when calculating the rental profit.

Insurance receipts

Likewise, if the landlord is able to recover the costs of damage caused by tenants under an insurance policy, the insurance receipts must be taken into account.

A director’s loan account is simply a means of keeping track of transactions between the director and the company of which they are a director. Where the company is a personal or family company, the director may borrow from the company or lend money to the company. Similarly, the director may meet expenses of the company, or the company may pay the director’s personal bills. These transactions are recorded in the director’s loan account. Dividend or salary payments may also be credited to the account.

If the director’s account is overdrawn at the end of the company’s accounting period or at any point during the tax year, there may be tax implications to address.

Close companies

If the company is close, as personal companies and most family companies are, there will be tax consequences for the company if the director’s account is overdrawn at the company’s year end. Broadly, a close company is one that is under the control of five or fewer participators or any number of participators if those participators are directors. A participator is someone who has an interest in the capital or income of the company.

The action that the company needs to take in respect of an overdrawn director’s loan account depends on whether the account is still overdrawn at the corporation tax due date, which is nine months and one day after the end of the accounting period.

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If the loan has been repaid within this time frame, the company must disclose the loan on form CT600A when they prepare their corporation tax return, notifying HMRC of the amount that was outstanding at the end of the accounting period and the date(s) on which the repayments were made.

If the account remains overdrawn at the corporation tax due date, the company must pay section 455 tax on the outstanding loan balance along with their corporation tax. Anti-avoidance provisions exist to prevent the loan being repaid and then reborrowed in a bid to avoid the section 455 charge.

Section 455 tax

The company must pay section 455 tax on the amount by which the director’s account remains overdrawn nine months and one day after the company year end. The rate of section 455 tax is aligned with the upper dividend rate (currently 33.75%). The tax is paid with the corporation tax but crucially is not corporation tax.

Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the accounting period in which the loan is repaid.

Clearing the loan, whether by an injection of cash, declaring a dividend or by paying a bonus, will prevent a section 455 liability from arising. However, this will not always be the best option. If the loan is cleared by a dividend or a bonus, this will trigger tax and (in the case of a bonus) National Insurance liabilities which may be greater than the section 455 tax. It may be cheaper to pay the section 455 tax and to clear the loan at a later date when it can be done more tax efficiently.

Benefit in kind charge

If the loan balance exceeds £10,000 at any time in the tax year, a tax charge will arise under the benefit in kind provisions by reference to the difference between interest on the loan at the official rate and that paid by the director (if any). The employer will also pay Class 1A National Insurance on the taxable amount.