Accounting Journal

Relief for replacement of domestic items

Asif Patel — Thu, 30 Jul 2026 19:39:29 GMT

Where a landlord lets a residential property (including from 6 April 2025 onwards, a furnished holiday let), they are not entitled to tax relief when they purchase domestic items, such as furniture, furnishings, household appliances, and kitchenware. Instead, relief is given for the cost of replacing the item.

For the relief to be available, four conditions must be met.

Condition A is that the individual or company seeking to claim the relief is carrying on a property business that includes the letting of a dwelling house.

Condition B is that an old domestic item that has been provided for use in the dwelling house is replaced with the purchase of a new domestic item. The new item must be provided for the exclusive use of the lessee in the let property, and the old item must no longer be available for use by the lessee.

Condition C is that the expenditure is incurred wholly and exclusively for the purposes of the trade, but a deduction would be prohibited as the expenditure is capital.

Condition D is that capital allowances must not have been claimed in respect of the item.

Where the property in question is a furnished holiday let, it is important to check whether capital allowances were claimed where the old item was purchased before 6 April 2025. Under the former regime for furnished holiday lets applying before that date, landlords were able to claim capital allowances on the purchase of domestic items for furnished holiday lets.

Relief for replacement of domestic items is not available where Rent-a-Room relief has been claimed.

The relief

Under the relief, a deduction is allowed for the cost of a like-for-like replacement and any incidental costs, such as delivery or the cost of disposing of the old item or installing the new one. Where the old item is sold, the deduction is reduced by the sale proceeds.

Where the replacement is superior to the old item, the deduction is capped at the cost of a like-for-like replacement. For example, if a fridge was replaced with a fridge-freezer, the deduction would be capped at the amount of an equivalent fridge.

Where the old item is taken in part exchange, the deduction is the excess of the part-exchange value (plus any incidental costs).

Example

George lets a flat fully furnished. He replaces the two-seater sofa with a new sofa of a similar size and standard. The sofa cost £800 and delivery was £50. He also paid £70 for the council to dispose of the old sofa.

Under the rules for replacing domestic items, George is allowed a deduction of £920.

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SDLT and exchanging the main residence

Asif Patel — Mon, 27 Jul 2026 19:37:14 GMT

A supplement applies on top of the residential stamp duty rates where a person has two or more residential properties. The supplement is set at 5% and applies where the consideration for the second or subsequent property is £40,000 or more.

However, special rules apply where a person replaces their main residence and the SDLT supplement is not payable where both of the following conditions are met:

· the new property replaces the main residence; and

· the former main residence is sold within 36 months of the date of completion of the main residence.

However, if the former main residence has not been sold on the day on which the purchase of the new main residence completes, the supplement will initially be payable on the purchase of the new main residence. However, if the former main residence is sold within 36 months of completion of the new main residence, a refund of the supplement can be claimed.

Example 1

Matt and Lucy own two investment properties in addition to their main residence. They sell their main residence and buy a new home which becomes their main residence. The sale of the old main residence and the purchase of the new main residence complete on the same day. SDLT is payable at the residential rates on the purchase of the new main residence. The supplement does not apply as the couple are exchanging their main residence.

Example 2

Alicia has a holiday cottage in addition to her main residence. She buys a new home nearer to her family. The sale of the new home, which costs £500,000, completes on 1 March. However, the sale of her old home is delayed and does not complete until 16 April.

As Alicia has not completed on the sale of her old home when she completes on the purchase of her new home, she must pay SDLT at the residential rates plus the 5% supplement. Her SDLT bill is £40,000 of which £25,000 is the SDLT supplement.

When the sale of her former main residence completes, Alicia can claim a refund of the £25,000 SDLT supplement.

Claiming a refund

Where an SDLT supplement is paid because the sale of the former main residence completes after the purchase of the new main residence, the supplement is refunded. The refund must be claimed – it is not given automatically. To claim the refund, the former main residence must have been sold within three years of the completion of the purchase of the new main residence. In exceptional circumstances, it may be possible to claim a refund if it took more than three years to sell the former main residence.

The refund claim can be made online and HMRC must receive the claim by the later of 12 months after the date of sale of the former main residence and 12 months from the filing date of the SDLT return for the new main residence. An SDLT return must be filed within 14 days of the completion date.

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Taking dividends from a property company

Asif Patel — Fri, 24 Jul 2026 19:30:12 GMT

Where a property business is operated through a company, the profits need to be extracted if they are to be used personally. One of the ways of extracting profits in a tax-efficient manner is to pay dividends, particularly if the shareholder’s personal allowance has been used elsewhere.

All taxpayers regardless of the level at which they pay tax are entitled to a dividend allowance. For 2025/26 this is set at £500 and will remain at this level for 2026/27. There is no personal tax to pay on dividends covered by the allowance. However, as the allowance acts as a zero-rate band, it uses up part of the tax band in which in falls.

If shareholders in the property company have yet to use their 2025/26 dividend allowance in full, it is worthwhile paying a dividend to mop up the unused allowance.

However, before paying a dividend, it is important to check that the company has sufficient retained profits from which to pay the dividend. Where a class of share has more than one shareholder, dividends must be paid in proportion to shareholdings. However, if each shareholder has their own class of share (known as an alphabet share structure), dividends can be tailored to the shareholder’s circumstances.

Once the dividend allowance (and any remaining personal allowance) have been used up, dividends, which are treated as the top slice of income, are taxed at the dividend tax rate appropriate to the tax band in which they fall. For 2025/26, the dividend ordinary rate (applying to dividends falling in the basic rate band) is set at 8.75%, the dividend upper rate (applying to dividends falling in the higher rate band) is set at 33.75% and the dividend additional rate (applying to dividends falling in the additional rate band) is set at 39.35%. However, from 6 April 2026, the dividend ordinary rate and the dividend upper rate both increase by two percentage points to, respectively, 10.75% and 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

Where the property company has sufficient retained profits, consideration could be given to paying a dividend prior to 6 April 2026 to beat the tax rises. This will only be worthwhile if less tax is paid if the dividend is paid in 2025/26 rather than in 2026/27. If the policy is to take dividends to use up the basic rate band and dividends of this level have already been paid in 2025/26, there is no point paying a further dividend in 2025/26 which will be taxed at the dividend upper rate if that dividend would be taxed at the dividend ordinary rate if paid in 2026/27.

