Enterprise Investment Scheme (EIS)

Enterprise Investment Scheme (EIS)

What is EIS?

EIS uses tax reliefs to incentivise private investors who recognise that significant returns are achievable if they are willing to risk their funds by investing in early-stage businesses. Early-stage businesses often struggle to raise equity finance, so EIS has established itself as a trusted and crucial source of equity funding. The schemes, therefore, play an important role in facilitating the smooth flow of risk equity capital from private individuals to early-stage businesses.

The Enterprise Investment Scheme (“EIS”) is a Government scheme that provides a range of tax reliefs for investors who subscribe to qualifying shares in qualifying companies.

How the scheme works

EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.

Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale.

You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules at least 3 years after the investment is made.

Are you eligible for EIS?

both the company and investor must fulfil certain additional conditions to benefit from any of the tax reliefs under EIS. EIS is one of the more complex tax benefit options available. Before you think about applying, check that you meet the requirements, either as a company looking to attract an investor under the EIS scheme or as an investor hoping to profit from tax benefits.

Investor

If you are an investor, you must satisfy the following requirements to qualify for EIS:

  • Your interest in the company must be no more than 30%
  • You must not be an employee, partner or ‘paid director’ of the company
  • No partner or associate of yours may have interests in the company (including your spouse, relatives, or previous business contacts)
  • You must not have any form of preferential shares
  • You must not have any form of controlling interest in the company
  • You must not be using the scheme as a form of tax avoidance.

There is one exemption to the rule disqualifying connected persons employed in the company. This exemption aims to encourage investment from business angels in the scheme, despite their roles as directors of the company. Business angels may still qualify for tax relief despite being paid for their services, provided that the angel director was not connected to the company at the time of issue of the shares. The rules for business angels are strict, however, so its advisable to seek advice from HMRC.

Company

For an investor to be able to claim EIS, the company they are investing in must meet the EIS eligibility requirements and maintain their EIS eligible status for the duration of the shareholding. To be considered an EIS eligible company, the following conditions must be met:

  • the company must have a permanent establishment in the UK
  • the company must not be listed on a recognised stock exchange, or plan to be listed, at the time of issuing shares
  • the company must not have control over another company, except any qualifying subsidiaries
  • no other company may have control of the qualifying company or have 50% or more of its shares
  • the company does not expect to close
  • the qualifying company and any of its subsidiaries must not have gross assets which exceed more than £15 million in value before any shares are issued, and not more than £16 million immediately after
  • the company must have less than 250 full-time employees at the date of issue of the shares.

In addition to these conditions, the investment must be used for a qualifying trade. Most business activities are acceptable, but some of the excluded trades are listed below. Should these excluded trades represent over 20% of the business’ daily activities, this would render the company ineligible for the scheme. Examples of excluded activities are:

  • Coal or steel production
  • Farming or market gardening
  • Forestry
  • Legal or financial services, including banking and insurance
  • Property development or leasing
  • Production of fuel
  • Energy generation
  • Exporting electricity
  • Operating hotels or care homes
  • Providing services to a non-qualifying business
  • Dealing in futures or securities.

HMRC will evaluate your daily business activities to determine whether your company fulfils the qualifying trade requirement. If your company deals in any of the excluded trades above, you should consider seeking advice from HMRC on your eligibility for the scheme. You can do this by seeking ‘advance assurance’.

Enterprise Investment Scheme

  • In 2020 to 2021, 3,755 companies raised a total of £1,658 million of funds under the EIS scheme. Funding has decreased by 12% from 2019 to 2020 when 4,165 companies raised £1,890 million.
  • As the Covid-19 pandemic impacted the UK economy, EIS investment across the first 3 quarters of 2020 to 2021 remained below the level seen across the same quarters of 2019 to 2020. However, in the last quarter of 2020 to 2021 EIS investment rebounded above the last quarter of 2019 to 2020.
  • Around £358 million of investment was raised by 1,370 new EIS companies in 2020 to 2021.
  • In 2020 to 2021, companies from the Information and Communication sector accounted for £571 million of investment (34% of all EIS investments).
  • Companies registered in London and the Southeast accounted for the largest proportion of investment, raising £1,078 million (65% of all EIS investment) in 2020 to 2021.

If you need assistance in applying EIS, please contact us at 02082271700 or info@wimaccountants.com.

Furnished Holiday Lettings

Furnished Holiday Lettings

What are furnished holiday lettings?

A Furnished Holiday Let is a specific category of rental property classification in the UK, Ireland, and other European countries. If your property is a Furnished Holiday Let, it allows you certain tax advantages and benefits as an owner. But how does your holiday home receive this status? To be given a Furnished Holiday Let status, you will need to meet certain conditions.

What are the advantages of a Furnished Holiday Let?

Holiday Let Tax Deductible Expenses

Capital allowances can be claimed on your FHL property. This means the cost of kitting out your cottage to a luxury standard (and, in return, increasing your potential rental income) can be deducted from your pre-tax profits. This isn’t an option available for long-term rental properties.

Make tax-advantaged pension contributions.

Income generated from an FHL property is classed as ‘relevant earnings’, which means you can make tax-advantaged pension contributions.

When you sell your property

If you should come to sell your FHL property, you can claim certain Capital Gains Tax (CGT) reliefs. These are unavailable to long-term rental properties and include:

  • Entrepreneur’s Relief
  • Business Asset Rollover Relief
  • Gift Hold-over Relief

Split the profits between your husband/wife

The 50/50 rule does not apply to income arising from a UK property business that consists of, or so far as it includes, the commercial letting of furnished holiday accommodation.

  1. If a spouse or civil partner carries on the activity alone: that spouse or civil partner is taxable on the income.
  2. If a spouse or civil partner carries on the activity with others: the income is split for tax purposes in the way the parties have agreed to split the profits amongst themselves.

Council Tax for Holiday Lets

Self-catering accommodation in England, which is available for short-term lettings for more than 140 days in any given year, is subject to Business Rates property tax.

Since all FHL properties must be available to let for a minimum of 210 days, they fall into this category. However, this isn’t necessarily bad news, as you can claim Small Business Rate Relief, which can be up 100% depending on what area you are in. in this case, you would not need to pay council tax.

If you have self-catering accommodation in Wales, you are eligible to claim Small Business Rates relief if the property is available for letting for up to 140 days per year and is let out for 70 days of the year.

If you own self-catering accommodation in Scotland, you may also need to pay business rates. You are advised to contact your local authorities to confirm your eligibility for Business Rates relief, as this is handled differently than in England.

What are the disadvantages of a Furnished Holiday Let?

VAT

As part of the 2021 budget announcement from Rishi Sunak, it was announced that a new rate of VAT at 12.5% will run from October 1st, 2021, until March 31st 2022, for the tourism and hospitality sector.

If your FHL property portfolio turnover exceeds the VAT threshold, you must become VAT registered. If you own an individual FHL property, to exceed the current VAT threshold, you will need to let your property for over £1,635pw for the entire year (52 back-to-back bookings), equating to £85,000 in total per year. Be sure to do the maths, but you’ll most likely need multiple FHL properties before VAT becomes something you need to consider.

If your income generated from guests exceeds £85,000 per year, you must register for VAT and pay the standard rates. This requires you to pay 20% (or the temporarily reduced VAT rates) above the fee you charge for guests to stay.

Losses cannot be offset against other taxable income

If you make a loss in your UK Furnished Holiday Letting business, it can only be carried forward against a profit of the same UK Furnished Holiday Letting business.  Likewise, a loss in an EEA Furnished Holiday Letting business can only be carried forward against the profits of the same EEA Furnished Holiday Letting business.

Business rates

The criteria that decide whether or not you must pay business rates for Furnished Holiday Lets changes depending on which country the property is in.

Although owners of multiple holiday lets may be disadvantaged by business rates in some cases, business rates for holiday lets could be advantageous to you. If you let just one property and its rateable value falls below £15,000, then you could be eligible for Small Business Rate Relief.

What are Furnished Holiday Lettings allowable expenses?

Your FHL property is treated similarly to a business regarding expenses. This allows you to offset expenses against your revenue. Two crucial points are:

  1. Expenses claimed must be against commercial use only. If your family or friends use your property, your expense will be partly considered ‘private use’. This means you will need to calculate what percentage of the expense is commercial. For example, if you use the property privately for three months of the year, 75% of your expenses will be considered commercial.
  2. Expenses must not be capital. For example, one-off payments for the purchase or construction of the property or for its fixtures (capital allowances could cover these expenses).

Here are some examples of allowable expenses:

  • Utility bills or refuse collection
  • Interest on loans associated with the property
  • Advertising or letting agency fees
  • Products bought for the property (cleaning products and welcome packs)
  • Maintenance and cleaning costs
  • Insurance relevant to your FHL (e.g. public liability, buildings and contents insurance)

Furnished Holiday Let Capital allowances

Capital allowances are tax relief that you can benefit from when running a holiday let business. As holiday lets are classed as a business, this allows deducting the cost of certain items that will be used as a part of your business from your pre-tax profits. Holiday let capital allowances can be claimed for things such as furnishings, fittings and equipment that you will use to run your business.

What can I claim capital allowances on?

Capital allowances can be claimed against items purchased to be used as part of a business, under ‘plant and machinery. These items mainly include fixtures and fittings that help your property function as a business for holiday lets.

There are two main categories of items that can be claimed under capital allowances: loose and fixed items. Here are some examples from each:

Loose items (mobile items)

  • Furniture
  • Furnishings (Eg. bed linen, cushions, curtains etc.)
  • White electrical goods (Eg. washing machine, fridge, dishwasher etc.)
  • Electrical appliances (Eg. coffee machine, TV, kettle)

Fixed items (stationery items)

  • Electrical wires
  • Kitchen units
  • Water pipes and plumbing
  • Carpets
  • Repair and replacement required in the property (doors, windows etc.)

How to qualify to be a Furnished Holiday Let

Your property can qualify as a Furnished Holiday let if it meets the following criteria:

Your property must be finished.

Although this may seem a little obvious, it is part of the requirements. The rules do not specify to what extent your property must be furnished. Still, if you aim to provide everything you would expect from a self-catering holiday cottage, then you’ll be on safe ground (don’t forget, some of these expenses can fall under Capital Gains Tax relief).

Be within the UK or European Economic Area (EEA)

To qualify as a furnished holiday let, your property must sit within either the UK or one country that makes up the European Economic Area (EEA), including all European Union Members (EU).

Be available to let

For the first 12 months of being an FHL, your property will effectively be in a ‘probationary’ period. During this time, the potential and actual availability of your property will be reviewed, and for your FHL status to become a more permanent feature, in the first year, your property must:

  • be available to let for 210 days (30 weeks),
  • be let commercially as a holiday property for 105 days (15 weeks)
  • and if occupied for more than 31 days by the same person/people, there must not be more than 155 days of these longer lettings in total across the year

Any days that you, your friends or your family spend on the property, for free or at a discounted rate, do not count towards the total commercial occupation requirements.

While this requirement may seem somewhat strict, there is some reasonable flexibility if you are:

  • Unable to meet the required occupation figuresThese figures can be averaged out across multiple FHL properties – however, properties in the Republic of Ireland are considered separate from the rest of the UK.
  • Unable to meet the actual occupation figure (after your ‘probationary’ period)If you met the occupation requirements during the previous year, a period of grace could be granted (for a maximum of two consecutive years) by the HMRC. This means you will retain your FHL status, providing you meet the occupation requirements in the future.

When does a property stop being a furnished holiday let?

Property no longer qualifies as an FHL if it meets one of the following criteria:

  • The property is sold
  • The property is being used for private occupation
  • The letting conditions are not met, including election averaging and period of grace elections

R&D tax credits: what is an HMRC enquiry?

R&D tax credits: what is an HMRC enquiry?

What is an HMRC enquiry?

The government’s R&D tax credit incentives were introduced to help grow the UK economy and reward innovative businesses. HMRC manage and administer the government R&D tax credit incentives. Sometimes this can include an enquiry.

When you submit an R&D tax credit claim to HMRC, HMRC should swiftly process your claim – they try to work to an internal 28-day deadline. In most cases, a simple desktop review of the claim documents will be sufficient for HMRC to be satisfied and process your R&D tax credit claim.

Sometimes, however, HMRC asks for more information to clarify any questions. This process is known as an enquiry.

Why do HMRC open enquiries?

The reason why HMRC might open an enquiry can vary. For example, their reasoning might be related to your company’s change in your circumstances.

HMRC may have some questions about the nature of your R&D work: perhaps about your industry or a particular technology you were working with.

What is an HMRC compliance check?

A compliance check or ‘enquiry’ is essentially an investigation into your R&D Tax Credit claim.

They generally happen when the tax inspector reviewing your tax credit submission finds a discrepancy in your financial data or is unsure whether some aspect of your development work is eligible for funding.

Or is unsure whether some aspect of your development work is eligible for funding. Some enquiries are also launched for random sampling purposes.

To clear up their concerns, your inspector will write to you with a list of questions designed to collect more financial and technical data about your R&D.

Enquiries generally involve multiple rounds of questioning and can take weeks, months, and sometimes even years to resolve.

But while facing an enquiry can be extremely inconvenient, they are a vital mechanism for projecting the R&D Tax Relief scheme for abusive claims and ensuring that UK taxpayers receive value-for-money.