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Holiday lets and business rates

Asif Patel — Tue, 21 Jul 2026 19:29:20 GMT

The abolition of the furnished holiday lettings regime abolished day counting for tax purposes from 6 April 2025 onwards. However, where a property is let as a holiday let, there is still a need to count the days on which the property is available for letting and actually let to check that the property is within business rates rather than council tax. As many holiday lets will be eligible for small business rate relief, this is a definite bonus, as there will be nothing to pay.

Business rates, like council tax, are paid to help fund local services. Business rates rather than council tax are paid on properties that are used commercially, which includes holiday lets.

The business rates system depends on where the holiday let is located. In England, a holiday let will be within business rates if it is available for short-term letting for at least 140 days and actually let for at least 70 days in a 12-month period. When counting the days, no account is taken of nights when the property is used privately by family or friends free or at a discounted rate, nights where the property is unavailable as it is under repair or future bookings which have yet to happen. Short-term lets are lets of 28 days or less. Stays of more than 28 days are disregarded.

Where these tests are not met, council tax will be payable instead.

Valuation

Single properties and complexes of up to four properties are valued by bed space. Complexes with five or more properties are valued as a percentage of the fair maintainable trade.

New valuations apply from 1 April 2026.

Small business rate relief

Small business rate relief applies where the rateable value of the property is £15,000 or less. Properties with a rateable value of £12,000 or less pay no business rates. Where the rateable value is between £12,001 and £15,000, the rate of relief reduces gradually from 100% to nil.

Multiplier – retail, hospitality and leisure

Where small business rate relief is not available, the business rates that are payable are calculated using the relevant multiplier. From April 2026, a new lower multiplier is introduced for businesses in the retail, hospitality and leisure (RHL) sector. The lower multiplier replaces the relief previously available to this sector. The RHL multiplier is set at 43p where the rateable value is £51,000 or more and less than £500,000 and 38.2p if the rateable value is below £51,000.

Transitional reliefs

Following the 2026 revaluation, transitional relief is available to limit the amount by which business rates can increase as a result of the revaluation. In addition, supporting small business relief is available where the rateable value increases as a result of the 2026 revaluation and the business has lost some of its small business rate relief, rural rate relief, RHL relief or 2023 supporting small business relief.

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VAT traps for small businesses: Common compliance mistakes

Asif Patel — Sat, 18 Jul 2026 19:17:08 GMT

While the rules regarding VAT compliance may appear straightforward at first glance, there are several common pitfalls that can lead to problems which, if not rectified, can lead to penalties. Some of the more frequent VAT traps that small businesses face are detailed below:

Late registration

One of the more common ‘traps’ is failing to register for VAT on time. Registration is required once taxable turnover exceeds the VAT threshold (£90,000) within a rolling 12-month period, not just at the end of the financial year. Many small business owners misunderstand this rule and only review their turnover annually, which can result in late registration.

The consequences of late registration can be significant. To rectify the error, a business may be required to pay VAT on sales made after the date they should have registered, even if they did not charge customers VAT at the time. This effectively means absorbing the VAT cost themselves, which can severely impact profit margins and cash flow.

Penalties (which automatically expire after two years, provided the filer has not yet reached their threshold), will be calculated as a percentage of VAT that should have been paid (with the percentage depending on whether the failure was prompted or unprompted, and whether behaviour was non-deliberate, deliberate or deliberate and concealed). Interest charges will be levied on unpaid VAT from the date it should have been remitted, and there may be the potential loss of input tax recovery on purchases made before registration, all of which could add up to a considerable amount of money. Note that businesses can generally reclaim input tax on goods and services purchased before registration (subject to time limits: four years for goods still on hand; six months for services).

Exceeding the limit temporarily

In some cases, a business that temporarily exceeds the VAT registration 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.

To avoid late registration, businesses should regularly monitor their turnover (ideally on a monthly basis) and keep accurate records.

Incorrect zero-rating or partial exemption claims

Another frequent ‘trap’ involves misunderstanding as to which goods or services qualify for zero-rating or fall under the partial exemption rules. Zero-rated supplies are taxable at 0%, but they still count as taxable turnover and must be reported correctly and included in the 12-month registration calculation.

Businesses making both taxable and exempt supplies (partial exemption) must be careful in calculating how much input VAT they can reclaim. Undercharging VAT by applying reduced or zero rates to supplies that should be standard rated creates liability for the underpaid VAT plus potential penalties if HMRC determines the error resulted from carelessness or deliberate attempt to underpay. To manage this risk, business owners should ensure they fully understand the VAT treatment of their products and services and consider seeking professional advice when dealing with mixed supplies.

Reverse charge obligations

The reverse charge mechanism is another area where small businesses often make mistakes. This rule shifts the responsibility for accounting for VAT from the supplier to the customer in certain transactions, particularly in sectors such as construction or when dealing with overseas suppliers.

Under the domestic reverse charge, suppliers do not charge VAT; rather, the customer accounts for the VAT on their own return. Similarly, when purchasing services from overseas, businesses may need to account for VAT, even if no VAT is charged on the invoice. Failing to apply the reverse charge correctly can lead to incorrect invoicing and reporting errors.

Late submissions

Submitting VAT returns late or with inaccuracies is another common compliance problem. VAT returns are typically filed quarterly (although annual submissions are possible), and deadlines are strictly adhered to. Late submission penalties work on a points-based system where a penalty point is applied for each return submitted late. The penalty point threshold differs by filing frequency: annual filers reach the threshold at two points, quarterly filers at four points and monthly filers at five points. Once the applicable penalty point has been reached, a penalty of £200 is levied. A further £200 penalty is levied for each subsequent late submission.

Practical point

By being aware of these common VAT traps, businesses can take proactive steps to stay compliant. These include keeping accurate and up-to-date records, reconciling accounts regularly and reviewing VAT returns carefully before submission. Bank streaming used in conjunction with accounting software can be useful, and seeking professional support can also help ensure compliance.