Why does HMRC launch enquiries?

Financial Discrepancies

At HMRC nothing raises a red flag quicker than numbers that don’t add up. If the figure in your claim report – the document containing a breakdown of your R&D costs – don’t match those in your corporate accounts, there’s a good chance your tax agent will initiate an enquiry to clear up the discrepancy.

Insufficient Proof of eligible R&D

To claim R&D tax credits, you must prove that your development work meets the government’s definition of eligible R&D.

You deliver this proof in your technical narrative, demonstrating that you pursued a genuine technological advance by tackling scientific or technical uncertainties through systematic experimentation.

If you fail to prove your eligibility – for example, by talking about business challenges in your narrative rather than technical ones HMRC will launch an enquiry to investigate whether your development work truly qualifies for R&D Tax Credits.

Please visit the link below for more information and if you have any questions, please get in touch with us at WIM Accountants at info@wimaccountants.com or call on 020822717000.

Insight to R&D eligible cost

Insight to R&D eligible cost

What costs qualify for R&D tax credits?

You can claim Research and Development (R&D) tax credits on revenue expenditure, i.e., day-to-day operational costs. But usually, capital expenditure (money spent on fixed assets such as land and buildings) is not eligible for R&D Expenditure within the claim.

Eligible R&D Expenditure

Revenue expenditure includes the following costs, which can be included in your R&D claim:

Staffing costs

For SMEs and large companies, the category can include:

  • Gross salaries (including wage, overtime pay and cash bonuses)
  • Employer NI contributions
  • Employer pension contributions
  • Certain reimbursed business expenses

Any benefits in kind, such as private medical cover and company cars, are specifically excluded from the staff costs category. You cannot include director dividends. And this can affect the value of your claim quite substantially if your directors spend time at work on the R&D activities.

Some employees or directors may be wholly engaged in R&D activities. However, it’s more common for staff to be partially involved in R&D. you should therefore determine the appropriate apportionment to their total staffing costs to include in your R&D claim.

Subcontracted R&D

The costs that you can include for subcontractors also differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme. If you make an RDEC claim, money spent on subcontractors does not usually qualify for tax relief, but some exceptions are explained below. If you make an SME claim, you can include 65% of payments made to unconnected parties.

SME R&D tax credits and subcontracted R&D

If you are an SME, you can include expenditure on subcontractors involved in R&D projects in your R&D tax credit claim. For ‘unconnected’ subcontractors, payments linked to R&D activities are restricted to 65% for the claim. For ‘connected’ subcontractors, the rules are more complex and based on the nature of the subcontractor’s expenditure.

R&D Expenditure Credits (RDEC)

Through the RDEC scheme, companies can only claim for expenditure on subcontracted R&D if the subcontractor is:

  • An individual
  • A partnership, where all partners are individual
  • A qualifying body (including charities, universities, and scientific research organisations).

The expenditure does not need to be restricted to 65% in the same way as SME claims.

Externally Provided Workers (EPWs)

Staff costs are paid to an external agency for workers engaged in the R&D project. Relief is restricted to 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected.

Consumable

The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.

Software

You may claim the cost of software directly employed in the R&D activity. Where software is only partly employed in direct R&D, an appropriate apportionment should be made.

It can be complicated to submit an R&D tax credit claim to HMRC’s exacting standards. Get in touch with our Tax Team at WIM accountants for guidance for your R&D claims on info@wimaccountants.com or call our offices on 02082271700

Can I get Tax Relief on Pension Payments?

Can I get Tax Relief on Pension Payments?

What is a pension, and how does it work?

A pension is a financial product that lets you save up to fund your retirement. Technically, it’s a kind of tax wrapper with specific rules around what you can save and when you can access your cash.

There are broadly three types of pensions – defined contribution, defined benefit and the state pension.

Defined contribution:

Most workplace pensions are the defined contribution type. Private pensions, including Self-Invested Personal Pensions (SIPPs), are too. With this kind of saving, the amount you get when you retire depends on how much you contributed to your pension fund during your working life, your investment returns, and the charges you’ve paid.

Whatever you save attracts tax relief, which means the government boosts your contributions. If you have a workplace scheme, your employer usually has to contribute.

Your employer sets up workplace pensions, and you won’t get a choice over the provider. You should be automatically enrolled if you earn over a certain amount a year with one company. Those who haven’t enrolled automatically can usually register voluntarily because they don’t make enough or are under 21.

Defined benefit:

These are also sometimes known as final salary or career-average salary schemes. How much you get at retirement depends on your salary when you work and your length of service. You get a guaranteed income for life and don’t have to worry about investment returns.

State pension:

The state pension is a qualifying benefit paid by the government. To get the full amount, you need to have 35 years’ worth of National Insurance contributions. You can also get NI credits in some cases if you are out of work – for instance, if you’re looking after small children and have applied for child benefit.

Why pay into a pension?

Even though retirement can feel like a million miles away, saving early is generally a good idea. Most people want to retire at some stage, and you need enough money to keep you going, often for more than 30 years.  That means the cash you save while you’re working needs to last decades.

The more you put away when you’re younger, the more your investments will grow, and the more comfortable your retirement will be. Burying your head in the sand could mean you have to keep working past the point at which you’d like to slow down. The state pension only works out at £179.60 per week, which is less than most people need to live on.

While there are many ways to save and invest for your retirement, a pension is often the most attractive because you can get:

  • Tax relief (free government money). When you contribute to your pension, you get tax relief. In simplistic terms, this means that the government gives you free cash to top up your savings. Depending on how much income tax you pay, you’ll usually get added between 20% and 45%. There’s a limit, though; you can only save £40,000 a year or your total salary – whichever is lower.
  • Employer contributions (free money from your bosses). A workplace pension legally requires employers to contribute on your behalf. Not only do you receive contributions from the government in the form of tax relief, but you also get free cash from your boss. The minimum employers have to pay is 3%, but many will pay more if you increase your contributions. Ask your employer if they offer contribution matching.

Pension investments are free from the capital gains tax, so that you won’t pay tax on any profits made from the investments within your pension pots.

Pension 2028

  • Clarity is required for people who reach the new normal minimum pension age in 2028.
  • Real estate investment trust regime broadened.
  • Higher rates of tax relief for new theatrical and orchestral productions.
  • Reporting deadline for residential capital gains extended from 30 to 60 days.
  • Cross-border group relief inequalities removed.
  • Dormant asset scheme amended, so a tax charge arises only when the investor claims the asset.

Annual allowance charge:

You can only get tax relief up to your current annual allowance, made up of the current year’s allowance (currently £40,000) and any unused allowance from the previous three tax years.

Since April 2016, anyone whose total income, pension contributions and employer pension contributions are over £150,000 in a year will get a reduced allowance. However, it was announced in the Budget in March 2020 that the annual allowance will only begin to taper for those who have an income above £240,000 – the £200,000 allowance plus the £40,000 you can save into a pension.

It means that for every £2 of ‘adjusted income’ that goes over £240,000, the annual allowance for that year reduces by £1. Meaning anyone earning a total income of £300,000 or more will only get £4,000 tax relief annually.

This example shows how the annual limits can be used and carried over…

Current annual allowance = £40,000 (NB reduces to £4,000 if you’ve started taking money from your pension). You can top up your allowance for the current tax year with any allowance you didn’t use from the previous three tax years.

Say you have been investing £10,000 a year in a pension in recent years. You would then be able to carry forward three lots of £30,000 – a total of £90,000 on top of the standard £40,000 annual allowance. That’s £130,000 overall.

Normal pension age:

You are eligible for the state pension provided that you have at least ten qualifying years on your National Insurance (NI) record. A qualifying year means a year in which you earn over the Lower Earnings Limit as salary (dividends don’t count). How much you receive will also depend on how many qualifying years you have. You need at least 35 qualifying years to qualify for the full amount.

Do I need to pay NICs to qualify for the state pension?

You don’t need to have paid National Insurance Contributions (NICs) to qualify for the state pension, though usually, you will. To build up qualifying years, your salary must be at or over the Lower Earnings Limit (currently £6,136). However, you don’t start paying NICs until you take a salary over the NIC Primary Threshold (now £8,632). So if your salary falls between these two figures, you’ll build up qualifying years without paying any NI. For this reason, some company directors deliberately set their salaries at this low level and take the rest of their income as dividends.

How much is the state pension?

If you qualify for the full amount of the new state pension, you will receive £175.20 per week, or £9,110.40 a year (the tax year 2020/21). This amount rises each year, at least in line with inflation, and often more. If you have fewer than 35 qualifying years, the amount you receive will be reduced proportionally.

If you reached state pension age before 6 April 2016, you would receive the old state pension instead, a different amount.

How much can I earn while taking the state pension?

You can earn as much as you like and continue to qualify for the state pension. However, you will pay tax on any income above the personal allowance.

Here’s an example. The full new state pension gives you an annual income of £9,110.40. The personal allowance is £12,500, so you could earn up to £3,389.60 a year on top of the state pension before having to pay any tax at all. If you were to earn (for example) £10,000 a year while drawing the state pension, your taxable income would be £6,610.40, and you’d have a tax bill of £1,322.08 However, you wouldn’t pay any NI contributions.

If you’re still earning and drawing the state pension, talk to us at WIM accountants for financial advice to ensure you’re not wasting too much of your state pension in tax. It may make sense to scale back your hours or find another solution.

What can be claimed as an expense for a Limited company?

What can be claimed as an expense for a Limited company?

What is a Limited Company?

A Limited Liability Company is an “incorporated” business structure that means that to bring the company into existence, it must first be formally registered with Companies House.

Once registered, the limited company is an entirely distinct “legal entity”, separate from the owners of the business.

A limited company is ‘limited by shares’ or ‘limited by guarantee.

Limited by shares

Limited by shares, companies are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

Limited by guarantee

Limited by guarantee companies are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount.’
  • invests profits it makes back into the company

Choosing company name

You must choose a name for your business if you’re setting up a private limited company.

There are different rules for sole traders and business partnerships.

Your name cannot be the same as another registered company’s name. If your name is too similar to another company’s name or trademark, you may change it if someone makes a complaint.

Your name must usually end in ‘Limited’ or ‘Ltd’. You can include the Welsh equivalents ‘Cyfyngedig’ and ‘Cyf’ instead if you registered the company in Wales.

‘Same as’ names

‘Same as’ names include those where the only difference to an existing name is:

  • certain punctuation
  • certain special characters, for example, the ‘plus’ sign
  • a word or character that’s similar in appearance or meaning to another from the existing name
  • a word or character used commonly in UK company names

Advantages of limited company:

  • Limited liability to owners.
  • Low set-up costs.
  • Easy to incorporate.
  • Simple succession and business transfer.
  • Tax advantage

Disadvantages of a limited company:

  • Complex administration
  • Obtaining finance
  • Public record of your finances and filing history

Limited Company expenses

Here are some of the core business expenses you can set off against Corporation Tax (unless otherwise stated, plus maybe others not listed here specific to your business):

  • Wages / Salary for third parties on payroll inc;
    • Director salaries
    • Pension contributions (via an approved scheme).
    • Employers’ national insurance contributions (NICs).
  • Subcontractor costsanyone you bring in to do some work for you.
  • Food and Drink – See below for further clarification on this
  • Accommodation costs when away from the usual place of business (although you must not exceed 24 months at a ‘temporary workplace’). If you need to pay for accommodation, you can claim the expenses as tax-deductible if they are exclusively for your work. If you use the capacity for a mix of business and personal use, you must calculate the proportion of business use and claim for this proportion only. HMRC advise that if a period of continuous work lasts more than 24 months at a single workplace (i.e. client site), then that work is not temporary, and you cannot claim expenses, subsistence and tax relief. A period of continuous work means 40% or more of your time. So, if you spend more than 40% of your time at a client’s site, you can only claim expenses, subsistence and tax relief for 24 months. After 24 months, or when you become aware you will be spending more than 24 months at a client’s site, your workplace is permanent, and you cannot claim expenses.
  • Incidental overnight expenses of £5/night (£10/ night if overseas) can be claimed as a flat rate if you work away from home.
  • Travel / Transport
  • If using your vehicle- mileage allowance of 45p/ mile for the first 10,000 miles, and 25p/ mile after that 20p/ mile for bicycles.
  • Alternatively, you can claim for ‘actual’- A percentage according to usage for the business of:
  • Vehicle purchase cost
  • Insurance
  • Road tax
  • Fuel
  • Maintenance and servicing
  • Parking for business
  • Any other travel costs which are incurred while running your business
  • Training course fees if the skills are relevant to the business and are for ‘upskilling’. Qualifications for a new skill (e.g. initial electrician training) are allowable only as a capital cost.
  • Tools and Equipment and safety equipment (inc first aid kits),
  • PPE (personal protective equipment) – work boots, Hi-Vis workwear, gloves, waterproofs, overalls, etc
  • Computer/Software and similar equipment for use in the business, e.g. laptop, pc, printer, scanner, chargers etc.
  • PPS (post, printing and stationery) Stationery, postage, and printing costs.
  • Insurance – Business insurance, such as professional indemnity insurance.
  • Memberships & Subscriptions Any memberships to professional or trade bodies and subscriptions to professional or trade publications. Also business magazines and books.
  • Professional fees, such as accountant or solicitor.
  • Telephone and broadband packages (if the contract is in the company name).
  • Mobile and Smartphones (if the contract is in the company name). The cost of business calls can be reclaimed on a residential phone bill.
  • Home office costs (a flat £4/week without receipts is allowed by HMRC or work out a proportion of the household bills).
  • Advertising and marketing – Costs of advertising and marketing your business inc standard costs, e.g. Business cards and online advertising, e.g. google ads
  • Business gifts up to £50 per individual are allowable before more complex rules apply. HMRC states, ‘ A gift of alcoholic drink, tobacco, food, or an exchangeable voucher is not tax-deductible unless it is a trade sample. Gifts which carry advertising – such as stickers, mugs, diaries, tax cards, keyrings, are generally allowable as advertising and promotion costs
  • Bank charges – authorised bank charges are allowable
  • Entertaining clients, customers, or third parties You should include this as a business expense, but this is not allowed. If you hire a venue for an event, then tax relief may be claimed on the cost of the venue
  • Staff –