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Charging interest where a director’s loan account is in credit

Asif Patel — Wed, 15 Jul 2026 19:14:10 GMT

A director’s loan account (DLA) is an accounting record that tracks funds owed by a company and its individual directors. Usually, a DLA will be in debit (i.e. the director has taken more money out of the company which has not been otherwise repaid in the form of salary, dividends or reimbursement of expenses). However, there may be occasions where the DLA is in credit (i.e. when the director has put more money into the company than they have taken out). This can arise through loans, unpaid dividends, undrawn remuneration or personally funded expenses.

The question is – can the director charge interest on the credit balance and, if so, what are the tax implications?

How much can be charged?

Interest can be charged but the rate should be commercially justifiable as charging an excessive rate could raise questions by HMRC as to whether the loan is used ‘wholly and exclusively’ for the purposes of the trade. Market rates fluctuate but a rate comparable to the rate the company would pay a bank for unsecured borrowing is generally considered reasonable (currently the average is 6.95% per annum but can vary between 6% and 15%).

Implications for the company

Interest paid on a DLA is usually treated as a non-trading loan relationship and provided the loan is used ‘wholly and exclusively’ for business purposes then the interest should be deductible for corporation tax purposes. For close companies, care is needed to ensure that the payments are not treated as distributions; however, where the loan is genuine and the interest rate represents a commercial rate of return, this should not be a cause of concern. In addition, for a close company to claim tax relief on the expense. interest must be paid within 12 months of the end of the accounting period in which it has accrued

A close company is a company which is under the control of:

· five or fewer participators, or

· any number of participators if those participators are directors.

A company may also be deemed ‘close’ if on winding up, five or fewer participators would be entitled to the majority of the assets.

Where interest is paid, the company will need to withhold income tax at the basic rate from the payment and submit a quarterly CT61 return, detailing the tax withheld and paid. The director receives the net amount and a certificate of tax deducted must be issued. Failure to undertake this process correctly can lead to penalties and interest.

Implications for the director

For the director personally, the interest received is taxable as savings income. If the director’s total savings income falls within their personal savings allowance (currently £1,000 for basic rate taxpayers and £500 for higher rate taxpayers – additional rate taxpayers are not eligible for the savings allowance), some or all of the interest may effectively be tax-free, though the withholding mechanism still applies. Depending on the director’s marginal rate, additional tax may be payable.

Company law practicalities

Any queries that may arise invariably do so under company law rather than tax law. The company must check its articles of association to confirm that the charging of interest is allowed. The Model Articles allow for interest to be paid on a director’s loan. The specific terms (including the interest rate to be charged) should be agreed in a properly documented loan agreement.

Practical point

Dividends can only be paid out of distributable profits, whereas interest can be paid regardless of profit levels, provided the company remains solvent. For some directors, charging interest may be a way to extract funds when profits are insufficient for dividends.

In small owner-managed companies, it is common for DLAs to fluctuate throughout the year. If interest is to be charged, the basis of calculation (e.g. on daily or monthly balances) should be clearly agreed and documented.

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Registering late for self-employment – The tax implications

Asif Patel — Tue, 14 Jul 2026 13:59:31 GMT

Having made the big decision to start a self-employed business, there will be countless decisions and administrative tasks to attend to. Informing HMRC of the new venture may not be high priority, particularly where income is uncertain. However, failure to do so and in time can lead to penalties, including possible backdated obligations.

When is registration required?

The key threshold is the ‘trading allowance’, currently £1,000 of gross trading income per tax year. There is usually no requirement to register immediately when trading starts. If by the end of the tax year it is found that registration is required, notifying HMRC by 5 October the following year avoids any issues. Missing the deadline puts you in late registration territory.

The government has announced that, from a future date (expected to be by 2029), individuals with trading income between £1,000 and £3,000 will generally no longer need to complete a full self-assessment tax return solely because of that trading income. Instead, they will be expected to report any tax due through a new simplified online reporting service.

Missing the deadline

Missing the 5 October deadline may not necessarily result in a penalty as HMRC will first consider whether any tax has been lost due to ‘failure to notify’.

If HMRC believes registration should have taken place, it may start a compliance process, request outstanding tax returns and potentially charge late filing penalties and interest on unpaid tax, or opening compliance checks and enquiries.

Late registration penalty

HMRC can charge a penalty, based on the tax that remained unpaid when the taxpayer finally comes forward (known as ‘potential lost revenue’).

Penalties can be:

up to 30% for a non-deliberate failure;
up to 70% for a deliberate failure; and
up to 100% for a deliberate and concealed failure.

No penalty will normally apply where there is a genuine reasonable excuse (e.g. illness or bereavement), the failure was not deliberate and HMRC was advised without unreasonable delay once the excuse has ended. Not knowing about the registration requirement does not qualify.

Voluntary disclosure

Voluntary disclosure is made via HMRC’s online digital disclosure service. After notification, HMRC will issue a unique disclosure reference number and a payment reference number. Disclosure must be within 90 days of HMRC acknowledging the notification and, importantly, payment of the tax must be made at the same time.

Backdating self-assessment

HMRC may require self-assessment returns for every year that should have been filed. Each late return carries automatic penalties – a £100 fine from day one, daily £10 charges from three months (up to £900), and further surcharges at six and 12 months plus separate penalties and interest on unpaid tax. Where several years of returns are required, these charges can accumulate quickly.

Making Tax Digital

The arrival of Making Tax Digital (MTD) for Income Tax Self-Assessment has significantly changed late registration in practice. Self-employed individuals with gross income above £50,000 must keep digital records and submit quarterly updates to HMRC using approved software. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028.

For a late registrant, the issue is no longer limited to missed annual returns. If turnover exceeded the relevant MTD threshold, HMRC may expect compliance with the digital regime from the date the obligation first arose.

Penalties for missing the quarterly update deadlines operate on a points-based system with one point per missed deadline, a £200 fine on reaching four points and a further £200 penalty for every subsequent missed submission. For 2026/27 only, HMRC will not issue penalty points for late quarterly updates.

Late VAT registration

Late registration issues are not limited to income tax. Where turnover has exceeded the VAT registration threshold (£90,000 in any rolling 12-month period or within the next 30 days), late VAT registration may add further penalties and interest, calculated at the Bank of England base rate plus 4%. HMRC can also require VAT to be accounted for on past sales, even where it was never charged to customers.

Practical point

The combination of late registration penalties, backdated self-assessment returns, MTD obligations and potential VAT exposure shows that inaction can be costly.

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Director loans: When borrowing from your company can be expensive

Asif Patel — Sun, 12 Jul 2026 19:28:30 GMT

Convention has it that in times of high interest rates, borrowing from your company is invariably more tax efficient than borrowing from other sources such as a bank. However, this may not always be the case. If the loan cannot be repaid within nine months and one day after the company’s accounting year end, the company will be liable for a tax charge equal to the dividend upper rate (35.75%). Without this charge, the director could borrow money from the company indefinitely without ever paying income tax or NIC on the amount withdrawn. In addition, where a beneficial loan exists, the director may face an income tax charge on the benefit, while the company pays Class 1A NIC. This applies regardless of whether the loan is repaid.

Company charge

The tax charge is technically temporary as, should the company be liable, the payment will be refunded when the loan is repaid (or written off.) The refund is usually offset against the corporation tax bill due, nine months and one day after the accounting year end in which the loan is repaid, with no interest received. If no corporation tax is due and a cash refund required, HMRC will not refund until after the same nine-month period has passed. This delay could create serious cash flow problems for the company.

Director’s charge

A separate set of rules applies entirely independently of the company’s charge, designed to catch the benefit to the director of having an interest-free (or below-market-rate) loan. If the loan balance exceeds £10,000 at any point during the tax year (even for one day), the director is treated as receiving a taxable benefit in kind equal to the notional interest on the loan, calculated using HMRC’s official rate (currently 3.75%). Income tax is levied at the director’s marginal tax rate on the difference between any interest charged and the ‘official rate’, such loans termed ‘beneficial loans’. The company must also pay Class 1A NIC at 15% on the same amount.

The benefit in kind and employer’s NIC can be avoided by levying interest on the loan at the official rate (or above), even if rolled up in the loan, rather than immediately paid. If the ‘official rate’ is charged, borrowing from the company is cheaper than a bank loan or credit card.

Planning to clear the loan

Not repaying the loan on time can produce significant tax charges on both the company and the individual. Therefore, unless repayment is made on the sale or winding-up of the company, settlement will have to come from personal savings, by taking taxable income from the company (e.g. dividend) or by further external borrowing. In practice, paying a bonus or dividend to clear the loan is the cleanest route, but this triggers income tax (on a bonus) or dividend tax, so the ‘free loan’ turns out not to have been free at all.

For a basic taxpayer, it would be cheaper to convert the loan into a dividend taxed at 10.75% rather than have the company pay the 35.75% charge. Conversely, where the director is an additional rate taxpayer, it may be cheaper for the company to suffer the charge, as this is ultimately repayable when the loan is repaid or written off. For a higher rate taxpayer there would be no difference. However, even when tax does have to be paid, the shareholder can still end up with more initial funds through a loan than through additional salary or dividends, having benefited from interest-free or low-interest borrowing in the meantime.

Some directors repay using borrowed money by taking out a personal loan or 0% credit card, repaying over time. This can work, but needs careful planning, as personal loans carry interest costs and 0% credit card deals have time limits.

Practical point

Borrowing from the company only makes sense for basic rate taxpayers who require short-term loans e.g. where a dividend will be declared shortly after year end and the loan cleared promptly. Treated as a long-term financing tool, it is almost never tax efficient. However, the s455 charge is only temporary and any benefit in kind may be less than the cost of external borrowing.

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Temporary reduction in VAT on children’s meals and certain attractions

Asif Patel — Fri, 10 Jul 2026 22:29:08 GMT

On 21 May 2026, the Chancellor announced a temporary reduction in the rate of VAT applied to children’s meals and admission to certain attractions. It does not apply to sporting activities. The measure is intended to help families over the summer holiday period.

Children’s meals and tickets to attractions currently are liable for VAT at the standard rate of 20%. However, from 25 June 2026 to 1 September 2026 inclusive, a temporary reduced rate of 5% will apply to qualifying children’s meals and tickets to attractions. The rate will revert to 20% from 2 September 2026.

Qualifying supplies

The temporary reduced rate will apply to children’s meals, children’s cinema, theatre, show and concert tickets and admission to certain attractions.

Children’s meals

For a meal to be a ‘children’s meal’ both of the following must apply:

· the meal is held out for sale only as a meal for children; and

· the meal is supplied as part of catering by a restaurant, café or similar establishment for consumption on the premises.

It is important to note that the marketing, presentation and price determine whether a meal is a children’s meal rather than who consumes it. Consequently, the reduced rate will not apply to an adult meal consumed by a child but will apply if an adult purchases a children’s meal. It should also be noted that the temporary reduced rate will not apply to meals marketed as smaller portions, lower-calorie options, discounted versions of adult meals and shared meals intended for both adults and children. Where the same meal appears on both the adult menu and the children’s menu, the children’s version should be smaller and cheaper. However, portion size alone will not determine whether a meal is a children’s meal.

If the children’s meal is supplied as a package and includes more than one course and a (non-alcoholic) drink, the reduced rate applies to the whole package. However, separate add-ons, such as sides, retain their usual VAT treatment. Meals that include an alcoholic drink are not regarded as children’s meals.

The reduced rate does not apply to takeaway meals.

Meals that are currently exempt, such as those provided alongside a supply of education, remain exempt.

The measure will reduce the cost of a children’s meal which normally costs £12 to £10.50.

Theatre and cinema tickets

The temporary reduction in VAT will apply to children’s cinema and theatre tickets. These are tickets which are marketed and sold only as a right of admission for a child. A family ticket which provides admission for one or more children will also benefit from the reduced rate. However, group tickets which are not family tickets do not qualify. Adult tickets remain standard rated.

The measure will reduce the cost of a £30 children’s theatre ticket to £26.25.