        o  Entertaining staff – this is allowable for tax purposes as staff welfare. This only applies to official employees, not freelancers/subcontractors. There is also a Christmas party exemption for employees of £150 per person per year.

         o An eye test for employees who use computer equipment.

         o An annual private health check for employees.

  • Capital allowances (depreciation of assets)
  • Hire purchase agreements (in the business name).
  • Company car expenses (although there is a benefit in kind charge for private use).

Food/ Subsistence

HMRC rules say, “everyone must eat to live, and such costs are normal costs of living incurred by all and not incurred for trading” this means that because you derive some personal benefit (you eat to stay alive). You’re not eating to do your job; the cost of food and drink is not wholly and exclusively for your business and cant be included as an allowable business cost.

See common expenses claimed for incorrectly include:

  • Working out of your local coffee shop. You buy coffees and food/snacks. Your food and drink cost is not allowable for tax but should be included in the accounts as it is a business expense. Just be aware you will NOT get tax relief on the cost.
  • You spend the day working at a client’s site close to home but pop out to buy coffee and/or lunch. Your food and drink cost is not allowable for tax but should be included in the accounts as it is a business expense. Just be aware you will NOT get tax relief on the cost.
  • You attend a local networking event, and the entrance fee doesn’t include refreshments, so you pay for your coffee when you get there. The networking fee is allowable, but the cost of your drink is NOT.
  • You work from home and order food because you’re got a deadline to meet and no time to cook. The cost is not allowable.

Some allowable food/subsistence costs:

Be warned about claiming subsistence for locations too close to your base of work as these may not be allowed.

  • If you are staying away from your usual base overnight on business.
  • For example, you live and work in and around Winchester but must travel to Birmingham for a 2-day conference. You would be allowed to claim “reasonable” costs for the evening meal and breakfast (please note alcohol is not subsistence unless it is purchased with a meal, and even then, it must be reasonable, e.g. one drink or half a bottle of wine).
  • If you make a journey that is outside your normal pattern of business activity
  • For example, you run a coaching and mentoring business from your home in Bolton. If you had to embark on a 3-hour drive to attend a CPD course and stopped off at an M&S en-route to buy lunch – the cost of lunch would be an allowable deduction.
  • If you are running a business that is by nature itinerant
  • This would involve running a company where you did temporary work at various locations without visiting the same client regularly. Examples include a party entertainer or a jobbing gardener.

Unfortunately, HMRC doesn’t give precise guidance as to what constitutes “itinerant” or “reasonable” regarding costs. If your circumstances aren’t straightforward, talk to WIM Accountants about what you can and cannot claim. And don’t forget to keep all your receipts.

 

If you would like any further information on anything covered in this blog, please feel free to contact us

 

 

Autumn Budget 2021: Big changes incoming for R&D

Autumn Budget 2021: Big changes incoming for R&D

 

The Chancellor announced a number of changes, policies and reforms as part of the Autumn Budget – most notable among these for us were the incoming changes to the R&D Tax Credit structure.

 

The Chancellor made sure it was well known that the underlying theme of the announcement was the cultivation of a highly skilled and productive UK economy, so it was almost no surprise to see a vow to increase UK R&D spending to £20 billion annually from 2024/25. Those following the government R&D plan may notice that this is lower than the £22 billion promised last year. Instead, the £22 billion target will be hit by 2026/27, two years later than originally planned. In any case, this is an encouraging sign of growth in the UK innovation and technology sector with the current R&D investment sitting at 1.1% of GDP and forecasted to grow by 1.3% by 2027. In this regard, the UK has shown to be far ahead of its international competition, namely France, Germany and the United States.

The current R&D tax credit scheme is also set to see a shakeup in its qualifying criteria. As expected, cloud computing and data costs were added to the scope of qualifying expenditure for R&D relief. Although more guidance is required from the government on the items defined under the above costs for example, how HMRC defines cloud computing which in itself is a broad concept. The changes are set to be implemented at the start of the 2023/24 tax year, but we can expect further guidance in late autumn.

Brexit meant that the UK was no longer bound by EU non-discrimination requirements, a fact the Chancellor alluded to:

“The second problem is this, companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the UK.”.

Whilst the exact intricacies of the proposal are unknown, it is reasonable to assume that most (if not all) R&D expenditure will have to be domestic in order for it to qualify for the tax relief incentive. There is a clear correlation between this proposal and the government vision for ‘high-skill, high-productivity’ individuals to propel the UK above its international peers. A very optimistic outlook from Mr Sunak, but immediate concerns are to be raised over the feasibility of such a proposal. Consider core science sectors (e.g. life sciences) that often carry out R&D activity outside the UK, especially when conducting clinical trials which may not be able to gain the needed licencing approvals in the UK. Limiting the industry pool will no doubt result in an increase in R&D activity costs.

A review of the R&D tax relief incentive was launched in Spring 2021 with the goal of ensuring that the UK continues to compete as a location for cutting-edge research and evolving into a “science and technology superpower”. The government is expected to respond to the consultation paper published after the review in the following months.

Your guide to EMIs

Your guide to EMIs

Enterprise Management Incentive (EMI) schemes are great for keeping and encouraging employees by awarding significant tax benefits to both company and worker. Typically, you may see EMIs being used as a tax-efficient tool to aid with a company’s internal growth (such as bringing up key workers to have a stake in the business).

The scheme itself is quite flexible in that it can be fashioned to suit the targets of a company, such as allowing companies to allow options to qualifying employees on an efficient tax basis (for example, the right to subscribe to shares). Private or small companies can take great advantage of this to gain access to select grants for selected employees or even their entire workforce.