Attractions

The temporary reduced rate will also apply to admission tickets to qualifying attractions that are suitable for families. Unlike cinema and theatre tickets, here the reduced rate applies to all admissions, regardless of the customer’s age. Qualifying attractions are amusement parks and fairs (including water and theme parks but not pay-per-ride attractions), circuses, adventure parks, museums and other cultural facilities (such as nature reserves, planetariums, heritage sites and botanical gardens), zoos, aquariums, wildlife parks and farm visitor attractions, soft play centres, indoor bounce parks and indoor play facilities and observation attractions, including viewing platforms, towers and observation wheels.

The reduced rate applies only to admissions and only during the period from 25 June 2026 to 1 September 2026.

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Working from home – The new/old tax rules

Asif Patel — Thu, 09 Jul 2026 19:11:16 GMT

For many years, employees required to work from home could claim tax relief for additional household expenses incurred personally, even where not reimbursed by their employer. This relief recognised that certain expenses (e.g. increased heating, electricity or business-related telephone use) arose directly from the performance of employment duties. However, the relief was tightly defined and was not available where homeworking was undertaken by personal choice or for convenience rather than necessity.

During the pandemic, for the tax years 2020/21 and 2021/22 only, HMRC temporarily extended eligibility to reflect the exceptional circumstances in which large numbers of employees were required to work from home. Under this relaxation, employees could claim relief where they worked from home due to government guidance or workplace restrictions, even if not required under their employment contracts. This significantly broadened access to the relief and led to a substantial increase in claims.

When these temporary measures ended, the stricter pre-pandemic rules technically resumed. However, in practice, many employees continued to submit claims under the more relaxed pandemic rules. Subsequent compliance reviews by HMRC indicated that more than half of these claims failed to meet the original statutory criteria. As a result, HMRC decided not only to withdraw the pandemic concession but also remove entirely the ability for employees to claim tax relief directly for additional household expenses where those costs are not reimbursed by their employer.

Changes effective from 6 April 2026

From 6 April 2026, employees cannot claim tax relief directly from HMRC for unreimbursed additional household costs, regardless of whether homeworking is voluntary or a requirement of employment. Even where employment contracts mandate homeworking, or where no alternative office accommodation is available, employees cannot claim relief independently. Any tax-efficient support must be provided through employer arrangements.

Employer-provided support

Although the removal of employee claims represents a significant change, there are other tax-efficient mechanisms employers can use to support homeworking staff.

· Flat-rate homeworking allowance

Employers may pay a flat-rate allowance of £6 per week (£26 per month) free of income tax and National Insurance contributions without requiring employees to evidence their actual costs. Two conditions must be satisfied:

1. there must be an agreement permitting the employee to work from home; and
2. the employee must do so on a regular basis such that there is a pattern of home working (e.g., one day a week).

In practice, emails notifying employees of their requirement to work from home should be sufficient to confirm a ‘homeworking agreement’.

· Provision of goods and services

Employers may provide equipment and services necessary for homeworking, such as computers, office furniture or other work-related items. In contrast to the flat-rate allowance, there is no requirement for the employee to work from home regularly or for a formal agreement to be in place. The tax exemption applies provided any private use of the equipment is not significant, a condition that HMRC generally interprets flexibly. There is no prescribed financial limit, but the employee must have a genuine business need for the items. The employer must either provide the equipment directly (retaining ownership) or, from 6 April 2026, reimburse the employee where the employee has incurred the expenditure on the employer’s behalf.

· Reimbursement of actual costs

Employers may reimburse employees’ actual additional household expenses, including increased utility costs or business-related telephone charges, free of tax and National Insurance contributions, provided the expenses are necessarily incurred in the performance of employment duties. Any excess will be treated as taxable income. Usually, HMRC requires a high level of proof that payments are no more than the employee’s additional household expenses.

· Broadband

Broadband costs may be reimbursed on a tax-free basis where no prior broadband connection existed, the employee is required to work from home and the service is used primarily for business purposes. Where these conditions are not met, reimbursement may give rise to a taxable benefit in kind.

Practical point

The key practical implication of these changes is that support for homeworking expenses must now be delivered exclusively through employer arrangements. Employers should review their existing policies, employment contracts and staff handbooks to ensure compliance.

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Can a director become liable for unpaid corporation tax?

Asif Patel — Mon, 06 Jul 2026 19:09:06 GMT

Directors of limited companies are generally not personally liable for unpaid corporation tax as limited liability usually protects them. A company is a separate legal entity and limited liability is one of its core features.

However, in some circumstances, HMRC may pursue directors personally. The risk increases where non-payment of corporation tax is due to deliberate behaviour, negligence or fraud. If directors pay themselves rather than settling their company tax bills then HMRC may view this as evidence of misconduct. Similarly, if the business pays connected creditors such as family or friends but does not pay its corporation tax then the directors could face personal claims. HMRC is more likely to pursue directors for payment under a liquidation where HMRC is a preferential creditor.

Fraudulent and wrongful trading

Under insolvency law, directors can be personally liable if they engage in fraudulent trading or wrongful trading.

· Fraudulent trading occurs where a business operates with intent to defraud creditors or for any fraudulent purpose. If proven, the court can order directors to contribute to the company’s assets personally.
· Wrongful trading has a lower threshold applying if directors continued to trade at a time when they knew, or ought reasonably to have known, that there was no reasonable chance of avoiding insolvent liquidation.

If corporation tax increases during the period where fraudulent or wrongful trading is proved, a liquidator may seek a court order requiring directors to contribute personally. Although this action would be brought by a liquidator rather than HMRC directly, unpaid corporation tax often forms a substantial part of any claim.

Unlawful dividends

Shareholders are generally protected by limited liability. However, if dividends are paid unlawfully, shareholders and directors who knew or had reasonable grounds to believe that the distribution was unlawful may be required to repay.

Under the Companies Act 2006, dividends may only be paid out of distributable profits. These are defined as accumulated realised profits less accumulated realised losses. Consequently, a dividend may be paid in a loss-making year provided sufficient retained profits are brought forward. Alternatively, if there is a profit for the year but past accumulated losses exceed total realised profits then a dividend cannot be paid.

In addition to the substantive requirement for distributable reserves, proper corporate procedures must be followed. If a director authorises a dividend when there are insufficient reserves, and knew or had reasonable grounds to believe the payment to be unlawful, then the dividend may be repayable. This can happen even if the director was unaware at the time that the accounts did not support the payment.

A liquidator may seek recovery from shareholders should it be found that a dividend was paid but corporation tax was unpaid and the payment contributed to the company’s insolvency. In owner-managed companies, where directors and shareholders are often the same individuals, the exposure can be significant.

Capital distributions following asset disposals

Further risk may arise where capital distributions are made to directors following asset sales. A capital distribution is defined as a distribution in money or money’s worth that is not treated as income in the hands of the shareholder, either because it falls outside the income tax definition of a distribution or because it is paid to another corporate shareholder.

Where a company disposes of assets and realises chargeable gains, corporation tax may arise on those gains. If the company then makes a capital distribution to a shareholder and fails to pay the associated corporation tax within six months of the due date, HMRC has statutory powers to pursue that shareholder. An assessment may be raised on the recipient within two years of the corporation tax due date.

Practical point

Trading whilst insolvent, paying connected parties, paying unlawful dividends or making distributions without paying the corporation tax due can all lead to personal claims on the directors. Directors should prioritise paying corporation tax, pay dividends only from distributable reserves and check that the company is solvent before paying dividends.

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Making quarterly returns for MTD for ITSA

Asif Patel — Fri, 03 Jul 2026 19:04:33 GMT

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is now a reality for individuals who had combined trading and property income of at least £50,000 in 2024/25. They will now need to keep their records digitally and file their first quarterly return by 7 August 2026.

The quarterly updates are sent to HMRC digitally using software that is compatible with MTD for ITSA. Quarterly updates must be submitted for each source of self-employment income and each source of property income.

The quarterly updates will contain:

· the digital records for self-employment and property income and expenses for the previous three months; and

· the digital records which have already been created since 6 April 2026 and any corrections to those records.

After sending each update, the individual will be able to see an estimate of their tax bill.

Details of the categories under which the information provided in the quarterly update should be recorded can be found online at: www.gov.uk/government/publications/update-notice-for-making-tax-digital-for-income-tax/making-tax-digital-for-income-tax-update-notice.

If the individual has other income, such as income from employment or a pension or investment income, they do not need to report this in the quarterly update. Instead, other income is reported in the final declaration. This is the point at which reliefs are claimed too.

Update periods

Individuals have a choice whether to prepare quarterly updates using the standard periods, which correspond with tax months, or the calendar update periods.

The following table shows the periods and quarterly update deadlines

Taxpayers can choose to send updates more frequently if they wish, such as monthly.

Missed deadlines

Under the penalty regime that applies under MTD, where a deadline is missed, a penalty point is issued. Once the penalties reach the penalty threshold, which for quarterly return is four points, a £200 penalty is levied.

However, HMRC have stated that for taxpayers who are mandated for MTD for ITSA from 6 April 2026, they will not issue penalty points for late quarterly updates for the first 12 months.

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July payment on account and what to do if you need to reduce it

Asif Patel — Thu, 02 Jul 2026 22:07:35 GMT

Taxpayers within Self-Assessment must make payments on account towards their next tax and Class 4 National Insurance bill if the tax that they owed for the previous tax year was £1,000 or more, unless they paid more than 80% of the tax that they owed for that year outside Self-Assessment, for example, under PAYE. Each payment on account is 50% of the tax and Class 4 National Insurance liability for the previous tax year. The payments must be made by 31 January in the tax year and 31 July after the tax year. If more tax and Class 4 National Insurance is due for the year, the balance must be paid by 31 January after the end of the tax year.

Example

Tom is a self-employed gardener. In 2024/25 he had profits from self-employment of £45,000. He paid tax of £6,486 and Class 4 National Insurance of £1,945.80 – a total bill of £8,431.80.

As his total tax and Class 4 National Insurance bill is more than £1,000, he must make payments on account towards his 2025/26 bill. Each payment on account is £4,215.90 (50% of £8,431.80).

31 July 2026 deadline

The second payment on account for 2025/26 is due by 31 July 2026.

If payment is not made on time or the full amount is not paid by this date, interest will be charged from the due date of 31 July 2026 to the date that the payment is made in full.

Review the payments

As the July payment on account is made after the end of the tax year to which it relates, the profit for that tax year may be known. Where this is the case, the payment on account should be compared to the actual payments which will be due for the year. If taxable income has fallen, for example, because profits are less in 2025/26 than in 2024/25, the payments on account can be reduced.

Example

The facts are as in the example above. In June 2026, Tom does his accounts for 2025/26. During that year, he took some time off to care for his elderly mother. As a result, his profits have fallen and for 2025/26 are £36,000. His tax bill for 2025/26 is £4,686 and his Class 4 National Insurance bill is £1,405.80 – a total of £6,091.80.

If Tom makes two payments on account of £4,215.90, he will overpay by £2,240 Consequently, he reduces his payments on account.

Reducing payments on account

Where a taxpayer knows that their bill will be lower this year than last year, they can ask HMRC to reduce their payments on account. The taxpayer can do this online by signing into their personal tax account, selecting the option to view their Self-Assessment return and selecting the ‘reduce payments on account’ option. An application to reduce payments on account can also be made by post on form SA303.

Example

The facts are as in the above example. Tom opts to reduce each payment on account to £3,045.90 (50% of his 2025/26 liability). He paid £4,215.90 on 31 January 2026. He must therefore pay £1,875.90 by 31 July 2026. The payments on account will match his 2025/26 liability so there will be no balancing payment to make by 31 January 2027 (although the first payment on account for 2026/27 of £3,045.90 will be due by that date).

It is important to note that if the payments on account are reduced by too much, interest will be charged on the shortfall.

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Associated companies

Asif Patel — Tue, 30 Jun 2026 19:46:04 GMT

Over time, companies may accumulate substantial cash reserves. Whilst funds are commonly extracted through salary, dividends or pension contributions, another possibility is to incorporate a second company and transfer funds using an intercompany loan.

How does it work?

The first company lends excess cash to the second company, usually for valid business purposes such as investment, property acquisition or a new business venture. Importantly, the loan must comply with the loan relationship and associated company rules.