EMIs can only be awarded to companies with a permanent establishment in the UK, but if your company has overseas shares, you can rest assured as EMI options are still available to you. There are a few other requirements to qualify for an EMI, namely the company itself must:

  • Have gross assets less than £30m
  • Operate in a qualifying trade, which does not include financial & legal activities, leasing, farming, and property development

The options available through EMI also have conditions attached:

  • Ordinary shares issued must be fully paid and not redeemable
  • EMI treatment is only applied to shares not exceeding £250,000 per individual
  • Options can be awarded at discount (even nil price) at the risk of tax consequences
  • These options must be exercised within 10 years

Employees are also subject to eligibility requirements, namely:

  • EMI options are only available to employees working more than 25 hours a week, or who spend 75% or more of their time working for the company
  • The employee must not have more than 30% of the company share capital before options are awarded to them

 

What are the benefits?

EMIs can be tailored to help a company achieve their commercial objectives, and have benefits for both employer and employee alike:

For employers:

  • No tax cost
  • No employer NIC on grant or options exercised
  • Corporation Tax Relief on the difference between the market value of shares at the time of acquisition and the price paid
  • HMRC validation of share valuation, allowing for tax certainty in the interest of the company and workers.

For employees:

  • Only tax payable is CGT arising when shares are sold
  • Lower tax costs compared to non-EMI schemes or even cash
  • No Income Tax or NIC payable on grant or options exercised
  • Reduced CGT rate – EMIs will cause a 12-month holding period for Entrepreneurs Relief to accrue, resulting in a reduced 10% CGT rate. This rate can be achieved even with minority holdings in Growth Shares

 

Disqualifying events

There are several changes or developments within a company that could lead to disqualification from EMI. Also known as “disqualifying events”, they include the following:

  • Loss of independence – Namely when a company becomes a 51% subsidiary of another company
  • No longer meeting the trading requirements – When the company’s activities become primarily focused on a non-eligible trade. It could also occur when the intent to carry out a qualifying trade was never realised.
  • Employees are no longer eligible – Usually, if they no longer work at the company or meet the required hours
  • Share capital is altered
  • If Company Share Option Plans (CSOPs) are granted – This means the amount of unexercised options exceed £250,000

You may want to heed caution to this as if your company is subject to a disqualifying event, you may be liable to a tax charge. This is usually imposed when the EMI option is exercised after 90 days of a disqualifying event, causing income tax and NICs to become payable on the increase in share value from when the disqualifying event occurred and when the option was exercised.

 

How can I register for EMI?

You can report your options to HMRC electronically within 92 days of receiving the grant. It is advised that you agree upon the share market value in advance with HMRC.

WIM Accountants can also help you in dealing with all aspects of your EMI plan and will endeavour to make sure it truly reflects the commercial objectives of your business.

Get in touch with us to find out more.

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

 

A sole trader or an individual in a partnership making a loss has zero taxable profit for the year. Keeping in mind that losses are calculated in the same way as profits, loss relief is an option for businesses that are run on a commercial basis and have the means of realising their profits. As a result, the relief claims available depend on the length of time the trade has been active; if it has started within the last four years, is a continuing trade or if the trade is no longer operational. This blog will focus on the opening years of the trade (ie. trading losses in the last four years).

 

Carrying back losses

Losses incurred within the opening four years of trade, in the interests of continuing trade or profession, can be relieved against other sources of income of the three tax years which precede the year of loss. For example, if trade starts 18 February 2021 (so in the 2020/21 tax year) the loss relief will be available off losses incurred in 2021/22, 2022/23, 2023/24, as well as the tax year trade commenced. Trading losses in each of these tax years can be carried back up to 3 years.

But keep in mind that the relief is not administered automatically, instead, a claim is required to be made on the first anniversary of 31 January succeeding the year in which the loss arose (ie. if a loss was incurred in the 2021/22 tax year the claim must be made by 31 January 2023).

What is HMRC’s view?

HMRC hold the stance that, when carrying back losses to earlier years the past tax returns are not amended. Rather relief is provided by calculating the tax adjustment and Class 4 NIC liability if relevant for the previous years. This figure is then included in the tax return for the year of loss.

To illustrate this case, consider a loss arising in the tax year 2020/21 which is then carried back to 2019/20 to produce a repayment of £1,500. This figure of £1,500 is entered into box 15; page TC2 of the tax return 2020/21.

A partial claim is not allowed. If a claim is desired then the carried bac loss is offset against earlier years first, which provides relief on all income for each year until the loss is exhausted. Take care as this could lead to waste of Personal Allowances or losses being offset at lower rates than usual.

 

Can I carry forward losses?

Absolutely. Trade losses incurred early on qualifies for a relief claim. Remaining losses after an opening year loss relief are permitted to be relieved in alternative methods, namely, losses carried forward.

 

For example, Serena began her trade in 2020/21 and realised a loss of £45,000. If her total income for each of the previous tax years was £10,000 Serena can make a loss relief claim. She also does not need to worry about the income tax relief cap as her total amount of tax reliefs does not exceed £50,000.

This also means that her net income for the previous three tax years is zero and her remaining loss is (£45,000 – (3 * £10,000)) = £15,000 which is permitted to be carried forward to offset future profits.

Suppose Serena then made a £50,000 profit in 2021/22 and other income of £5,000. Her net income would then be ((£50,000 – £15,000 = £35,000) + £5,000) = £40,000.

 

Are there any restrictions on claiming loss relief?

There are restrictions that may be applicable when claiming opening year loss relief, so it is imperative to be aware of such restrictions before beginning a new trade, more so if there are high upfront costs expected. The loss must arise from a trade, which is an important factor to consider as the business has only just started operation.

 

  • Commerciality test: Loss relief is only available if the business is run on a commercial basis and profits can be reasonably expected in the period or appropriate time afterwards. Holding evidence of business plans that could support the claim of profit expectation is essential, even if losses are big and can be relieved at high tax rates. This also applies to instances where a partner leaves and then rejoins a partnership at a later time.
  • Simplified cash basis: Not available for trades operating with the simplified cash basis. If losses can be utilised it is advised to not opt into this scheme.
  • Cap on unlimited tax reliefs
  • Non-active traders
  • Tax-generated losses
  • Farming or gardening businesses

 

How can I plan for the relief?

When planning for loss relief it is important to consider the following factors:

  • Personal Allowances and Annual Exempt Amount: Aim to maintain these allowances
  • Marginal tax rates: Prioritise offsetting losses against income taxed at higher rates for maximum savings
  • Cash flow: Consider if it is worthwhile to claim relief for earlier tax years for cash repayment, or to claim relief at the highest marginal rate
  • Income tax relief caps: Consider if reliefs will be lost if not claimed in the following year which they may arise

 

Class 4 NICs

HMRC consider losses as ‘negative earnings’ for Class 4 NIC purposes, so trading losses can only be set against trading profits. If otherwise (ie. set against non-trading income common in early trade loss relief), in the interests of Class 4 NIC this section of the loss is carried forward and will be set against future profits.

 

Overlapping losses

In the event the trader chooses to not end the year on the regular Financial or Tax year (31 March and 5 April respectively), trading profits could be taxed twice according to basis period rules. This amount is known as the ‘overlap profit’ and is only relieved if the accounting date changes or trade terminates. However, a loss is only identified on the earliest period so a double relief cannot be claimed.

 

For more information or if you’d like to discuss our Sole Trader services, feel free to contact us.

Car Benefits: Your 2021/22 Tax Guide

Car Benefits: Your 2021/22 Tax Guide

 

Car benefits are a topic which is often brought up in enquiries with our clients, so this article will go over some concepts in the interest of tax planning for the acquiring cars through businesses.

 

Generally, when a business owner uses their own car in the interests of their business, they can be reimbursed by their own company and will not incur tax liability – as long as they are classed as a qualifying expense by HMRC.

If they were to use a company car instead, they would have to pay income tax on the benefit received. This varies on the CO2 emissions and listing price of the car. The company would also then be liable to Class 1A NIC on the benefit.

The company will, in most scenarios, pay for the ownership (or lease) of the car and its concurrent costs provided it satisfies HMRCs golden rule when it comes to expenses, that it must be done “wholly and exclusively” for the purpose of paying the business owner. These costs will allow deductions for Corporation Tax purposes. Car depreciation also enables corporation tax relief in the form of capital allowances.

As a result, when deciding between the acquisition of a car via lease or buying it outright, one must consider the effect of the capital contributions, company contributions, business mileage, capital allowances and the factors listed beforehand amongst others.

 

What are the charges?

Car Benefit:

Car benefit charges are calculated from the product of the listing price of the car and the current percentage rate set by the Chancellor, which can be found on our tax rates page. The rates are determined by car CO2 emissions which are measured in grams per kilometre (g/km).

Fully electric cars are subject to this tax, currently at 1% and are set to rise to 2% for the successive tax years. This percentage varies with the range at which an electric car can cover. A pure electric range above 130 miles will also be subject to the benefit in kind rate.

2021/22 1%
2022/23 – 2024/25 2%

Fully electric cars have low benefits in kind, qualify for 100% capital allowances and the anti-avoidance rule for salary sacrifice is applicable. Therefore, businesses may want to consider exploring electric cars as a tax-efficient option for a company car in the future as corporation tax rates are set to increase to 25% by 2023.

Fuel Benefit:

Fuel benefits can be calculated by multiplying the same percentage rate used for the car benefit and the current set figure for the tax year:

Year Fuel Benefit
2019/20 £24,100
2020/21 £24,500
2021/22 £24,600

In an instance where an employee has to reimburse the entire expense incurred by their employer for the provision of private fuel, no fuel benefit will arise. If the employee makes a partial reimbursement, then the benefit will be calculated to the method described above.

 

Business Mileage

Employees can be reimbursed for business mileage carried out in their own cars (i.e., miles travelled wholly and exclusively for the business) at 45p per mile for the first 10,000 miles and 25p for every subsequent mile. If a fellow employee is also carried in the same car a further 5p per mile is added to the reimbursement if and only if the travel is a work journey.

This rate also applies to fully electric cars.

A director that does not receive fuel benefit but drives a company car can claim an allowance for the business mileage at a lower rate than if they were to use a car in their ownership.

 

Capital Allowances

Eco-friendly cars are encouraged by HMRC, indicated by the numerous associated incentives which have a considerable positive impact on the cash flow of a business.

  • Writing down allowances (WDAs). Cars emitting less than 50g/km of CO2 in the 2021/22 tax year are included in the Plant and Machinery pool at an 18% WDA. Cars emitting more than the aforementioned amount is in the Special pool with 6% WDA. Hence, there is no balancing allowance on the disposal of these vehicles.
  • 100% first-year allowances (FYA) on expenditure for new low emission electric cars. The car must be purchased between 16 April 2002 and 1 April 2025 and have zero CO2 emissions.
  • 100% FYAs on brand new equipment installed for the purpose of electrically charging vehicles.
  • 100% FYAs on new goods vehicles with no CO2 emissions.

Note that the FYAs are not available to businesses in “difficulty” or are deemed to be recovering.

15% of the leasing costs of a car are also available to claim as a reimbursement provided its emissions are less than 50g/km from 6 April 2021.

 

HMRC also has a company car and car fuel benefit calculator which is a useful tool to help with tax planning.

 

If you have any further queries or are interested in our services, feel free to contact us and have a quick chat.

Your Pension Obligations as an Employer

Your Pension Obligations as an Employer

 

Pensions are an essential resource for individuals as a reliable source of income to live on when they retire from working. A recent investigation found that the average pension pot savings across the UK are £61,897 which tends to also come with an extra £12,000 annually in retirement income. This is a significant amount to allow an individual to have a basic retirement lifestyle, but this money doesn’t appear out of thin air. As an employer, it is your duty to attend to an employee’s enrolment in a pension scheme to help facilitate this lifestyle post-retirement, which will be the focus of this piece.

What do I need to contribute?

Before we delve into what your obligations are, let’s run through the actual rates an employer and employee need to contribute to the pension pot.

The amount contributed to the pension depends on the type of workplace pension scheme the employee is enrolled in, or whether the employee has opted into a scheme or has been automatically enrolled. Make note of the auto-enrolment, as this is an important system every employer should be aware of and will be discussed in depth further on. Additionally, it is common for the government to apply a tax relief to a pension provided that the person pays income tax and pays into a personal or workplace pension.

If an employee is auto-enrolled, you as an employer must contribute at least 3% of an employee’s earnings towards the pension scheme. The employee then makes up the reminder to make the total minimum contribution of 8%. These rates only apply if the person earns between £6,240 and £50,270 a year pre-tax (also known as “qualifying earnings”) and may also be influenced by the type of private pension scheme they are enrolled in.

What is auto-enrolment?

Auto-enrolment moves away from the archaic method workplace pensions used to operate. In the old system, a burden was placed on the employee to enrol into a pension scheme but now the process is automatic provided the employee earns above £10,000 per year and is over the age of 22. This pension pot can only be accessed once the employee is 55 years old, otherwise, it is held by the company.

The reason for this change is to increase the number of people saving for retirement, which has produced positive results with 78% of UK employees enrolled in a workplace pension – up from less than 50% in 2012 when auto-enrolment came into effect.