Loan relationship rules

A company is party to a loan relationship where:

it is a creditor or debtor in respect of a money debt; and
the debt arises from a transaction for the lending of money.

As a result, most intercompany loans fall within the loan relationship regime.

Where the borrowing company pays interest:

Lender company – the interest received is taxable as a loan relationship credit.
Borrower company – the interest paid is generally deductible as a loan relationship debit, subject to the usual corporation tax restrictions.

An interest-free loan can still qualify as a loan relationship and many UK intercompany loans are structured on this basis.

Problems often arise where the borrower cannot repay the loan and the lender writes it off. In many cases where this happens, HMRC denies relief for the lender because the companies are connected.

What is an associated company?

Companies are associated where one company controls another, or where the same person or persons control both companies.

‘Control’ includes the ability to acquire more than 50% of:

ordinary share capital;
voting rights;
distributable profits; or
assets on a winding-up.

When determining control, the rights and interests of associates may also be attributed to an individual. Associates include spouses or civil partners, parents, grandparents, children, grandchildren, siblings, members of a business partnership in which the taxpayer is also a member, and in some cases trustees and settlors.

However, when HMRC attributes rights held by associates, the companies must usually also have ‘substantial commercial interdependence’. HMRC considers three main factors:

Financial interdependence – e.g., intercompany loans or guarantees.
Economic interdependence – where one company supports or depends upon the activities of another.
Organisational interdependence – such as shared premises, equipment, staff or management.

Direct ownership by shareholders is always taken into account regardless of commercial interdependence.

Dormant companies are generally ignored for associated company purposes. Certain passive holding companies may also be excluded where their activities are limited to holding shares and receiving dividends.

Importantly, a company only needs to be associated for one day during an accounting period to count as an associate for that period.

Tax implications

The associated company rules can significantly affect corporation tax liabilities.

Companies with profits up to the small profits threshold pay corporation tax at 19%, while companies above the upper threshold pay tax at 25%, with marginal relief applying between the two limits. This impact of associated companies is that these profit thresholds are divided equally by the number of associated companies.

For example, where there are two associated companies, the standard upper limit of £250,000 is reduced to £125,000 for each company. As a result, companies can reach the 25% corporation tax rate much sooner so both companies are taxed at the same tax rate.

Corporation tax payment deadlines

Associated companies also affect corporation tax payment deadlines.

A company generally enters the quarterly instalment payment regime once it is regarded as ‘large’, (i.e., where taxable profits exceed £1.5 million). This threshold is divided by the number of associated companies at the end of the previous accounting period.

Consequently, companies may become ‘large companies’ and have to pay corporation tax by instalments within the accounting period rather than the usual nine months and one day after the year end, thus creating potential cash flow pressure.

However, companies are protected from the instalment regime where their corporation tax liability is less than £10,000.

Practical point

Intercompany loans should always be properly documented, especially between connected companies. With reference to associated companies, it is important to regularly review company structures and control arrangements.

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Alphabet shares – A way to reduce tax

Asif Patel — Thu, 25 Jun 2026 09:42:47 GMT

When a company pays a dividend, all shareholders holding the same class of shares must receive dividends in proportion to their shareholdings. To pay dividends at different rates, a company must either issue different classes of shares with distinct dividend rights or vary the proportions held by shareholders. Alphabet shares are commonly used to provide such flexibility.

What are alphabet shares?

Alphabet shares are different classes of shares identified by letters, such as ‘A’ ordinary shares and ‘B’ ordinary shares. They allow dividends to be paid to one class of shareholder without requiring equal dividends to all shareholders. This can be particularly useful where shareholders are taxed at different rates, e.g., where one shareholder is a higher-rate taxpayer and another is a basic-rate taxpayer or non-taxpayer.

In addition to differing dividend rights, alphabet shares may allow different voting rights or other restrictions, such as redeemable or non-redeemable rights. However, where shares are intended to qualify for the spouse exemption under the settlements legislation, care should be taken to ensure the shares carry full ordinary share rights and are not substantially restricted. Otherwise, HMRC may argue that the recipient has not acquired true ownership but only a right to receive income and tax dividends on the original shareholder instead. Therefore, shareholders should retain genuine beneficial ownership of their shares, including rights to capital, voting and future growth, rather than holding shares solely to receive dividends.

‘Settlements’ legislation

The settlements legislation is designed to prevent income being diverted from one person to another for tax advantages while the original owner retains effective control or benefit. Dividends paid on certain classes of shares must represent a genuine return on investment rather than effectively being remuneration for services taxed as employment income under PAYE and NIC.

HMRC’s stance

HMRC can now more easily identify who owns shares in which companies through enhanced digital reporting, data matching and Companies House transparency reforms.

In addition, as from 6 April 2025, any person who was a director of a close company during the relevant tax year must include the name and registered number of the close company, the dividend amount received by the taxpayer and the percentage of the share capital owned in their personal self-assessment tax return. The intention of this additional declaration is to enable HMRC to identify cases where a director’s dividend income appears inconsistent with their shareholding as declared to Companies House or where income-shifting arrangements may exist and merit further review.

Family investment companies (FIC)

Alternative structures such as a FIC may be worth considering. A FIC is a private company set up to hold, invest and distribute family wealth.

The typical structure involves parents as both directors and shareholders, retaining voting control through a single share class. Children or grandchildren are allocated different share classes with limited or no voting rights but entitlement to dividends and capital growth. Care must be taken where parents provide funds for the children’s share subscriptions or where the dividend policy is structured to benefit the children at the expense of the parents.

Suggested action

· Directors should be wary of creating alphabet shares immediately before declaring a dividend or after substantial reserves have accumulated, as HMRC may view this as evidence of income shifting.

· Generally, dividends should be paid into an account beneficially owned by the shareholder concerned. Genuine joint accounts are usually acceptable.

· If a future sale of the company is anticipated, shareholders should consider the qualifying conditions for Business Asset Disposal Relief. Any restrictions attached to alphabet shares may affect eligibility.

Practical point

Failure to maintain proper documentation can increase the likelihood of an HMRC challenge. Directors should ensure the articles of association permit the creation of alphabet shares, board minutes and shareholder agreements are in place, and all dividend declarations are properly documented and implemented in accordance with the company’s articles.