You must also let them know when they’ve been auto-enrolled as well as:

  • The date they were added to the scheme
  • The type of pension scheme and who runs it
  • Employer and employee contributions
  • How to leave the scheme. Note that you must refund money if the employee opts out within a month
  • How tax reliefs apply

You must notify them in writing of their right to join the pension scheme and of its associated details. They also have a right to rejoin a scheme at least once a year and you must auto-enrol them every 3 years if they’re still eligible and have previously opted out. It is your duty to inform an employee of these details and you cannot refuse a request to join a pension scheme. An exemption lies if, and only if, your employee earns less than the following amounts:

  • £520/month
  • £120/week
  • £480 over 4 weeks

But you don’t always have to auto-enrol your staff if they don’t meet any of the above criteria or the following conditions:

  • They have already provided notice to leave, or you have provided notice
  • They have evidence of “lifetime allowance protection”
  • They are already on an arranged pension with you
  • They have taken a lump sum payment from a closed pension scheme, and have left and rejoined the same company within 12 months of payment received
  • They opted out of an arranged pension scheme more than 12 months before the auto-enrolment start
  • They are from an EU member state and in an EU cross-border pension scheme
  • They are in a Limited Liability Partnership (LLP)
  • They are a director without an employment contract and employ at least one person

Do I have to enrol immediately?

You are not actually required to auto-enrol your employee as soon as they are eligible. A 3-month delay period is allowed but you must inform your employee of the delay. 

You can also delay the first 3 months of pension contributions, and instead pay it as a lump sum on the 22nd of the fourth month from the start of enrolment.

There are also tax saving incentives via usage of the ‘salary sacrifice’. Also known as a ‘SMART Scheme’ the salary sacrifice works by paying a portion of the salary an employee gives up directly to the pension pot. This may be desirable as it means you and your employee pay less tax and NI.

What happens if I don’t auto-enrol?

To keep things simple, you will be penalised, and in some cases heavily. The typical process involves fines being noticed, which must be paid online. In the event you are late in payment, missed contributions are expected to be paid to staff and may include the need to backdate contributions. You may also be expected to pay your staffs own contributions on top of your own. Further action involves court proceedings to recover debts which could end with a maximum of 2 years imprisonment.

Fines tend to range between £400 for non-compliance with notices to as much as £10,000 daily depending on the size of your company and staff numbers. 

If you have further questions regarding your obligations as an employer towards pensions feel free to give us a call and have a chat. Find our contact details here.

 

Remittance Basis for Non-Domiciles in the UK

Remittance Basis for Non-Doms in the UK

 

What does the term ‘Remittance Basis’ mean to you? If you are a domiciled UK resident it probably won’t mean much, but if you are non-domiciled (or non-dom) this is a concept which you should familiarise yourself with as it could be a huge advantage in your favour. In short, if you are eligible for Remittance Basis you are only taxed on your non-UK income and Capital Gains if they were brought into the UK.

So if you do not have UK income and Capital Gains, as well as having no need to bring in non-UK income to sustain your living, you can be deemed as a UK tax resident and pay no tax. This is a huge prospect that many overseas individuals living in the UK are unaware of.

 

What is meant by tax residence?

Tax residence is defined by how many days an individual spends in the UK. For an individual to be considered a UK resident for tax purposes, the must have spent a minimum of 183 days in the UK during any tax year.

Certain factors can actually affect how many days spent in the UK qualify you as a tax resident, such as having family living in the UK. As the number of factors connecting you to UK stay increases, the fewer days you can spend in the UK without gaining tax residency status.

 

What is meant by domicile?

Domicile is a concept of common law, and an individual can only ever hold one domicile at any point in their life. In this regard it is very distinct from residency, as you cannot be domiciled in more than one country at a time, nor can you be domiciled nowhere. In most cases, you are domiciled in the country you have permanent residence in.

A non-dom has limited exposure to the UK tax rules due to the fact they have less of a connection to the UK than say someone who was born and domiciled in the UK. As a result, a non-dom has thrice the tax advantage of an average taxpayer:

  • Being able to benefit from the Remittance Basis of tax
  • Restricted Inheritance Tax to UK assets
  • The ability to create a non-resident trust where the individual can benefit. The individual is exempt from IHT, CGT, Income Tax and anti-avoidance rules being placed on the trust’s assets

 

 

What is ‘Remittance Basis’?

If you are a UK resident but non-domiciled (ie. you are living in the UK but plan to return to your homeland in the future) your foreign income is taxed on an arising basis. This means your worldwide income is taxed whether or not it is brought and spent in the UK, however you can apply for a claim under the Remittance Basis.

This claim is not automatic, as you must apply for the Remittance Basis via your UK tax return and it can only be claimed in some tax years.

The number of years you have resided in the UK also determine the Remittance Basis Charge (RBC) you pay when you bring foreign income to the UK:

  • In the first 7 tax years of residency in the UK, the Remittance Basis is free of charge, at the downside of losing some minor CGT and income tax allowances.
  • When at least 7 of the previous 9 tax years have been spent as a UK resident (ie. you are in your 8th year of continuous UK residency), the annual RBC payable is £30,000.
  • If you have been a UK resident for at least 12 of the previous 14 tax years, the RBC rises to £60,000 per annum.
  • From the 15th tax year onwards no RBC is imposed on you as you will be deemed domicile in the UK, and you will no longer be able to benefit from the Remittance Basis.

It is also worth noting that an individual considered a minor during the duration of a tax year is exempt from RBC.

 

Pre-Arrival advice

Funds that you bring into the UK before gaining tax residency is considered to be ‘clean capital’ – which is exempt from income tax and CGT. This also includes:

  • Income/gains which were taxable on an arising basis (income was from a UK source or gains were attributed to a UK asset)
  • Gifts or inheritances
  • Income/gains received during relief from a ‘split year’ treatment under the scope of the statutory residence test
  • Income/gains received from dual residency under a double taxation treaty

 

If you are planning on moving to the UK, you need the best advice and specialists. The UK tax system is strict, and it is important that you plan your lifestyle funding well in advance. WIM Accountants can help you make your claim and will endeavour to guide you every step of the way. This blog post aims to serve as a basic introduction to non-domicile status in the UK, but if you have more queries or would like to have a chat about our services feel free to contact us.

WIM Accountants are here to help businesses with their accounting and taxation needs.

ACCAWe are a member firm of Association of Chartered Certified Accountants

London Office

Office Suite 1, 12b High View
Parade, Woodford Avenue,
Ilford, IG4 5EP
Contact: 02082271700

Nottingham Office

Cattle Market Road, Nottingham, NG2 3GY

OFFICE HOURS

Monday - Friday : 09:30 - 17:30 Saturday and Sunday : Closed

Subscribe to Us