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Do ‘resident cruisers’ pay income tax?

Asif Patel — Sat, 20 Jun 2026 10:49:26 GMT

An increasing number of people live on cruise ships. They sell or rent out their main residence and spend their days living on the waves. The benefits are various – no meals to get yourself, entertainment every night, different ports to discover, even your washing done. You can even own a ‘villa at sea’, allowing residency aboard a ship for the duration of its life (or a minimum of 15 years). But what are the tax implications, if any? Unfortunately, UK tax liability is primarily determined by tax residence, not lifestyle, therefore a person may live on a ship and still be UK tax resident.

The UK tax system

Once residency is established, UK residents are taxed on their worldwide income/gains whereas non-UK residents are taxed only on UK-sourced income (rents, dividends, bank interest) and UK gains (property disposals); foreign income/gains are untaxed in the UK for non-UK residents.

Statutory residence test (SRT)

Determination of UK tax residence can be complicated and someone ‘living’ on a cruise ship must still assess their residence using the same rules as anyone else. Living on a cruise ship can support a non-UK resident tax position, but only if the steps comprising the SRT are not satisfied.

· The first step determines if an individual will be considered automatically resident.
· The second step determines if an individual will be considered automatically non-resident. There are three automatic overseas tests under this step and if any one of these tests is met the individual will be deemed non-UK resident for that year.
· The third step considers whether the individual meets either the second or third automatic UK tests. If any one of these is met the individual will be deemed UK resident for the year.
· The fourth and final step determines if an individual will be considered resident or non-resident under the ‘sufficient ties’ test.

First step

Under this test an individual will be automatically UK tax resident if:

they spend 183 days or more in the UK in a tax year; or
there is at least one period of 91 consecutive days (at least 30 of which fall in the relevant tax year) when their only home is in the UK and they spend a sufficient amount of time in that home in any one year.

Second and third steps

If the answer to the above is ‘no’, that is not the end of the process. The next step is to consider the automatic overseas tests which determine UK residence if less than 16 days were spent in the UK, or the individual was UK resident in one or more of any of the previous three tax years, or more than 46 days were spent in the UK (and the individual was non-resident in the previous three tax years) .

Fourth step

If the above tests fail to give a clear answer, the ‘sufficient ties test’ applies, combining days spent in the UK with ties (connections). Ties include the following:

· Family tie: spouse, civil partner, cohabiting partner or minor child (under 18) is UK tax resident.
· Accommodation tie: UK accommodation (owned, rented or belonging to a friend) available for more than 91 consecutive days and more than one night was spent there. The test is satisfied in the case of a close relative’s home if more than 16 nights are spent there during a tax year. Hotels/Airbnb usually qualify if long-term.
· Work tie: more than 40 days working more than three hours in the UK during the tax year.
· 90-day tie: spending more than 90 midnights in the UK in either of the previous two tax years (not combined).
· Country tie: UK is the country in which the individual spends most days during the tax year.

Therefore, to be non-UK resident, the individual on the cruise ship must:

limit UK days according to the SRT day-count; and
reduce UK ties, such as:
- a UK home;
- family in the UK;
- substantive UK work; and
- significant UK presence in prior years

Merely selling a house and living on a ship is not sufficient to gain non-UK residency if other UK ties remain.

Practical point

Note that time spent on a cruise ship does not count as time outside the UK if the ship is in UK territorial waters at midnight on any counted day. Therefore, a cruise away from the UK should be the preferred travel option to avoid tax complications (e.g. a cruise of the Southern Hemisphere starting in the USA and ending in the USA).

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Correcting errors in VAT returns

Asif Patel — Wed, 17 Jun 2026 10:33:28 GMT

It used to be possible to report errors in a VAT return to HMRC on form VAT652. This is no longer the case; form VAT652 was withdrawn from 5 September 2025. This means that now, where an error has been made in a VAT return, the error must be corrected in one of the following ways:

· updating the next VAT return;

· making the correction online; or

· writing to HMRC to notify them of the correction.

Updating the next VAT return

An error can be corrected by making an adjustment in the next VAT return if the value of the error is £10,000 or less or if the error is between £10,000 and £50,000 and does not exceed 1% of the box 6 figure (net outputs) in the VAT return for the period in which the error was discovered.

A correction can only be made by updating the next VAT return if the error was made carelessly.

The net value of the error is the difference between the additional amount owed to HMRC as a result of the error and the additional refund due from HMRC as a result of the error.

Correcting the error online

If the value of the error is more than £50,000, is between £10,000 and £50,000 and more than 1% of the box 6 figure in the VAT return for the period in which the error was discovered or was made deliberately, it must be notified to HMRC rather than being corrected in the next VAT return. The default route for doing this is to make the correction online. The trader will need to sign into their Government Gateway account.

When reporting the error online, the following information must be provided:

· how each error arose;
· the VAT accounting period in which it occurred;
· whether it was an input tax error or an output tax error;
· the VAT underdeclared or overdeclared in each VAT period;
· how the VAT over or under declaration was calculated;
· whether any of the errors resulted in the payment of an amount to HMRC that was not due; and
· the total amount to be adjusted.

Refund claims can only be accepted where all the above information is provided.

Notifying in writing

If the trader is unable to use the online service, they will need to notify HMRC in writing of the errors if they are of a type that cannot be corrected in the next VAT return. The letter must include the trader’s VAT registration number and the information listed above. It should be sent by post to:

BT VAT
HMRC
BX9 1WR

Time limit

Errors should be corrected as soon as possible, but time limits do apply.

The time limit for correcting errors in a VAT return is four years from the end of the prescribed period in which the error occurred where the error related to output tax or over-claimed input tax, and four years from the due date of the return for the prescribed accounting period where the error related to under-claimed input tax.

The four-year time limit does not apply to deliberate errors.

Share Accounting Journal

Tax relief for unpaid rent

Asif Patel — Sun, 14 Jun 2026 10:31:37 GMT

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.

VAT registration waiver

Asif Patel — Thu, 11 Jun 2026 10:27:52 GMT

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.

Must the cash basis be used?

Asif Patel — Mon, 08 Jun 2026 10:25:59 GMT

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.